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The Rot Within, Part II: Inflation Is Not "Growth"

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Just as the Federal Reserve cannot directly force you to stick the needle of monetary heroin (debt) into your arm, it also can't force employers to pay employees more.

The official policy of the Central Bank (Federal Reserve)/government is: inflation is necessary for "growth," i.e. economic expansion. The unstated reason for this official support of inflation is that it's easier for borrowers to service their debts as their income inflates.

To take an extreme example: let's say a homeowner has a mortgage of $100,000, an annual wage of $40,000 and annual mortgage payments of $10,000. At 100% annual inflation in both prices and wages, the home mortgage remains fixed at $100,000, the payment remains fixed at $10,000 but his earnings double to $80,000.

Where the mortgage payment initially took 25% of his earnings, now it only takes 12.5%. Yippee Skippy, the homeowner has an "extra" 12.5% of his earnings to support more consumption and debt: thanks to inflation, the homeowner can now buy a car on credit and use the "extra" 12.5% of earnings to pay the auto loan.

Central banks around the world seek inflation for another reason: the Keynesian Cargo Cult that dominates all central banks and governments believes with quasi-religious certainty that people respond to inflation by buying more stuff now rather than later: since prices will rise in the future, it makes sense to buy stuff now at "lower prices compared to next year's prices."

This is called bringing demand forward, as the demand to buy stuff is shifted from the future to the present.

In an economy dependent on debt-based consumption, inflation is absolutely essential to reduce the real costs of servicing old debts so households can afford to buy more stuff on credit. This is the basis of the Fed's insistence that inflation is equivalent to "growth"--inflation enables households to continue adding more debt to buy more stuff, as long as earnings inflate along with prices.

There are three problems with the Fed's "inflation is growth" scenario:

1. Earned income (wages and salaries) don't inflate along with prices
2. Rising inflation and low interest rates crimp lender profits and increase risks
3. Bringing demand forward exhausts households' ability to fund additional consumption with debt.

To date, all the Fed's efforts to generate inflation have bypassed earned income: wages and salaries have declined when adjusted for inflation. Hourly wages: stagnant since 2008.


source: Rising Wages Where? Real Wages Post First Annual Decline Since 2012

Real household income has declined across the entire income spectrum:

Here's the same data in chart form, courtesy of Doug Short:

Deduct healthcare expenses and debt service, and what's left of wages for the rest of life's expenses is tanking: Courtesy of longtime correspondent B.C.:

Debating the real rate of inflation has become a financial parlor game because the real rate of inflation depends on the household's demographics, locale, expenses and income. Anyone paying the unsubsidized costs of healthcare or college tuition is experiencing crushing inflation (i.e. loss of purchasing power), while the low-income or retiree household receiving federal subsidies (i.e. no exposure to the real costs of higher education and healthcare) experiences low inflation.

But even the official measures of inflation reflect the destruction of purchasing power wrought by supposedly low inflation when wages are stagnant while costs keep rising:


source: What Inflation Means to You: Inside the Consumer Price Index (Doug Short)
Inflation: A Six-Month X-Ray View (Doug Short)

Fed policies have inflated asset prices but left earned income in the ditch. Please read How Effective Have The Fed's QE Programs Been? (STA Wealth Management) for a fuller understanding of the perverse consequences of the Fed's "inflation is growth" policies.

Though nobody in official circles dares discuss it, the reality is inflation coupled with low interest rates reduces lenders' profit margins and increases systemic risk. In an economy in which wages are stagnating or declining in real terms while major expenses are galloping ever higher, the only way lenders can expand borrowing is to lend to marginal borrowers--households who would not qualify for loans under prudent risk management.

For evidence of this, we need only look at the explosive rise in subprime auto loans and higher-education student loans: In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates (New York Times)

Lastly, there are limits on how much future demand can be brought forward when wages are declining. The Keynesian Cargo Cult has absolute faith in the notion that consumers faced with inflation will buy more today rather than pay more next year.

