Still Think The Fed Isn't Fueling Inflation?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Just as we can't eat iPods, we can't subsist on official reassurances that the Fed and inflation are both benign.

There is a great divergence between the conventional financial media and the public who goes to the supermarket: the financial media swallows whole the official artifice that inflation is near-zero while J.Q. Public sees his/her grocery costs, health insurance, etc. rising by leaps and bounds.
Many observers finger the Federal Reserve as the villain in the inflation story: it's all well and good to conjure up a few trillion dollars to pass out to your banker buddies, but there are always costs, recognized or not, to every action, and the Fed's credit creation and numerous quantitative easing operations have greatly expanded money supply.
All else being equal, a massive expansion of money typically causes inflation, as the flood of new money starts chasing goods and services that haven't expanded at the same high rate as money supply.
One camp reckons the reason why inflation is muted is that the Fed largesse has flowed into asset bubbles rather than goods and services, and proponents of this view make a good point: since little of the Fed largesse has trickled down to the to bottom 99.5%, it can't exerting much pressure on consumer prices. In effect, the price pressure is all in equities and rentier assets such as real estate rather than in goods and services.
But demand from consumers flush with cash is only one facet of inflation, as this chart of oil and Fed operations from Fine Charts (courtesy of Petr Fiala) reveals. Recall the charts I posted a few days ago showed a tight correlation between the price of oil and food: Why Are Food Prices so High? Because We're Eating Oil.
In other words, if the price of oil goes up, so does the price of food, and everything else that must be transported or that consumes oil in its manufacture.
Now examine this chart of Fed operations and the price of oil: when the Fed is actively expanding credit/money, oil goes up in price.
If little of the Fed's largesse is ending up in consumer's wallets, why should oil go up as the Fed shovels money into financiers' accounts? The answer is somewhat speculative, but there are two avenues of price pressure other than consumer demand:
1. Financial speculation in oil futures contracts, which fuels non-consumer demand
2. Fed credit/money creation weakens the U.S. dollar (USD), pushing the cost of oil priced in USD higher.
This is how the Fed fuels inflation, even when little of its largesse ends up in consumers' wallets. Recall that the price of tradable commodities such as grains and oil are set on the global marketplace. That means that grain harvested in the U.S. and oil extracted in the U.S. is not priced solely by domestic demand: as the Fed has weakened our currency with its various manipulations to favor financiers and bankers, oil and everything that uses oil rises in price in the U.S.
Sellers of grain and oil have a fiduciary obligation to get the best price they can, and in a Fed-engineered weak-dollar environment, the best price is not in domestic markets but in overseas markets.

This chart shows the Fed is indeed fueling inflation by driving oil higher. Official denials are to be expected, as are ginned-up inflation statistics; but just as we can't eat iPods, we also can't subsist on official reassurances that the Fed and inflation are both benign.

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buzzsaw99's picture

My Birinyi ruler now says next stop S&P @ 2362.

Pinto Currency's picture

Inflation means growth.

Less money in your pocket means happiness.

Mission accomplished.

max2205's picture

I am calling spy top today. ..bookmark it bitchezzz

ejmoosa's picture

What keeps the Feds from buying the spy and pushing it higher whenever it decides the markets need a boost?

What if they were to identify perhaps 50 or so key stocks that if they are rising, the markets follow suit and rise?

Any idea how many billions of dollars might be necessary to pull this off?  

They can print all the money they want, and then keep the prices in the ranges they want.  Hell, they could even start voting those shares and manipulating the obectives of the companies toward whatever objectives they sought. They could short gold and silver at will, and never even worry about whether the trades made money.  After all, they can print more.

At this point, I don't trust anything to be out of the realm of possibilities.  And it sure makes a lot more sense than any other explanation on what we are seeing at this point.


Sonic the porcupine's picture

Eventually people want physical delivery of gold. At some point supply and demand has to impact price, right, RIGHT???

Hal n back's picture

Is there is limit as to how far the markets can be inflated. At some point even the insiders say this is crazy and do not want their money chasing this.

Winston Churchill's picture

Another summer of recovery will be fatal.

Hal n back's picture

will those 11,600 and HPQ 40,000 go directly to discouraged?

fonzannoon's picture

I don't see how you get inflaton without wages going up. 

ejmoosa's picture

Businesses raise their prices to cover their costs.  If they sell less volume, so be it.  But they are not going to be operating at a loss.  


And more and more of the bucks floating around out there are not from wages.  They are from student loans, HELOCS, and the government.

