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Worldwide Inflation Is Impacting Recovery
This article originally appeared in The Daily Capitalist.
The import-export reports came out Tuesday revealing declining imports and exports. In addition export and import prices continue to rise substantially. Much of the cause of this is due to inflation and price inflation not only in the U.S., but worldwide. In particular, the decline in imports since May, 2010 is a negative signal for the economy. It was Adam Smith and Frederic Bastiat who demonstrated that rising imports was a sign of a healthy economy, not a poor one, and the data has borne out that truth for centuries.
U.S. imports fell 1.7% to $210.9 billion after climbing 5.4 percent to $214.51 billion in January, the biggest gain since 1993. Decreasing demand for autos and petroleum products led the decline. Exports declined 1.4% to $165.12 billion from $167.54 billion the previous month.
From the Census Bureau and the BEA:
The January to February decrease in exports of goods reflected decreases in automotive vehicles, parts, and engines ($1.0 billion); industrial supplies and materials ($0.6 billion); other goods ($0.5 billion); capital goods ($0.3 billion); consumer goods ($0.2 billion); and foods, feeds and beverages ($0.2 billion).
The January to February decrease in imports of goods reflected decreases in automotive vehicles, parts, and engines ($2.3 billion); capital goods ($2.1 billion); industrial supplies and materials ($1.4 billion); and other goods ($0.1 billion). Increases occurred in consumer goods ($2.3 billion) and foods, feeds, and beverages ($0.1 billion).
The February 2010 to February 2011 increase in exports of goods reflected increases in industrial supplies and materials ($9.6 billion); capital goods ($4.0 billion); foods, feeds, and beverages ($1.9 billion); automotive vehicles, parts, and engines ($1.0 billion); and consumer goods ($0.8 billion). Other goods were virtually unchanged.
The February 2010 to February 2011 increase in imports of goods reflected increases in industrial supplies and materials ($9.2 billion); consumer goods ($5.7 billion); capital goods ($5.7 billion); automotive vehicles, parts, and engines ($3.3 billion); and foods, feeds, and beverages ($1.4 billion). A decrease occurred in other goods ($0.3 billion).
But look what the Wall Street Journal reported:
An easing in the U.S. trade gap late last year provided some support to the slow economic recovery. Trade was the biggest contributor to growth in the fourth quarter as exports rose sharply and imports, which subtract from growth, fell. But high oil prices, and the subsequent rise in gasoline prices, are now expected to weigh on the economy. ...
February’s trade data showed imports fell for the first time in four months. With oil prices surging above $110 a barrel for the first time in more than two and half years amid ongoing unrest in the Middle East and North Africa, the U.S. has cut back on its energy imports.
The U.S. bill for crude oil imports in February fell to $21.13 billion from $24.51 billion the month before, despite a $2.83 jump in the average price per barrel to $87.17 -- its highest level since October 2008. That’s because crude import volumes tumbled to 242.37 million barrels from 290.67 million.
“The narrowing in the trade deficit in February is a brief respite before the impact of the more recent surge in oil prices pushes the deficit sharply wider,” Paul Dales, economists at Capital Economics, wrote in a note. He said the data provide evidence that higher commodity prices pose greater risks to economic growth than to inflation.
So now most mainstream commentators and economists are saying that reduced imports and greater exports were reviving the economy in Q4 2010, but now that exports have slowed and imports have decreased we are getting worse. That isn't the case. Rising exports was a result of inflation the first impact of which was to debase the dollar and make U.S. exports more attractive to foreign buyers.
The BLS report on import-export prices that also came out yesterday and noted big price increases:
U.S. import prices rose 2.7 percent in March, the U.S. Bureau of Labor Statistics reported today, following a 1.4 percent advance in February. The March increase was driven by both higher fuel and nonfuel prices. The price index for U.S. exports increased 1.5 percent in March after rising 1.4 percent the previous month.
This was the biggest jump in food prices since 1994.
Underlying these beliefs is the idea that inflation is a cost-push factor, whereby rising prices beget rising prices as labor demands higher wages to keep up with prices and, as the theory goes, this can spiral out of control. But they confuse price changes from supply-demand with inflation which, as we all know, is an increase of the supply of and demand for money.
“The weak dollar and higher oil and commodity prices continue to lift inflation,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.
Let me correct that for you: "Inflation continues to weaken the dollar and lift oil and commodity prices."
There are several factors going on here that are leading to higher prices.
First there are supply-demand factors, mainly oil, and, to a lesser extent, food costs. A large portion of the import picture had to do with oil, no question about that. The current unrest in the Middle East, especially in Libya (6% of U.S. supply), Bahrain, Iraq, and instability in other non-oil producing states, have roiled the oil markets but supplies remain adequate. If you look at the U.S., demand for petroleum products has declined because of high prices. Output of refineries in the U.S. actually declined 1.6% in March and inventories of crude oil have been climbing steadily since January, 2011. "Gasoline demand, at minus 1.2 percent year-on-year, is the weakest it's been in six months in what is solid evidence that high pump prices are changing driving habits."
I would expect that gasoline prices will start dropping, assuming nothing crazier happens in the Middle East.
