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Inflation: It's Here
This article originally appeared in The Daily Capitalist.
In an interesting article in the Wall Street Journal's "Numbers Guy" column, it was pointed out that maybe the government's reporting of price inflation is skewed to favor the government. Shocking. He notes that the government keeps fiddling with its methodology:
According to one rogue economist, John Williams at Shadow Government Statistics, if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%.
I follow Shadowstats for price inflation, though I rarely report it. He uses the same methodologies used by the BLS in 1980 and 1990, depending on which chart you select. According to Mr. Williams:
The SGS Alternative CPI-U measures are attempts at adjusting reported CPI-U inflation for the impact of methodological change of recent decades designed to move the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.
His latest numbers per the 1980 methodology:
Compare this to the latest official chart on CPI-U from the BLS and the GDP Price Index which the Fed follows:
This is an important topic because with an expanding money supply, one would expect to see price inflation, yet the official statistics reveal no substantial price increases. And that begs the question: Why not?
Austrian theory commentators, including me, have been saying: just wait and price inflation will happen. Yet it the official statistics were not revealing significant price increases. Austrians say that money expansion, either through the Fed (money base) or the banks (credit creation supported by the Fed) is inflation and that rising prices are an effect of inflation. This theory makes sense because, if the money supply were stable, then if prices rose in one sector of the economy it has to be because of greater demand for those goods relative to the supply. Accordingly, that would leave consumers with less money to spend on other goods, the prices of which would go down. Thus it is a factor of supply and demand for goods in a stable money supply system and not all prices rise, as it does during a price inflation.
On the other hand, assume that the money supply increases overnight by 20% (assume that magically everyone had 20% more dollars the next morning). There is no new wealth created, just more pieces of paper. If everyone goes to buy stuff in the morning, they would bid for scarce resources and drive up all prices for goods, ultimately by 20%. It's not magic; it's simple math.
True inflation, an increase in the money supply, is occurring. This is no surprise to my readers. Here is the latest data on Austrian Money Supply from Michael Pollaro:
The U.S. money supply aggregates based on the Austrian definition of the money supply, what Austrians call the True Money Supply or TMS, continued their recent surge, in December posting an annualized rate of growth of 38.9% on narrow TMS1 and 24.6% on broad TMS2. That brought the annualized three-month rate of growth on TMS1 and TMS2 to 22.3% and 18.1%, respectively, 8.6 bps and 2.7 bps higher than those posted in the prior month. ...
Turning to our longer-term twelve-month rate of change metrics – more indicative of the underlying trends – and focusing on our preferred TMS2 measure, we find that TMS2 saw another healthy increase, in December growing at an annualized rate of 9.9%. Not only was this a tick up from November’s 9.8%, but we think close enough to 10% to mark December as the 23rd time in the last 24 months that TMS2 posted a twelve-month rate of growth in the double digits. For new readers of the Monetary Watch, the last time TMS2 saw this kind of string was during the run up to the now infamous housing boom turn credit implosion, a time during which TMS2 saw 36 consecutive months of double digit growth.
With QE2 underway there is no reason to doubt that this trend will continue.
That is why the ShadowStats data is intriguing. If we measure price inflation by historical methodologies, the rate would be over 8%. If you study the ShadowStats chart you can see that price inflation took off in 2009 about the same time as did QE1 (QE1 expanded dramatically in March 2009), then backed off with the decline in QE and now is moving up again after the announcement of QE2 in September, 2010. This conclusion could, of course, just be confirmation bias or a logical fallacy on my part (post hoc ergo propter hoc), but it does fit into the general Austrian monetary theory: we would expect to see this occur.
I believe we are just starting to see the beginning of price inflation. The data reveals that the main drivers of the CPI at this point are food and oil, and part of those increases are related to supply and demand issues. We all understand the role of OPEC in oil and how they can let short supply chain issues drive up the price of oil. That is occurring now. The same thing is occurring with food where disruptions in production in a short supply chain world (we are just discovering this issue with regard to food) can drive up food prices worldwide.
Supply and demand issues don't account for all of these price increases, but there is no practical way to measure that versus money supply-driven price inflation. The only way to determine it is to look at money supply itself: if money supply expands, we should see other secondary effects besides price inflation.
We should see a rise in the stock market. Since QE goes directly into the pockets of the Fed's primary dealers (the big banks and financial institutions on Wall Street), those companies do what they do best, which is to invest the new money into financial media. Such as the stock market. Since the supply of stocks hasn't grown, it may be that this new money is chasing the stock market and driving it higher. For a discussion of this, please see this article.
We should see a modest increase in consumer spending. While consumer spending as measured by retail sales has been modest (see this chart), I believe much of such spending is coming from upper income folks as a result of the wealth effect of the stock market boom. It isn't coming from middle America since wage growth has been relatively flat, unemployment is still high, and the spending source from this sector has been from savings.