But the facts do not support the Keynesian Cargo Cult's misplaced faith. In Japan, where the central bank and government have struggled for years to generate price inflation as the means to "re-start growth," wages have fallen by 9% in real terms since 1997. (source: Voodoo Abenomics: Japan's Failed Comeback Plan Foreign Affairs)

When prices rise faster than incomes, people can't afford to buy as much. Soconsumption necessarily declines as prices go up and purchasing power goes down.There is nothing mysterious about this, but the Keynesian Cargo Cult is unmoved by mere fact and common sense.

Just as the Federal Reserve cannot directly force you to stick the needle of monetary heroin (debt) into your arm, it also can't force employers to pay employees more. Prices don't just rise for consumers; they rise for producers and employers as well. Every tick up in healthcare costs and producer costs increases the need for businesses to slash the one large expense they still control: payroll.

We all see the desperate gimmicks corporations are deploying to lower costs while keeping prices the same: reducing package sizes, putting less product in each package, selling "individual servings" at higher cost per ounce, lowering quality of the product, using more fillers, and so on.

The ultimate hubris of the Keynesian Cargo Cult (which includes the global economy's central banks) is the naive notion that they can manipulate an entire system with a few levers such that the desired outcome--and only the desired outcome--is the output.

The idea that you can change one input in an interconnected system of systems and only affect the one output you want is not just naive and simplistic: it requires a level of blindness and incompetence that is off the charts.

 

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Wed, 07/23/2014 - 15:08 | 4994428 Four chan
Four chan's picture

inflation = devaluation

the fed steals savings silently.

Wed, 07/23/2014 - 15:13 | 4994461 PartysOver
PartysOver's picture

Inflation is good!  Just look at Venezuelian stock market.  Up how many percentage points?  No toilet paper in the whole damn country but the stocks are rock'n.

Coming to a stock market near you.

Wed, 07/23/2014 - 16:00 | 4994707 NotApplicable
NotApplicable's picture

His summary is not quite complete.

The idea that you can change one input in an interconnected system of systems and only affect the one output you want is not just naive and simplistic: it requires a level of blindness and incompetence that is off the charts.

Or perhaps an overwhelming criminal class that empowers and enriches itself by doing so?

Wed, 07/23/2014 - 16:02 | 4994725 NOTaREALmerican
NOTaREALmerican's picture

The top 10% are doing pretty good managing all these debt & Big-Gov transfer scams.    That's 30 million criminals.  

Wed, 07/23/2014 - 16:58 | 4994992 lasvegaspersona
lasvegaspersona's picture

The 'accumulated return' on Charmin is great (but brown and stinky)....TP FTW!!

Wed, 07/23/2014 - 15:17 | 4994492 Da Yooper
Da Yooper's picture

Inflation ='s stealt theft of your earning's

 

without wage growth equaling or outpacing the manufactured banker caused inflation

 

every wage earner looses

 

& the bankers win

Wed, 07/23/2014 - 15:24 | 4994524 BKbroiler
BKbroiler's picture

stealt? you mean stolen? or stealth?  grammar police is watching you pal.

Wed, 07/23/2014 - 16:29 | 4994778 RaceToTheBottom
RaceToTheBottom's picture

Stealt= Stolen in the past

 

Coming to your new Eubonics dictionary.

 

Wed, 07/23/2014 - 15:10 | 4994435 orangegeek
orangegeek's picture

inflation is good for gubbamant - the gubbamant collects cash based on percentages of sale price, salaries and hourly rates ( you may find a few fixed fees)

 

unions like inflation because they take percentages for their extortion fees

 

so who's on the other side of this trade?  yep, you guessed it

 

so what's the solution??  stop spending - lower demand will drive deflation harder

Wed, 07/23/2014 - 15:13 | 4994449 Landotfree
Landotfree's picture

Everyone (99.99999999%) loves inflation as the alternative is deflation, eventually if things deflate enough the human species disappears.

The "solution" is the same "solution" God invented long ago.... inflate to max potential and then deflate to max potential.   My guess is 1-2 billion of the unfunded walking liabilities are going to have to go this cycle. 

Wed, 07/23/2014 - 15:28 | 4994551 NidStyles
NidStyles's picture

What utter BS. 

 

"the human species will disappear." 

