McDonald's and Wal Mart Warn of Inflation Because Big Banks Use Trillions of Taxpayer Money as Gambling Chips for Speculative Commodities Plays

George Washington's picture

The signs for inflation in food and basic consumer goods are widespread.

McDonald's is warning of inflation in food prices:

McDonald's
Corp forecast higher prices for beef, dairy and other items and said it
would cautiously raise prices to keep attracting diners, who are
grappling with higher grocery and gas bills.

***

McDonald's
and other restaurant operators are getting squeezed by accelerating
food costs and must figure out how to raise prices without scaring away
already skittish diners.

Similarly, the American head of Wal Mart - the world's biggest retailer - is warning of price hikes across the board:

U.S.
consumers face "serious" inflation in the months ahead for clothing,
food and other products, the head of Wal-Mart's U.S. operations warned
Wednesday.

***

Inflation is "going to be serious,"
Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's
editorial board. "We're seeing cost increases starting to come through
at a pretty rapid rate."

CNBC reported yesterday:

 

The
combination of rising gasoline prices and the steepest increase in the
cost of food in a generation is threatening to push the US economy
into a recession, according to Craig Johnson, president of Customer
Growth Partners.

***

Of course, at lower income levels,
these percentages are much higher. One sign of the stress some
consumers are already feeling is that some AAA offices have already
seen an increase in out-of-gas service calls, as motorists try to put
off filling their tanks or drive around trying to seek out the gas
station with the least expensive price.

And as the New York Times notes, food producers are selling smaller portions for the same price, due to cost - push inflation:

With
prices for energy and for raw materials like corn, cotton and sugar
creeping up and expected to surge later this year, companies are barely
bothering to cover up the shrinking packs.

While it's tempting to say we've got inflation, things are not so black-and-white.

As I wrote in January:

Debates about inflation and deflation paint with too broad a brush, or too narrow a focus ...

 

Too
broad a brush because the economy is not a monolith ... different
asset classes can move in different directions at the same time.

 

Too narrow a focus because you can't analyze what's happening in the U.S. in a vacuum in a highly global economy.

 

MixedFlation

 

As I noted in 2008:

Some people think that some prices will go up at the same time that others go down.

For example, Dominic Frisby writes:

Are
we going to see rising prices or falling prices? Of course, it
depends on the asset class – and in what currency you are measuring.

 

***

Falling
prices in assets associated with debt [like houses]
and rising prices in things which you buy with cash – food, energy
and some imported goods.

Adam Hamilton of Zeal LLC agrees:

Anything
typically financed by debt is likely to see its prices plunge
dramatically, like houses and cars, as the ongoing Great Bear bust
continues to destroy the gross excesses of debt via higher long rates.
Conversely, anything not typically ‘paid for’ with debt, including
groceries and general living expenses, is almost certain to rise in the
coming years. We are staring down a brutal environment of widespread
inflation marked by various sectors witnessing falling prices as debt
leverage implodes.

So we may very well experience both inflation and deflation.

I wrote in July 2009:

You
know from experience that when you're in a national park, movie
theater or some other contained place, prices are higher than
elsewhere.

 

Basically, the stores in such places know you
can't go somewhere else, so they can charge you what I call "got you"
prices. In other words, you're a captive buyer, and they've "got you".

 

I've noticed the same thing with health care costs. My family's health care premiums increased 6% last year - on top of the 6% increase the year before.

 

This
is "got you" prices. The health care industry knows that Americans
are desperate for health care, and that if they raise prices, people
will pay.

 

I've previously pointed out that inflation versus
deflation is not necessarily an all-or-nothing proposition: we can have
inflation in some asset classes and deflation in others.

 

So
my current theory is that we will have deflation for some time in
most asset classes, but inflation in the "got you" classes of basic
necessities that everyone needs - food, energy, and health care.

