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Guest Post: Don't Be Fooled: Inflation Has The Upper Hand
Submitted by Chris Martenson
Don't Be Fooled: Inflation Has The Upper Hand
Here at Martenson Central, we are endlessly keeping a close eye out for the emergence of deflation, defined here as the purchasing power of the dollar going up.
Technically, inflation and deflation are terms that indicate a particular combination of money surplus or deficit (respectively), demand for money (of which velocity is but one measure), and demand for various goods and services (which themselves may be in abundance or short supply).
The reason that the inflation vs. deflation debate has been so noisy, yet simultaneously so murky, is that all of these intersecting variables impact the final equation. It is like the difference between trying to balance a single broomstick on your outstretched hand vs. trying to balance a broomstick with three well-greased hinges at points along its length. The former is tricky enough to balance; the latter would be impossible for nearly everyone.
Some try to reduce the inflation/deflation debate to a single broomstick (“…all we need to do is look at declining credit and see that we are in deflation!”), but in my opinion, that is far too simplistic a view. We still need to consider base money creation, velocity, and the relative level of faith in current and future monetary policy among the majority of market participants.
Because we cannot really know all the variables and how they are feeding back and forth between each other, we must simply look at the final impact to gauge where we are. Fortunately, we can do this with relative ease.
Again, what we care about at the end of the day is whether our future money will buy more, or whether it will buy less -- and, naturally, whether we will even have any coming our way.
The argument for deflation says that because of declining credit, people will hold onto whatever money they have for dear life, unsure if more money will be forthcoming. In this case, the velocity of money will slow and collapse.
The argument for inflation includes the idea that existing debts are a form of money and that the world’s central banks are busy printing up more than enough new money to swamp both the commodities markets and people’s preferences to hold something that can be created without any effort or cost.
Many in both the inflationist and deflationist camps say that prices are not worth analyzing because they are the result of, not the cause of, either "-flation." But it would be a mistake to ignore prices simply because they represent the passenger, not the driver, in the story. Knowing where the passenger is going can give you a pretty good indication of where the driver is headed, and therefore it’s important to keep a close eye on prices when assessing inflation/deflation.
Prices
On the plus side for inflation are commodity prices, which are again nearing their all-time peak and which have been compounding at an average annual rate of slightly more than 10% over the past decade.
But they seem to be at a critical juncture on this longer term timeline. Either they will break out from here, or they will be rejected, creating a massive double top not unlike the one seen in the stock market in 2000 and 2007.
Still, commodities could fall back a long way before they would violate the trend line in place since early 2002, when prices began the ascent that would see them finally break out of a long-standing range.
In my book, ten years is a respectable amount of time to assess commodity prices. Beware those who cherry-pick the 2008 topping event as their reference point, as they are missing the larger story of the trend line that I have drawn in blue above.
But commodities are just a small component of the overall price landscape. If one trusts the CPI statistic -- and I really have my doubts about its construction and methodologies (that’s putting it mildly) -- then it would seem that prices are actually quite tame and that disinflation (in which inflation is declining slightly month-by-month but still rising overall) is the greater concern, as the Fed has claimed.
But even here, when viewed on a longer time frame, I really do not see anything to suggest that we are facing a dire catastrophe of price collapse:
What I see in the above chart is that prices first climbed at one rate between 2001 and 2004 (first red line segment on the left), then climbed at a faster rate until a blowoff in 2008, have since recovered, and are climbing again quite handily.
For the record, I happen to think that the CPI systematically undercounts inflation due to underweighting certain components (especially medical care) and completely avoiding the impact of taxes on spending and costs. Given this, the fact that the CPI is higher this year than last year, we have to score another one for inflation.
But it’s almost certain that inflation is higher than stated by the CPI, so we might want to rate that one just a little bit more strongly than a literal interpretation of the CPI might suggest.