But there are other factors which drive oil prices and that is inflation, that is, the inflationary monetary policies worldwide are impacting demand for commodities and food as growing money supplies flood the markets. Here are some of the headlines I grabbed yesterday and today from Bloomberg and the Wall Street Journal:
- IEA Says Oil Prices Above $100 Hurt Economy, Keeps Demand Outlook Stable
- U.K. Retail Sales Plunge Most in 16 Years as Inflation Squeezes Households
- Stark Says ECB Intends to Raise Its Interest Rates at ‘Appropriate’ Pace
- U.S. Deficit to Rise to Largest Among Major Economies, IMF Says
- IMF, EU Officials Meet in Lisbon to Plan $116 Billion Portuguese Bailout
- Japan Sees Greater Hit to Economy Than First Estimated on Nuclear Crisis
- German Inflation Unexpectedly Quickens to 2 1/2-Year High on Energy Prices
- French Inflation Quickened in March, Adding to ECB Pressure
- BOK Raises Inflation Forecast
- Singapore Tightens Monetary Policy
- Commodities Hit China Trade Figures
- Surging Oil Prices Bite Demand
None of these stories are encouraging with regard to inflation and rising prices. In other words, commodities are rising internationally because of global cooperation to inflate money supplies in order to stimulate their economies to recover from the Crash of 2008. Food price gains are clearly a result of money pumping by central banks. While there are some supply-demand factors related to food, it is obvious that it is money printing that is stimulating all commodities. The above headlines reveal that many countries are seeing the impacts of loose money and are contemplating slowing down money growth by hiking interest rates. China is the prime example of this. I believe they will experience another real estate collapse.
We can conclude from these and other data that:
- A drop in imports (as well as exports) shows a weakening U.S. economy as shown on the first chart, above.
- Inflation and price inflation is a worldwide phenomenon.
- U.S. money supply (TMS1 and 2) is growing. In the past 12 months, TMS 1 has grown 6.8% and TMS 2 has increased 10.3%. (Data from Michael Pollaro's Contrarian Take.)
- The U.S. is just starting to see price inflation as the import-export price charts above show us and I would expect it to increase over the near term. Evidence of this is already happening, regardless of what the CPI reports.
- Retail sales in the U.S. are stimulated by money expansion and that the most active consumers are upper income people who are benefiting from the financial markets (the destination of QE dollars). The result is a two-tier economy which hasn't yet reached the lower tier.
- As prices have taken off, as China has been experiencing, there has been a boom in commodities and in financial markets which will decline when central banks start raising rates to stop price inflation.
- Oil prices will decline as demand drops because of high prices (stimulated from political and inflationary factors) and again when central banks increase interest rates. But this is also subject to political factors.
- As long as unemployment remains high, I believe the Fed will continue with QE2. Until there is a clear trend downward in unemployment (it shows continuous decline and drops below 8%), they will face political pressure to use monetary policy to stimulate the economy.
- If and when the Fed tightens the money supply, U.S. financial markets will decline.
- It appears that internal U.S. economic growth is mainly a monetary phenomenon, but there are some signs of organic economic growth as companies and banks seek to repair their balance sheets. It is very difficult to measure the relative impact of organic growth, but I do not believe it is a solid trend and will not be a solid trend until the credit markets and loan demand improves.
- The real estate markets, residential and commercial, will continue to cause a drag on the credit markets.
- It is clear that the economy is stagnating and experiencing price inflation.
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All of these articles debating in/deflation are either disingenuous or misguided at best.
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It was the fault of the Japanese for allowing such a reactor to be built in that location without additional safety measures being required. That's the real story here. That and the shitty enforcement of already lax safety standards.
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Thanks happened while I was rooting for fiscal sanity and deflation. My stack of PM became much more valuable than my cash. Inflation may be hampering
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I heard the whole interview, and he said "if silver goes to triple digits this year that would make me think about selling. On the other hand, if the dollar is confetti while silver is $150, I'll keep my silver."
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The lower echelons of a tyrannical regime who are responsible for (most likely) imposing unjust rulings against the oppressed masses are now scrambling over one another in a last-ditch effort to avoid their date at the hands of the lynch mob.
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A funny thing happened while I was rooting for fiscal sanity and deflation. My stack of PM became much more valuable than my cash. Inflation may be hampering your recovery, but it has strapped rocket packs onto mine.
Bernanke, MY MAN!!!!!!!!!!!
"It is clear that the economy is stagnating and experiencing price inflation."
Stagflation is here! The Federal Reserve, with QE2, is both slowing down economic growth and rapidly increasing inflation.
yeah we definitely aren't experiencing any of that nasty, hard-to-stop, inflation. Benny can kill this in 15 minutes.
Inflation and deficit spending is the stealth tax and confiscator of wealth and value of diligent savers.
Unless you "accidentally" keep your savings in things that have intrinsic value, such as real estate, commodities (gold, silver, crude oil, soybeans, etc.), productive businesses, or other items instead of pretty engraved / printed pieces of paper.
Thanks for the thorough analysis. Just right for developing one's own opinions, not a jamming down the throat of an analysts torqued "facts". I like that.
Ben says inflation is only transitory, don't you guys ever listen?
Nicely done.
"...The result is a two-tier economy which hasn't yet reached the lower tier..."
Yes it has! Didn't you catch the statistic that the retail/food service industry lost 23% of the jobs, but magically added 49% of all NEW jobs created (like those reported by the BLS)!
See, trickle down DOES work, a couple million minimum wage, part time, workers can't be wrong!
Thank you: clear & succinct.
Party like it's 1974!