101 years and counting's picture

and, as they sell less volume, they need fewer employees to produce fewer products.  and the cycle kicks into high gear of mass firings -> even less demand -> more firings, etc.....

ejmoosa's picture

Yes, they will right-size until their profit levels return, or fail trying.

Hey, isn't that how capitalism was supposed to work in the first place?

The Fed just delayed it by 8 years or so at the cost of trillions of dollars and years wasted, too.

intotheblack's picture

Debase the currency? Flood export markets with cheaper USDs that return higher energy costs that in turn support higher food and other prices?

Is inflation only a function of wages?

U.S. Federal government spends more (borrowed) USDs than every U.S. wage earner combined, yo. Also banks create deposits when they issue loans. Wage earners only a small part of the mix in our era of massive central states financed by credit money. 

marathonman's picture

You don't see the US government running trillion dollar deficits for 6 years running which the Fed is monetizing as having the potential to create inflation?  It worked for LBJ, Nixon, and Carter.  It's working for Barack.  Nothing new here.

Al Huxley's picture

...more money chasing the same amount of raw materials.  It doesn't have to wind up in the average guy's pocket, as long as some of it's being directed to buying stuff that's finite in supply.


The exception of course, is gold, which follows the exact opposite law of supply and demand - that, or alternatively, although the FED and CBs know how to control the price of real commodities via clever manipulation of paper proxies, they selfishly refuse to apply their magic to things like oil, corn, etc... as a favor to the average guy on the street.

fonzannoon's picture

Do the 1% have more buying power than the 99% when it comes to raw materials? Sure the 1% are benefitting while Joe sixpack croaks, but I think that is ultimately deflationary. I am expecting the final response to this to be inflationary, or just an overall death of the currency, and whatever fun that brings. 


Al Huxley's picture

Resource competition is global - 3 billion Indians and Chinese are competing to buy that same oil.  But if you want to see inflation in the .01%'ers world, look at the prices they're paying for art (or basketball franchises).

CrashisOptimistic's picture

The primary oil website had comments on this the last few days.

The Indians and Chinese . . . if they burn oil at US per capita rates they'll burn, just themselves, 120something million bpd.  That's just them, forgetting rest of the world.

The world's production is sub 90 million bpd. 

So are we going to persuade them to accept (forever) a lesser GDP than the US GDP, or are they going to demand equivalence (and they ARE entitled to that).

So when they are demanding 120 million bpd and only 90 comes out of the ground, plus the rest of the world's 70 mbpd demand -- how does that work, at any price?

Al Huxley's picture

The price goes up to ration demand, which of course crushes the economy...  I'm basically with you on oil being the limiting factor, but in the short term what happens is there's more money chasing it, so the price goes up.  All the fucking obfuscation by the banking class aside, you can't just increase the amount of $ in the system and expect no side effects - common sense is completely applicable here.

CrashisOptimistic's picture

It's pretty popular to say money printing diluted dollars with respect to oil.  But oil hit $147 the summer of 2008 before QE was even in the lexicon.  We'd never even heard of it then.

Oil was sub $20 in the late 90s and 2000, and boomed to 147 before the Fed did any printing at all.

So . . . sorry I don't sign onto oil got pricey because dollars diluted.  Oil got pricey because more and more people who HAVE to have it got born and what came out of the ground flatlined.

Al Huxley's picture

I think the 147 was an overshoot on speculation, just like the following drop to 35 or whatever was a over-snapback in the opposite direction.  And yes, the demand competition is absolutely driving the price - that was my point about 3 billion Chinese and Indians.  But if you and I both need a barrel of oil, and I have 50$ and you have 50$ to spend on it then the price will be around $50. 


But if I have the ability to print more money, and I just print an extra $20, then I'll outbid you for that, because now I have more money - except that if you also have another $20 (say because you loan me money so I can buy stuff from you, and then take the money I give you and use it to buy oil) then the price is going to be $70.

The wheels on the bus are going to fall off's picture

I agree with you guys, i think the lack of energy in the near future could be the major factor in warfare and the economy. We have a exponential population growth, an exponential currency supply all leaning against a finite energy supply. Something is going to give, its totally unsustainable. 

NoDebt's picture

It damned well better be inflationary.  Fed's been trying to do that for 5 years now.

The way you have inflation without wages rising is by with a declining standard of living.  The Fed's cool with that outcome.  Statist government elites seeking dependent subjects (er, voters) are DEFINITELY cool with that.


CrashisOptimistic's picture

Wage inflation in the new normal is indexed pensions and indexed govt benefits.