 

Talk about drinking the damn kool-aid.

Wed, 07/23/2014 - 16:05 | 4994724 Landotfree
Landotfree's picture

Yeah I am sure humans will be on this floating rock forever... humans do not have unlimited power, sorry buddy.  

You should get out of the trailer every once in a while, you would then realize that nature is just a series of cycles.    Millions of species have already went extinct, I am sure they all thought they would be around forever... forever is a very long time.

Some of you of you are going to have to go before other ones... which ones go first, going to be fun finding out.

 

Wed, 07/23/2014 - 15:15 | 4994484 LawsofPhysics
LawsofPhysics's picture

"lower demand will drive deflation harder" --  damand for what?  plastic crap, sure.

Unfortunately there are now 7+ billion people all competing for a better standard of living and the calories that make that possible, so in this regard there is plenty of demand.

Wed, 07/23/2014 - 15:29 | 4994560 NidStyles
NidStyles's picture

I beg to differ, I don't see many Americans seeking a better standard of living. If they were they wouldn't be up to their throats in debt.

Wed, 07/23/2014 - 15:35 | 4994598 centerline
centerline's picture

There is a world of difference between true improvements in standards of living and what is perceived by most as improvements (more, more, and more).  Sold to you daily and reinforced by the "herd."

Also, this is not just about Americans.

Wed, 07/23/2014 - 16:06 | 4994738 NOTaREALmerican
NOTaREALmerican's picture

Short term thinking pathologically-optimist human don't see debt as "bad".   Debt is good.   You know why?   ________________________ (fill in pathologically optimistic bullshit about the wonderful future here.    It's the same reason all the children are above average).

Bullshit, don't leave home without it.

Wed, 07/23/2014 - 16:38 | 4994890 LawsofPhysics
LawsofPhysics's picture

Unfortunately, it's a global eCONomy.  americans, like the dollar are becoming less and less relevant every day.

Wed, 07/23/2014 - 18:46 | 4995459 DaveyJones
DaveyJones's picture

Mr. Cheney said "the American way of life is non-negotiable"

He fails to realize these days, no one's inviting us to the table

 

Wed, 07/23/2014 - 15:14 | 4994454 DaveyJones
DaveyJones's picture

It's growth, but the cancerous kind

Hyper-Inflation is Full Mastecization

Wed, 07/23/2014 - 17:06 | 4995030 Citxmech
Citxmech's picture

Well put.

Wed, 07/23/2014 - 15:12 | 4994460 kchrisc
kchrisc's picture

They NEED for us to think that it is growth to hide that it is all a ponzi theft scheme benefiting them and their cronies.

 And the "rot" begins and ends with the Unconstitutional rotting of our wealth via a Rothschild central bank.

 

"Banksters and their pol and crat puppets will have no quarter with my guillotine and I.”

Wed, 07/23/2014 - 15:14 | 4994464 LawsofPhysics
LawsofPhysics's picture

As orangegeek points out above, your government-sponsored oligarchs want their pounds of flesh (that's the privilege of ownership) and by God they will get it...

 

Inflation?  inflation of what, financial "products" of mass-destruction?  No thanks.

Wed, 07/23/2014 - 15:42 | 4994624 disabledvet
disabledvet's picture

Time to cull the herd. "We cannot promise you will live...but we can promise you may look at everyone as a Palestian."

Remember..."it's all about precision."

And yes...you will have air superiority and massive artillery support. "Walls of steel r us."

Wed, 07/23/2014 - 15:13 | 4994469 Colonel Klink
Colonel Klink's picture

Quite the opposite, after watching the Fed's monetary policy I started refusing debt use.

Unintended consequences bitchez!

Wed, 07/23/2014 - 15:16 | 4994490 youngman
youngman's picture

And companies love it because their sales keep going up..at least the price does...they may still sell the same amount of units..but with inflation the top line goes up...and of course CNBC jumps all over that as good numbers..they beat the street again they say...weee..to da moon

Wed, 07/23/2014 - 15:24 | 4994532 NaiLib
NaiLib's picture

No inflation is not growth. Inflation is transfer of assets from those with no debt to those with debt. USA in a nushell

Wed, 07/23/2014 - 16:19 | 4994812 RaceToTheBottom
RaceToTheBottom's picture

That and the new definition of WS is debt without any risk gets you:

Inflation is transfer of assets to Wall Street.