On the subject of house prices, the situation strongly favors deflation. And given the importance of housing to the health of bank balance sheets and consumer wealth effects, this is certainly one of the demons that the federal government and Federal Reserve are fighting tooth and nail:
While house prices are above where they were a year ago, the bounce has been anemic at best and has recently turned down again. This is a very poor sign. Score one for deflation.
Stocks are now at two-year highs, bonds are up quite strongly over the past several years, and oil is at a two-year high. All of these weigh towards inflation being the dominant theme of the day.
With regard to prices alone favoring inflation, we find that commodities, stocks, bonds, medical costs, college tuition, and the CPI itself are all up over the past year, and in the case of everything but stocks, the past decade.
Conclusion
The point of this approach is to keep prices firmly in view when thinking about inflation and deflation. While the theories about the role of money and credit as the drivers of the ‘-flations’ are very important to understand, what we really care about at the end of the day is the final impact on our purchasing power. By nearly every measure, except in limited cases sprinkled throughout (with housing being the most visible and important), we find that prices have been rising smartly. Or we could say that the dollar and other fiat currencies have been sinking, which is a more accurate way to think about the dynamic.
This should not surprise anybody, as it is the obvious result of massive printing efforts undertaken by nearly every OECD central bank in response to the prior crisis caused by too-cheap money. Nor should it confuse students of our economic system, who know that continuous increases in asset prices and real things are essential to the very functioning of the entire system. Growth is a requirement of our monetary system and, by extension, our economic system. With growth, everything is fine and the status quo can be preserved. So naturally there is strong support for all manners of growth within and across our political and financial institutions. Without growth, the system misfires and threatens to collapse.
Those who read history also know that inflation is by far the more common outcome of a situation in which there is entirely too much sovereign debt that cannot be repaid by ordinary means. All one needs is to take a quick glance at the balance sheets and off-balance-sheet obligations of practically every developed country to realize that collective insolvency is the correct term to apply.
So at this point in the story, we see that prices have been rising, our fiscal and monetary authorities are trying quite hard to foster even more rapid price escalations, and they are doing so because the system demands it of them.
Right now, based on prices, we have to score inflation as the winner, although we’ll be the first to change our tune should the data change
Part II of this report covers the rest of the story by going into money and credit (the true drivers of the ‘-flations’) more deeply, as well as other economic data important to helping us figure out where we are in this story, how much time might remain before another “adjustment” arrives, and what we might do about protecting our wealth and opportunities. Click here to access Part II (free executive summary; paid enrollment required to access).
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Heyyyyoooo Siillllllvvverrr!!!!!!!!!
Speaking of silver horsefeathers,
the monetary base imploding hardly inflation...
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=BASE&s[1][transformation]=pc1
PS Please fix the captcha that requires but does not accept negative signs...
Horse feathers.
My Oreos cost 20% more than they did last year, ditto Cheewios, li'l Debs, donettes, and hershey's kisses. My whole wheat pitas are up from to $2.29 to $3.05!
My C.O.L., not theBenBernank's, is up easily 10% over one year across the board for what I need to live the same way I did last yearl
Grocery prices are a tricky indicator--the stores themselves are manipulating prices all the freaking time. If you buy right, when they are clearing out older inventory, you can get very good deals on foods. I would say that grocery stores are intentionally confusing people using fluctuating prices. A gallon of milk is $2.29, but the weekly flyer nearly always has a coupon for the same milk @ $1.98. Meats and other staples, you just wait until they need to move them and stock up when on sale. If you're just going in to the store and buying the exact same items at whatever price, you are being a model customer for the MBAs.
Oreos and whole wheat pitas. That is just nasty. They should raise prices until you can't afford one or the other.
I also believe there is confusion regarding the nature of debt deflation. Many market participants look at debt as an asset on their books and see that it has the potential to or already has deflated massively. They then scream "deflation, it is huge and obvious." What they don't seem to understand is that same huge, obvious deflation applies to our money, since our money is debt. The assets backing our money are becoming worthless, therefore our money is becoming worthless.
Our money is not debt, the USD is a Federal Reserve Note. It is a fiat currency, therefore there is no asset backing the dollar.