We should see a rather sluggish overall economy because monetary inflation causes the further destruction of real capital (i.e., savings derived from the actual production or services; not dollars from fiat money expansion). Monetary inflation distorts the business cycle, sends the wrong signals to business people, and they embark on projects that will ultimately amount to bad investments based on paper rather than wealth. Real capital is necessary for new economic expansion. Evidence of this lack of real capital is high unemployment, stagnant-to-modest growth, further liquidation of an oversupply of homes and commercial real estate from the last cycle, flat wage growth, lack of credit, and price inflation. All this is occurring now.
I believe this will drive our economy into stagflation: sluggish economic growth and price inflation.
The last time we had stagflation was in the Jimmy Carter/Arthur Burns era. The difference between monetary inflation now and, say the late 1970s and early 1980s as shown in the ShadowStats chart, is that bank credit isn't expanding significantly now, but it was back then. The main source of monetary growth now is from quantitative easing, a rather poor inflationary tool versus fractional reserve bank credit expansion where you have a 10:1 advantage. The Fed is resorting to QE (direct injections of fiat money into the economy by the Fed) only because nothing else has worked for them. While QE does not have as great an impact as bank credit expansion, it does have some impact. It is not possible to inject $2.2 trillion of new money into the economy and not have an impact. Pollaro's calculation of money supply reveals that is does. Even now we are seeing the Fed's measure of M2 money supply expanding, finally.
Price inflation is here.
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What ZeroGovt forgets in his analysis is that if the money velocity +/- is controlled by big retail banks, the input impetus kick starting the money supply chain comes from the FED. So the initial monetary step change inflation is FED fed and flows into the retail banks which then take over the dynamics of money creation either way. FED's ability to start a stampede based on psychological factors is thus huge as initial pyromaniac...lighting the new fuse...In that sense it can accelerate over the edge ongoing volatile trends...arsonist Ben!
We are seeing flation, but it is probably going to be stag more than anything else. And ferfal in argentina noted that real estate went down during the inflationary argentine peso collapse, or at least immediately afterward, even though other prices kept rising such as food.
Fortunately my savings are 100% in PM
and are not experiencing devaluation.
If only my labour contract was payed
in gold and silver I would not feel like
a working poor.
And you would pay for a dozen Twinkies, how?
I totally agree, and that is what Bernanke was trying not to have happen but it's happening.
We now know with the explosion of The Street in the Middle East that spending will not decline vis a vis the military and the war but in fact will rise and perhaps rise significantly. This is now being reflected in equity prices as "the ability to self commoditize" as opposed to "self-finance" (the latter of which we haven't been able to do for decades) becomes "realized" and the stock prices of those private entities that in actuality "finance the effort" soar. That would now include apparently Williams Co's which rose ten percent today "and is yet another entity that must be paid for." At some point we all agree "we must pay for the money, too." In short "the danger to Wall Street is not inflation" of course "but of actually having to pay for the money to fight it." We shall see.
http://tiny.cc/e26yv
Wall St. Journal
Here's an idea: Cap all COLA adjustments to government salaries, pensions and benefits at the CPI rate. That's when you'll want those TIPS back in your portfolio.
Econophile
Good article and just as good you used statitician John Williams SGS figures alongside the political football (bent) Govts own garbage as comparison. JW isn't so much "rogue" as independent and privately motivated and we all know that beats the crap out of the public sector on any measure including importantly data accuracy
Anyway to the point, you conclude using your Austrian School we face stagflation (inflation with a stagnant low growth economy/GDP). Your primary evidence for this is QE will continue to inflate various prices. At least you recognise the other important money factor is contracting, namely the retail banks credit creation is winding down.
Can i ask you to look closely at the top Annual Consumer Chart, ignore the Govt figures and focus on SGS's own. Do you see the real inflation rate go from +15% and drop like a bomb to only +7% post-2007 Credit Crunch to end of 2009?
That is deflation. It is still +7% inflation of course but that shows you how devastating and fast deflation can hit. When Credit Crunch II hits it'll be even bigger and harder than CCI and will drag even SGS's figures below the watermark into full negative deflationary territory.
If you're a chartest also look at that deflationary whack again and see the huge trend change. The 30 year up-trend has been hammered, crushed even. Also the 1980 top is higher than the 2008 top. Worse still the 2008 top is pointing down to our current top. I'm going to speculate 2008 is a top for inflation, and that we are now going to see ever lower tops until we sink into deflation, namely a major trend change from an inflationary economy to a deflationary.
All out deflation of all CPI prices, stocks and asset classes and GDP, not stagflation.
Repeat after me: "In a fiat monetary system where "money" can be produced by a simple key stroke on a keyboard DEFLATION IS A MYTH"
Your understanding of the economy depends on a few myths, let me point to them;
Myth 1. the Fed is all-powerful - if you believe central banks and Fiat money can wish this and adjust that i suggest you look at the 100% failure rate of all CB's in history to control their currencies exchange rate. Regards inflation begin looking at the Bank of Englands 100% failure rate. Currently its target is 2% inflation but UK CPI is running at 4-5%. So if you think CB's can control inflation why is the BoE incapable of hitting its target?