 

In a tough economy, companies that can squeeze broke consumers for more money will do so

I reported in September 2009:

Jeffrey Saut - Chief Investment Strategist and Managing Director of Equity Research at Raymond James - is now confirming that theory:

Inflation,
or deflation, the argument rages; yet on CNBC last Thursday I opined
that we are currently experiencing both... It appears to me that the
country’s top quintile of wage-earners (the folks with the most assets)
are experiencing deflation as their home prices have collapsed, their
401K’s are substantially below where they were in October 2007, their
bonuses have been “whacked,” and the list goes on.

Meanwhile, the
lower-income households are experiencing inflation with their heath
care costs rising, food prices escalating, insurance premiums
climbing, etc.

Saut thinks inflation will eventually win out:

Our
“bet” is that the inflationary forces will eventually win out because
that’s the way it has always played since the Great Depression.

But
that is not controversial. Indeed, even the greatest advocates of
the deflation theory say we may eventually get inflation. For
example, David Rosenberg says that deflationary periods can last years before inflation kicks in.

Well-known financial analyst Dian L. Chu wrote in June 2010:

Despite
the seemingly tame headline inflation numbers, consumers never seem
to see price declines in certain categories like education and health.
For instance, prescription drug inflation escalated to 5% from less
than 3% in 2007 and 2008.

So, it is pretty obvious what we have here--biflation--instead of deflation. Biflation is a state of the economy where inflation and deflation occur simultaneously.

***

The
price increase of commodities is caused by the increased money flow
(via loose monetary policy) chasing them. On the other hand, the growth
of economy is tempered with high unemployment and decreasing
purchasing power. This has resulted in a greater amount of money
directed toward essential items (inflation) and away from
non-essential items and things required credit to buy such as house
and cars (deflation).

***

While all of that money Federal
Reserve pumped into the system could in theory cause inflation ...
weak banks and slack in the economy would weigh against that. Indeed,
it is likely that crude material price increases could begin to move
down the supply chain; however, end markets are still too weak to
allow a full price increase.

So, in the near term, biflation
could be around through possibly 2012 with pockets of inflation seen
in certain sectors such as energy and feedstock chemicals, and
deflation/low inflation in other sectors, netted to a moderate
headline inflation number.

[We've got] rising food, commodity, energy and healthcare costs. But housing is double-dipping, and wages are declining. And see this.

So despite what die-hard inflationists or deflationists might say (and I respect both camps), things are actually mixed.

Moreover, as I pointed out last year:

Given that speculators drove up the price of oil last year,
it is possible that - especially in a stagnant economy - speculators
could drive up the prices of some asset classes and drive others down.

And see this.

And this.

Of course, instead of directly helping the American people, the government threw trillions at the giant banks (including foreign banks; and see this)
. The big banks have - in turn - used a lot of that money to speculate
in commodities, including food and other items which are now driving up
the price of consumer necessities. Instead of using the money to hire
Americans, they're hiring abroad (and getting tax refunds from the government).

Ironically, the financial system is in worse shape than it was in 2008, according to Standard and Poors:

Additional
fiscal risks we see for the U.S. include the potential for further
extraordinary official assistance to large players in the U.S.
financial or other sectors, along with outlays related to various
federal credit programs. We estimate that it could cost the U.S.
government as much as 3.5% of GDP to appropriately capitalize and
relaunch Fannie Mae and Freddie Mac, two financial institutions now
under federal control, in addition to the 1% of GDP already invested
(see "U.S. Government Cost To Resolve And Relaunch Fannie Mae And
Freddie Mac Could Approach $700 Billion," Nov. 4, 2010, RatingsDirect).
The potential for losses on federal direct and guaranteed loans
(such as student loans) is another material fiscal risk, in our view.
Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008 ....

In other words, the government has thrown trillions at the big banks,
but instead of using those funds to shore up their balance sheets and
return to prudent banking practices, the big boys have used the money as
new gambling chips for speculative commodities plays ... which are
hosing the American consumer at the grocery store, Wal Mart and the
pump.