Heaven forbid we get inflation in houses again to be coupled with this lunatics free money policy of Rudolf Havenstein. We'd get a credit/debt explosion as it would become a no brainer to borrow and buy borrow and buy and get rich. Those who have credit that is. Everyone else goes to poor house.
When the farmers have their grain stocks full but won't execpt that confetti from Washington, people may well starve. Hey, its' how it went down in Wiemar.
This chart from www.shadowstats.com says it all. The official manipulation of the numbers has been going on for over 30 years. This is why the average household now needs two incomes to provide what one did 30 years ago.
Just wait until you need three, then four.
We are de-industrializing. This means a return to the living conditions during, then prior to the industrial revolution. It won't be long before the kids have to quit school and get jobs, and I don't mean 16 year olds washing dishes. I'm talking 6 year olds gathering sticks to sell as firewood on the side of the road and thirteen year old street prostitutes. Welcome to third world America, where rich Asian sex tourists come to experience the evil pleasures that have become illegal in their own countries as they industrialized.
People should acquaint themselves with the zeitgeist in Germany during and after the great inflation. I'm not talking about pictures of wheelbarrows with paper money. I'm talking about the degradation that Germany's middle class experienced on a day to day basis. Then fit that into the history that followed.
We're no different.
In 1971 as an O-3 over four (Captain, USAF) I was making $12,000 per year. According to ShadowStats to equal that today, I need to make over $212,000. Dream on...
How did you arrive at your calculation, using the chart?
Besides, you miss the point entirely. You use the same method of measurement through the years or your comparison is meaningless.
My yard stick in 1971 was 36 inches long. If I distort that yard stick to the point where it's now only 20 inches long, yet I still call it a yard stick, what use is there in measuring things today using that distorted yard stick unless the only purpose is to deceive?
All the time we hear government officials telling us how things are today compared to times in the past. Same with the MSM. The purpose is to deceive, pure and simple, not to accurately measure something compared to something else in the past. Never does the Gvt go back and adjust the old numbers to reflect the new methodology. Doing so would expose the lie.
Recently I was turned onto a website that had some interesting theories. One of the most interesting thoughts was that hyperinflation is already here, in a sense. More specifically, instead of being truly "hyper-" it was massive inflation without the ferocious acceleration. It was accomplished via leverage and accounting tricks with much of it buried in the shadows right now - but having been borrowed into existence nonetheless over the last 30+ years.
Interesting food for thought.
Of course, what is logically next would be massive deflation. I personally amend this notion by suggesting that rather we first see a currency crisis... a hyperinflationary blow-off top per se. Which of course is an event not rooted specifically in printing or supply/demand economics, but rather in confidence. From there, we go solidly into the night of a failed system and need to face the beast of deflation. In facing this beast, we will most likely be outside of a normal function system and fiat currency as we currently know it... so traditional "economic" definitions of deflation will be utterly worthless.
what website is this?
It is some guy named "hypertiger." You can google it I am sure. The word of caution is that it is very doom and gloom - beyond much of what I have read anywhere else. Likewise, the author seems to break down in supporting thoughts in some areas - and rather than deal with the "holes" reverts avoidance and calling everyone stupid. A real false ego thing is what it comes across as. Makes hypertiger look like an idiot savant. Anyhow, I feel that almost everyone who is willing to rub a few brain cells together here has something to offer. And hypertiger's macroscopic viewpoint was an interesting "out of the box" twist on things.
dup
@CD regarding fudging of info.. Probably relates to centerlines post also.
Should be able to prove to a sane person using these 3 charts
hours worked
http://www.preservenet.com/simpleliving/02USWorkHours.gif
Productivity
http://www.preservenet.com/simpleliving/01USProductivity.gif
and inflation
http://one-simple-idea.com/InflationHistory1800-2003.gif
What do you think, CD?
Thank you for qualifying with "sane person". Anyone who is saying that inflation is not worse than the official rate is either insane (unlikely) an ideologue (likely) or a psyops disinfo agent (also likely).