Wed, 07/23/2014 - 15:26 | 4994538 disabledvet
disabledvet's picture

So property values continue to soar in North Dakota because..."it's a Vinter Vonderland!"??

I gotta say Kiev still sounds like a better alternative even if it does mean carrying a Kalishnikov around.

Sure we might have to cap a few Ruskies "in the name of peace and prosperity" on occasion...but every paradise has a downside.

Maybe General, errr, Mayor Bloomberg could off some site seeing tours in Kharkov too?

"And here was where the mighty T-34 was produced! What a bummer!"

Wed, 07/23/2014 - 15:31 | 4994541 Sudden Debt
Sudden Debt's picture

Today I had a discussion with a young kid who worked as a intern about the fact that he had to work for nothing and that it was slavery according to him.
In the back of my head he was right actually but I tried to convince him that he was being educated and that it will increase his outlook for a real job.
But actually, I already knew that the chances of him finding a job where pretty slim.
He also told me he already had send over 150 application letters but couldn't get a interview. That was sad... He had all the right education and look like every average kid out there.
So the older generation still has jobs and inflation will be hard but bearable if the luxury is cut.
But for those kids who make nearly nothing... Have nearly nothing... And to see prices rise...
This weekend we went to several parties my wife and me. We drank over 500 euro in alcohol alone with the both of us and it wasn't that crazy. 2 days of fun. 250 euro's per person.
How do kids still pay that?
I used to go out 4 days in a row when I was young! And I drank a shitload more than what I drank this weekend.
Kids are missing out on a lot these days... We all had 20 to 30K euro cars that looked like they came out of fast and furious. These days, kids are lucky if they can buy those crappy little budget cars.
I drove a 73 Cuda back than. Banks would go crazy if a young kid would go to the bank to loan that kind of money to buy one now! Back than it was like : here's a blanc cheque kid! Have fun!
Sad shit...

Wed, 07/23/2014 - 15:33 | 4994581 NidStyles
NidStyles's picture

Your generation got to live it up though...

Wed, 07/23/2014 - 15:37 | 4994605 disabledvet
disabledvet's picture

Concentration Camps are good for you!

"And so is taking out some grid squares!"
Bring on the BUFF! Our backs are against the wall! We need all in on this one! There's only Me in Team! Profit Grupen Forward!

Wed, 07/23/2014 - 17:10 | 4995053 Citxmech
Citxmech's picture

My education cost me about 75x what the older guys in my office with the same degrees paid.  They graduated with little to no debt AND made the big bucks.  I'm getting half of what they make with 10x the overhead - and I'm still doing half-ass OK.  The younger kids now are just completely fucked.

PS  Big style points for the 'Cuda. 

Wed, 07/23/2014 - 18:53 | 4995487 DaveyJones
DaveyJones's picture

I went to UCLA for undergrad in the very early eightees and it cost under 400 a quarter. I was talking with my sister's mother in law who went a few decades before me and was shocked how insanely little it cost. She paid for everything and could. Just another example of our thieves and the new scale of their theft. This system was designed to be a publicly accessible system. That is the fartherst from the truth now and a complet violation of the laws that established it.    

Wed, 07/23/2014 - 15:44 | 4994638 Reaper
Reaper's picture

If you call a monkey. professor, do you listen to his ramblings? What qualifies our present monkeys to run our economy? The flaw is the craving by the lazy non-thinkers for someone better than them to think for them. What qualifies a NY Times editor or a Wall Street Journal editor to certify the correctness of economic schemes? Whichever Snake Oil is promised to be the best should be chosen?

There is no Keynesian free lunch. There is no banker to be trusted. There is no one to trust with your earnings.

Wed, 07/23/2014 - 15:51 | 4994665 NOTaREALmerican
NOTaREALmerican's picture

You are completely ignoring the most important human survival trait there is:  the ability to manipulate other humans with bullshit. 