Al Huxley's picture

I'm willing to bet that, for the majority, wage inflation is not the new normal (that was the old normal), but a declining standard of living definitely is. 

all-priced-in's picture

Part of it is --

Government transfer payments + other government bucks being handed out are not included in wages -

So even if wage growth is flat - you still have a flood of cash - SS checks, food stamps  & student loans are some of the big ones - but there are many more.

Plus I think  you have many more people working "off the books" so they can keep their food stamps, unemployment "compensation" and Obama phone.

It use to be people worked off the books to avoid paying taxes - now they do it to keep their welfare free shit benefits.





Gaius Frakkin' Baltar's picture

What are we waiting for then? Let's eliminate all jobs and let everyone print their own money.

Everybodys All American's picture

That would be considered hyper inflation when that happens ...

cape_royds's picture

Answer: debt.

Look at post-secondary students. They don't make much money, but their tuition costs have soared. Conclusion: you don't need rising wages to cause higher prices. Credit expansion can do the job.

Ask yourself: have you ever seen an economy in which it's so easy to borrow, but so hard to earn?

That's why we get the spectacle today of stagnant wages and rising prices.

We don't have hyperinflation. We have steady, grinding, relentless inflation. It's not the inflation that makes you push a wheelbarrow. It's the sort of inflation that quietly eats your grandchildren.

LawsofPhysics's picture

So long as there are people looking to improve their quality of life, there will always be demand for calories.  Oil remains one of the most concentrated forms of calories.  With 7+ billion, and growing, there will be plenty of demand, regardless of what a bunch of useless paper-pushers at the Fed do.

Want energy demand to drop?  Take the population back under a billion.

Oh wait...

CrashisOptimistic's picture

Yup, good call LoPdood.

The bad news is this is the most obvious, most effective and most likely way it happens.

El Vaquero's picture

That would be disease and starvation.  Barring a nuclear war, war in and of itself doesn't kill people fast enough.  That's not to say that war couldn't kick off disease and starvation, but famine is how you kill off large chunks of the population.  Or, rather, how nature will kill a bunch of us, so long as no oil substitute is found and we don't nuke ourselves off of the planet.

Kaiser Sousa's picture

want to see what an orchestrated operation to take down the phony paper price of Silver looks like??

as has been the case for 5 years...

2 hours before the open of trading in london...

the open in london...

the open in NY on the Crimex..

the last hours of trade goin into the close iin london...

Winston Churchill's picture

Start thinking in ounces, not fiat.

You are tearing yourself up daily here, man, take it easy or sell.

If you can't you will nver live to sae this charade over.Stress kills.

LawsofPhysics's picture

I'll second that.  After taking a company public I have seen stress kill many.

When they hammer the PMs, just say thank you as it allows you to physically save some of your purchasing power at a lower cost.

Grande Tetons's picture

I will second your second. It is like buying fire/all perils insurance near Mt. St. Helens in the 70s. 

Kaiser Sousa's picture

hey guys thanks but just pointing out the fraud - albeit daily...

my last 500oz order arrives sometime today...

im watching to see how low they take the phony paper price b4 hitting Apmex up again next week...


Al Huxley's picture

Huh, and here's me with a few bucks in my pocket - what to do, what to do...  Kidding of course, I expect the price to fall quite a bit more before they wrap this downleg up.

Quinvarius's picture

They will run out of customer assets to ship out eventually.  They have to move the price down because of all of the bullish derivative bets they are on the unhedged short side of.  The more bullish people are, the more they have to move the price down.  That is what I learned from the Barclay's post mortem.  They will shed customer assets and take trading losses to stop their derivatives from hemorrhaging.  It is a gift to the rest of us.

SDShack's picture

Derivatives and their stepchildren CDS only come into play if the rule of law is followed. The rule of law doesn't exist anymore. When the shit is about to hit the fan, the law is compromised. Derivatives and CDS didn't take out AIG. Derivatives and CDS didn't take out Greece, or Cyprus or any of the PIIGS. Derivatives and CDS didn't take out GM or Chrysler. Derivaties and CDS are just another con man shell game. TPTB will ALWAYS be bailed out because of TBTF. They have engineered the system this way. Forget derivatives and CDS. They have NEVER been triggered, even though they should have had the rule of law been followed. The rule of law is dead. Derivatives and CDS are just a tool of TBTB to insure TBTF and tax payer funded bailouts. History has proven this.

foodstampbarry's picture

Holy Fuck I went to Walmart yesterday and spent 189.00 on nothing. Fuck you Mr. Yellin.

A82EBA's picture

some have an EBT card that adjusts for inflation

Sudden Debt's picture

does the card get bigger?