Of course, if that person is in a high income bracket and receiving bonuses etc, then they aren't really feeling the effects of inflation like middle class America. Been to the grocery store lately? Or filled you gas tank or paid your utility bill or needed to actually pay for your medical care or your health insurance premiums on a middle class wage?
Back then, your wife didn't have to work to pay the bills. You were comfortable and debt free. Today, in order to have the same standard of living, both have to work, and must drown themselves in credit card debt.
Your salary was about 285 oz of gold per year, if that tells you anything.
I was told everything is more expensive today because we have nicer things than 30 years ago!!! LOL.
But you've got it wrong, comrade. Women working outside of the home is just an indication of how free women have become. Now they are free and we live in a near-utopia. Soon your retirement will also be liberated.
Double-plus-good.
Housing was wildly overpriced up until 2008. Still is.
Right, saying some kind of equilibrium has been reached since the bubble top is ridiculous. It was a massive bubble, and is still a big bubble, while mortgage rates now march upwards from lows where no one was buying.
Inflation drove us out of Aus. We've just moved to Canada, and already enjoying a much higher standard of living, on far less pay. (Brought everything with us, including our PMs.) That said...
It's too easy to get embroiled in in/de-flation black & white. 'Inflation' and 'deflation' are only symptoms I think of how we define 'money', and that's where it gets complicated.
There's no question that the credit markets are causing massive deflation in discretionaries and things we want.
There's no question that inflation is making it harder to afford commodities and things we need.
I think this is an outmoded debate, because we simply need a new word. 'Stagflation' is not very descriptive of what's happening now.
+1
Welcome to Canada. I agree. Central banks are trying very hard to create inflation across the board but can't in any kind of product that needs financing, but will keep trying until they ruin all faith in fiat currency. Or if/when one of the major nation states defaults on debt owed in a currency they don't control, the domino's start falling and it would be massive deflation. So stagflation (soupflation, new word), then complete greshams dynamic currency meltdown (hyper inflation) or massive deflation. Or 'the bearded wonder' the Bernank, 'tricky' Trichet and the rest of the 7 mental dwarves actually have a handle on this mess 100% and Ron Paul is forced to publicly apologize and refer to the Bernanck as 'sir' or 'boss' and smile like he means it when he says it.... forever. By the way, what is this 'pay' that you speak of, and where would one find it here in Canada? My job here gives me a room in the attic, free soup, and hockey tickets (juniors games).
The IMF/Worldbank will own us all.
When we say "it's a pact with the Devil," who do we suppose the Devil is?
incidentally, the devil is the "father of lies" and here we have Ben who lies constantly.
Most of the rise in CCI can attributed to the increase of the Agricultural and Soft's which are major component making up over 50% of the total weighting these have been on fire of late.
Copper has cleared $400 and looks ready to move much higher.
$100 Crude well within sight.
Both these breakouts will propel the CCI to new highs.
Great post
Time for Load more USD and sell EURos till 1.26 first target
BINGO!!
YouTube - Best Joke from "The Naked Gun"
Whatever you hear, stay away! John Doe has the upper hand!
Aw! What's in the box!
Her pretty....little.......head.
It seems to me that there is, indeed, a
"this time its different" element in the equation.
What is different, here and now, from Weimar, or Zimbabwe, or the others,
is that so many of us know about Weimar, Zimbabwe, etc.
That knowledge affects our decisions and hence, the outcome.
Heck, it affects Bernanke too, and the other policy makers.
Yes, but people had information from past business cycles and fiat failures during Weimar and Zimbabwe. We never operate in a vaccuum. This knowledge doesn't seem to stop our policy makers from the same path.
...quite simple really, when i was in the sixth grade (1978), i was able to walk off the school campus, cross the street to a small store during lunch and buy a bean and cheese tostada for 25 cents, or decide which penny candy to buy...even ponder the higher end 2 cent candy if i felt like indulging...then, walk back to school and finish up the day. now, the school is surrounded by locked chain link fences, no one is allowed to enter or leave without permission. the store is long gone and penny candy no longer exists...inflation/deflation does have unseen variables, i agree. can we ever get back to the age of life, freedom, trust, and value? or are we just a bunch of losers?