Politics is simply a forum where the smartest-n-savviest people in society manipulate the dumbasses for fun-n-profit.  The forum is created (in part) by "the media".    The bullshit flows into the brains of the dumbasses (via the media),  the dumbasses create soothing self-delusion,  and - in exchange - give power to the smarter-n-savvier people as represented in loot.

Re: There is no Keynesian free lunch. There is no banker to be trusted. There is no one to trust with your earnings.

The bullshit says otherwise.  

Bullshit,  ask for it by name.

Wed, 07/23/2014 - 16:23 | 4994825 RaceToTheBottom
RaceToTheBottom's picture

Don't use that term.  Please don't say "Smart and Savvy"

There you caused me to vomit all over my keyboard.

Wed, 07/23/2014 - 15:47 | 4994645 NOTaREALmerican
NOTaREALmerican's picture

Survival of the fittests,  BITCHEZZZ!!!! 

Wed, 07/23/2014 - 16:13 | 4994779 honestann
honestann's picture

All true, except you confuse what the cargo cult says with what they actually know.  Exactly zero of the top-level Keynesians believe their Keynesian claims are valid or correct.  What they do is strictly to misdirect wealth into their hands in the short term, and cause the world economy to collapse so they can implement complete tyranny when that happens.

Wed, 07/23/2014 - 16:17 | 4994798 NOTaREALmerican
NOTaREALmerican's picture

Maybe.

 

Keynesianism is more of a religion.  Believers repeat the bullshit of the religion because they believe.    Sure, the ones at the top, the smart-n-savvy people, are opportunistic sociopaths but they still believe.  

Wed, 07/23/2014 - 16:34 | 4994871 honestann
honestann's picture

Oh, enormous numbers of non-top-level Keynesians "believe" the Keynesian religion and propaganda.  Absolutely true.  But they don't "believe" because they've thought it through, they believe "on faith" (because any careful inspection will reveal their religion to be bogus).

But no way do the top-level predators believe the Keynesian BS.  They're not that stupid.  They're smart, crafty, diabolical... and self-conscious predators.  They know they are predators, and are proud of it.

Wed, 07/23/2014 - 16:18 | 4994801 Offthebeach
Offthebeach's picture

I can remember attending a Red Sox double header ( bleachers, natch), The Naked Eye, to China Town for dog/pork/cold tea unti 3AM, then stop Brockton for a good BJ ( I'm hammered and its like a chub skin tab. She gets me off.)
Started with 2 bills, hand coffee money in the morning.

Rot in Hell Fed Bank Soul Slavers!

Wed, 07/23/2014 - 16:19 | 4994809 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

The desired outcome is to separate you from the wealth you have so that the banks will end up with it. These bureaucrats want churn and volatility

and they don't care about the markets we live in and work in. The Neo-Keynesian wants any market activity as opposed to no market activity.

Foreclosure, bankruptcy, liquidations, mergers, all add up to systemic churn whether that is good or bad churn does not matter if the God damned markets are moving somehow. Neo-Keynesians would use the availability heuristic and pull the plug on the mainframe if they thought it would jump start the markets. Equilibrium Economics does not exactly work well under condition where nothing is stable and the meso levels of economics are wiped out. Clearly, major structural changes are required but the powers that be need to be pushed out of the decision making process entirely. Carp on all you want about the Neo-Keynesians but until we get rid of the unworkable system they will always be the meat puppets that sell to the Muppets.

This is why Karl Marx came to the conclusion that revolution was going to be the only end game available to select from en masse.

IMHO the revolution has started and shit will hit the fan eventually. It's just a matter of time.

Wed, 07/23/2014 - 16:32 | 4994864 Duc888
Duc888's picture

 


Inflation Is Not "Growth"

 

Bullshit.  Tell that to my buddy in Easton who uses his home as a fucking ATM machine.

Wed, 07/23/2014 - 16:56 | 4994980 Colonel Klink
Colonel Klink's picture

One day to be deposited on a bank REO list.