You've heard the term "runaway inflation". Doesn't that term 'ping' to you CB's have lost control? To me it suggests they never had any control at the start and therefore have no control at any fuking point in time, they are victims of the economy, not masters of it.
I also suggest you look at the Feds own track record with their QE targets; reduce rates (fail); hold up property values (fail); stimulate economic growth/GDP (fail); reduce unemployment (fail); increase credit in the system (fail); support stock markets (jury's still out)
Myth 2. the Fed can print/cause inflation - yes the Fed can inflate its own money supply but it is out-gunned by the biggest inflaters, the retail banks, whose own credit creation is at least 40 times as large as the Feds. Retail banks are currently reducing credit faster than the Fed is creating its own new counterfeit money. Credit is deflating and the mighty (puny) Fed cannot do anything about it.
Myth 3. the Fed can target inflation in the CPI from 2% to 4% - another myth based on yet another myth (misunderstanding) that the CPI shows inflation. Not only does Bernanke not understand what inflation is he also doesn't understand what the CPI is (double-dumb). The CPI is an indicator of pricing power, how high retailers etc can lift or lower prices. The CPI is therefore not an inflation index, it is in truth a pricing index.
And Bernanke has no control or levers whatsoever on businesses pricing decisions. Bernank is an ivory tower of Big Govt and they only talk to Big Corps. The Big Boys never talk to the retailers etc that make up the CPI. So the tubby midget can pray every day and print all day to change the CPI but he has no fuking influence over it whatsoever.
So wether Bernank sees "runaway inflation" or "runaway deflation" in his CPI is not up to him and never will be, he cannot create either. Period.
I hope that's enough to blow away your belief in the Fed as anything to write home about because the reality is the Fed does not control anything in the economy and especially not inflation (or deflation)
Isn't it funny when the mainstream financial press wakes up (in a very small, back page way) to something so obvious that most people here have been aware of for years? I've been emailing (with no replies) these idiots for years telling them that comparing current CPI figures to past ones is comparing apples to oranges because the methodology for its calculation has changed so radically over the years, pointing them to shadowstats for a full explanation.
Morons... and people actually listen to them for investment advice?
you could kidnap them and force them to watch martenson's piece: http://www.youtube.com/watch?v=zsNgJVD8KgY
sending the MSM shadow-stats pointers implies that you don't think they're actually in on the game...
This is why I dumped my TIPS. What kind of protection will you get if the guys on the hook control the numbers. Made a very nice profit on them but I am very glad they are out of my portfolio.
And I heard a voice in the midst of the four beasts, And I looked and behold: a pale horse. And his name, that sat on him, was INFLATION. And Hell followed with him.
In the real game, the newly created money is not given to everyone. It is given to the very top of the food (money) chain. The way these people invest in the markets is how the inflation will play out.
The most insidious aspect to inflating the money supply is most people are paying a lot more for food and energy without seeing an extra penny in their paychecks.
Inflation is a tax that hits the poor and lower paid people most of all.
The people who get the freshly printed money first, when it has the most value, make out like bandits (they actually are bandits in this case), the people at the bottom get completely screwed. Of course, no one is getting a raise to keep up with their costs of living, they are being driven the other direction, into "austerity".
So the people at the top seem to not be investing in America, but rather chasing emerging markets. What's the effect then on the US?
When you think about it, aren't the first guys getting something for nothing?
Remember the term ' Voodoo economics'? I believe one of the 'Old Gippers' terms. We the people are so fucking stupid it boggles my mind. Bennie and the ink jets and the commanders in chief just keep lying to us and we all just seem to think they are reading to us from the book of psalms or the koran or what the fuck ever.
But there is nothing we can do about any of it, right?
No we'll just sit on our thumbs believing in Santa til the bankers own the land, the food, our homes, all the ( worthless of course)gold, all the water, what am I forgetting?
By the way, they already own all the money in our pockets.
Amazing!
The term actually came from George "Voodoo" Bush as his pre-election (and pre-selection of him as VP running mate) characterization of Reaganomics. He also promised us "no new taxes." BS seems to run in his family.
The sky: It's blue
One of you guys who can submit articles please submit this entertainment:
http://www2.tbo.com/content/2011/feb/16/PMENEWSO1-uninvited-guests/
That's been happening around here too. In the Seattle suburb of Kirkland a large vacant for sale property had a family squatting in the house, that had some kind of similar paperwork which they showed to the cops.
yes, exactly right. stagflation is here. tobacco in nyc went to $7 per pack to $15 per pack.
http://covert2.wordpress.com
To covert,
Re: Tobacco. That ain't inflation mate, that's taxes.