But today's 6th graders can get all the porn they want on their iPhones.
Hedonic substitution.
The decline of an empire.
More access to hedonisim. Less access to real freedom.
An aside, my former school, which used to be cheery and open, looks like a prison, with chained linked fences, window bars, security guards, cameras, and access to the school with a passkey only. Even school lunch, is now only allowed on school property whereas when I was there, we ate lunch downtown in the various pizza/delis. Every facilty member must wear a photo ID card.
Is this a school or a psycho ward?
Very clear explanation.
Only but is his use of growth. The GDP going up because of inflation or recless spendig is not growth.
Yall are thinking too linearly on this issue.
There's no denying that commodity prices have risen. Margins will get squeezed to some degree, but ultimately retail prices will rise all things being equal.
The problem is that commodity prices got hammered in 2008-(Q1)09 in a sudden massive crash. The effect was non-linear. This is how commodity retail prices decline. You are looking for price bahavior that is stable and symmetric to these price increases.
Think outside the bubble, baby.
Yeah, get back to me on inflation after
China slows things way way down.
And don't forget to take your tax losses
on bonds and get into equities right
up here in the stratosphere
where all us pigmen want you. lol
After all, Obama's tax cut is going
to give you just enough jingle to supersize
lunch at Mickey D's. Now get out there
and buy some stocks.
Everyone convinced levitation and anti gravity is the new normal, and we'll soon see 350,000 DOW, whatever good luck to em! The Pigmen are dying to get the sheep in here at currency value adjusted all-time highs, they can suck paddy water far as Im concerned.
C'mon, do me a favor, buy some
stocks. My lobbyists have arranged
to have Obama fill your gas tank
free for an entire year!!!
They can play with food commodities for a while since it typically represents such a small percentage of cost of goods. (Speaking of your typical boxed / canned items)
Do you have any idea how much money you send to the street each week?
Tired of people claiming that we are safe from hyperinflation because of low consumer demand.
What about trust in government? The ability to pay and secure debt is quickly getting to the point where it trumps other factors.
Thank you for this article Chris.There are others who question the path of US inflation and in particular the measure used by the authorities, Consumer Price Inflation. I notice this from back on the nineteenth of November.
So US inflation is at a level that the President of the European Central Bank was crowing about only last week..... Surely some mistake or a policy error?
OK gize, I'm gonna say this 1-MORE-TIME and then I'll just give up. If you buy 0 healthcare, 0 educational enlightenment, 0 petrol products and 0 food, the CPI categorically proves that inflation DOES NOT EXIST! Bad peasant, no meth-lab!!
This is shallow and shit for brains. Higher costs are not always due to inflation. Once more, for the record, higher costs are mostly limited to taxes/regulation, health care, tuition, and government manipulation.
Look at the long term trends. Jobs are dead or dying in:
Retail
Construction
Manufacturing
Customer Service
And soon in GOVERNMENT
Try to get some inflation out of that. Unemployment was just extended for up to THREE YEARS. Good thing too, because we have at least three more years of depression ahead.
That's why Barry's giving you free lunches
for a year. Me, I get a new Ferrari.
there is nothing wrong with dumpster diving to get your daily nutritional needs! just cook the stuff twice as long! yumeeeeeeee!
If you cook rotten food, even for twice as long, you may kill all the bacteria, but the toxins they produced are all still there. If it smells bad, throw it out!
That is darn good advice for the times ahead. It is not the bacteria, it is the toxins.. In water, kill the bacteria you are good, not in food.
This is not a great article. He could almost be thought paid by the word.
Look, stop with the verbal gobbledygook and handwaving compulsion to find complexity where there need not be any.
Inflation or deflation is change in cost of living -- and it's not anything else. It is the measure of the delta in cost of living for the average human in the US of A.