Wed, 07/23/2014 - 16:39 | 4994898 pakled
pakled's picture

"...is the naive notion that they can manipulate an entire system with a few levers such that the desired outcome"

 

"The more you tighten your grip, Tarkin, the more star systems will slip through your fingers".

 

/Princess Leia

Wed, 07/23/2014 - 16:46 | 4994927 Youri Carma
Youri Carma's picture

"Inflation Is Not "Growth"

Like Jim Willie said on Greg Hunter's: We Got a Monster Recession of -6% or -7% Right Now https://www.youtube.com/watch?v=cIphgOd-8t8

Wed, 07/23/2014 - 16:46 | 4994929 passenger_pidgin
passenger_pidgin's picture

Chuck's charts are quite compelling, but to me, the biggest rot is the American people themselves.  The dumbing down and demoralization of our population have brought productivity and expectations to new lows.  A very small percentage of the population can even understand this material, and even less have the means to take any action, even if they can comprehend.

I'm thinking about making a run for it.  Any suggestions?

Wed, 07/23/2014 - 18:07 | 4995287 World Dollar
World Dollar's picture

It was always obvious that inflation is not growth, only fools fall for the crackpot economics promoted by central banks and governments. 

"All prices, whether rising, falling, or constant, allow profitable production of goods and services to occur. Under falling prices in the long run (World Dollar) economy, both buying and selling prices fall, meaning the spread between them which profit depends on continues to exist. To give an example, the vibrant market for computers and information technology has combined rapid growth with constantly falling product prices. Also, the late nineteenth century saw the United States, during its two decades of falling prices under the gold-standard, experience high growth rates. 

As the money supply only determines prices, and any prices allow profitable production to occur, the real factors that determine economic growth include capital accumulation, growing innovation, productivity growth, and an intensifying division of labour."

Wed, 07/23/2014 - 18:52 | 4995470 novictim
novictim's picture

This is all a straw man.

I have no doubt that the Fed has -never-  stated that Inflation equals Growth. 

They have stated that the market knows best. Which was wrong.

They have stated that moar cheap moneyto the "investors" in this economy will spur investment and growth.  Which was wrong.

They have failed to acknowledge the phenomena of a liquidity trap and instead keep pumping money into the hands of people who just then hoard it.  And that is VERY VERY wrong!

The FED Fuckers have implemented bank friendly policies to keep inflation low and they have ignored unemployment which happens to be double the healthy rate of unemployment (3.0%).  And both of these things are linked and the policy is elitest and unacceptable and WRONG...exept, of course, to the goof balls jere on ZH.

You know, classical economics does link inflation to job growth, 'tis true, and it does so for very good reasons.  You folks at ZH should pull your heads out of each other's butthols for a moment and understand why rising inflation rates tend to drive increased job growth.  Unless, of course, you are too chicken to actually grasp some basic Econ101 factoids?  Yep, you are aren't you?  Too bad!

Wed, 07/23/2014 - 21:25 | 4996138 Ban KKiller
Ban KKiller's picture

All I know is I don't buy anything I don't need. No debt. Do have a depreciating liability, car. Three years bank fighting so no payments. First plaintiff attys quit and now the plaintiff wants to substitute some other fraudster, Nationstar mortgage, a well know criminal outfit, as the brand new, all improved plaintiff. In discovery the current plaintiff admits to giving up the note and assigning away the mortgage. As if!  Judge allowed me to file all the discovery. Pre trial confe rence this Friday. I'll take a dismissal with treble damages (unfair trade practices) with prejudice. They won't give that so will oppose the dismissal until they admit to submitting a forged note in the complaint.

 

 

So yes inflation is understated and all the books are cooked.

Wed, 07/23/2014 - 21:28 | 4996142 starman
starman's picture

Inflation is a bitch then you die!

Wed, 07/23/2014 - 23:22 | 4996583 Spungo
Spungo's picture

I smoked a bunch of monetary stimulus last week. I woke up with a sore ass, and I think I have HIV.

Thu, 07/24/2014 - 03:27 | 4996993 IronForge
IronForge's picture

For the USA, the betrayal began with the Federal Reserve, then amplified by the Wage Freeze in the late 70's.

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