You measure that with an agency that gets a budget and a staff and makes an effort to be accurate. They take a survey of citizens to determine what % of their budget is represented by purchase of various items. Then they survey the change of prices of those items.
AND DONE. DONE. That is how you measure inflation.
Its value is positive and low because that is reality. Housing is a huge % of the average person's budget and it's flat to down. Cars are the next % and amortized monthly for depreciation and features, they are flat to slightly up.
Health care is up sharp, but not anywhere near the portion of budget housing is.
Food is up sharp but even less of a portion of the budget.
Looking at the graphs of commodity prices are relevant only to the extent that they affect the surveys. They have no point otherwise.
They WILL affect the surveys, and thus they are included. But they are swamped out by housing stagnation.
Yup, you heard it here first folks, deflationists are so delusional, the believe GOVERNMENT numbers.
Meanwhile, old people on SS who get checks based on CPI are eating dog food and skipping medicine. You really think they were doing that 40 years ago?
I love the way numbers can be massaged to end up with something that's not so bad.
We have a 20% rise in food and energy costs (BAD for the consumer) and an 18% drop in real estate values (BAD for the consumer), so let's combine these two numbers and end up with an inflation rate of 2% (EXCELLENT for the consumer).
Or better yet, let's just EXCLUDE food and energy from inflation calculations. That way we don't have to increase social security payments at all!
Shrug. What % is housing of YOUR monthly budget?
WTF, how can there be US deflation in a world economy? The only asset prices deflating are homes because of supply/demand function (no lending = no demand). If prices of goods fall it is because of efficiencies, competition or no demand (product not that great). If Bernank could understand that this is 2010, he would realize that someone in Brussels can buy cheap US goods online supporting prices. Therefore, the Fed needs to just come out and say "we need a weaker $ to sell our stuff to the rest of the world" so we can create manufacturing jobs (wow sounds like we are competing with China...a losing battle).
Good read, up until the part where he says that bond prices going up is a sign of inflation. WTF?
Don't worry so much, Ben's got an idea!
I completely disagree with CM's conclusions about inflation. With diminishing oil supplies -- as indicated by dollar markets rather than fudge-able 'production' and 'reserve' figures -- inflation is impossible. At some point the oil price rises to a level where economic activity slows sufficiently to kill demand for oil. When this happens the oil price drops. The high price level is the 'upper bound' of dollar or other currency devaluation relative to oil. It is therefor oil which sets the value of dollars, euros, yen, yuan and other currencies at the all- important margin. Since the dollar is the world's reserve currency, its value is the fulcrum over which other currency values are leveraged.
Since the dollar value upper bound is fixed by economic forces that matter, activities by fun- loving central bankers are compleately irrelevant! The Federal Reserve seeks to become so by forcing the dollar lower on foreign exchange markets. It does this by activating its network of primary dealers, by manipulating gold and silver prices, by stage- managing currency interventions, by purchasing bonds in the open market then selling these same bonds under the table in the derivatives markets and by other well-known central bank tactics. These tactics backfire when they trigger speculative bubbles in crude oil which forces the price to the level where economic activity slows down. The oil value of dollars is set by the economy, not by the market or by central banks.
The takeaway is that the Fed and other central banks can effect monetary policy and pretend to set currency values only when it doesn't matter. Central banks that attempt to matter can only effect values adversely, when they stupidly force oil prices to the upper bound! Doing so reinforces central banks' impotence and self- destructiveness.
When economic activity slows, market entities that rely on currency flows are starved for short- term roll- over funds.
Since the fast- becoming- unproductive world's economies are reduced to various ponzi schemes of buying and selling money in order to obtain oil ... so that the drivers of the world can burn it up for absolutely nothing ... upsetting the cash flows through these various ponzis is fatal. On the one hand there is the blameful drivers inexorably bankrupting all around by way of resource depletion, on the other is the periodic mad scramble of collapsing ponzis desperately seeking liquidity.
If it wasn't so tragic it would be hilarious.