Inflation

Charles Kaldec writes:

To see more clearly how the price of the dollar has changed, it helps to
view price changes over a 10 year period. Since 2002, the price of a barrel of
oil has increased four-fold, to $107 last Friday from $26 in 2002. To suggest
that oil companies had enough power to impose such a price increase, or that
speculators are responsible for a quadrupling of the price of oil is, on its
face, preposterous. Instead, the price of oil and gasoline are up because the
Federal Reserve has driven the value of the dollar down.

For example, if the dollar since 2002 had been as good as the:

Chinese yuan, the price of oil today would be $82 and a gallon of
regular gas would cost about $3.10;

Euro, the price of oil today would be $77 and regular gas would cost
about $2.90;

Japanese yen, the price of oil today would be $71 and regular gas would
cost about $2.75;

Swiss Franc, the price of oil today would be $63 and regular gas would
cost about $2.50.

Thanks Mr. Bernanke!

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Coming Inflation?

If the economy continues to improve and more money is sloshing through the system, it's easy to see how inflation could grab hold. Yet, if you understand Austrian economics, you'll look beyond how the mainstream views inflation and to its root cause: monetary debasement.

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Inflation

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Cartoon: Gas Prices

CPI: 3.6%

The Labor Department reported that U.S. consumer prices decreased 0.1 percent in October, due largely to falling energy prices, and that annual inflation now stands at 3.6 percent, down from a three-year high of 3.9 percent in September.

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Inflation

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Cartoon: Bernanke's Printing Press

"The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."

Ben Bernanke November 21, 2002

Greenspan is Pro-Printing Press

Former Federal Reserve Chairman, Alan Greenspan, appeared on MSNBC's meet the Press where he made a shockingly blatant statement that is sure to make its way around the 'Net at lightning speed.

What makes this ironic, is that many free-market and Austrian economists believe Greenspan's policy of taking interest rates to historic lows at the Fed were responsible for the subprime mortgage and credit crises and the bubble in the real estate and stock markets which culminated in the 2008 market meltdown and real estate crash. In fact, Time Magazine placed him 3rd on a list of 25 people to blame for the financial crisis, and this is probably so.

While Greenspan has spent much of his time since the crisis attempting to rewrite history and his participation in the worst economic downturn since the Great Depression, mainstream media appearances such as this one will not liekly do much to help his efforts.

In this MSNBC interview, Greenspan was asked, "Are US Treasury bonds still safe to invest in?" You have to listen to his answer to believe it. Greenspan sits there and utters a single sentence that basically says what no dollar-debt holder wants to hear: We will devalue your debt into the ground by cranking up the printing presses.

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Inflation: 3.6%

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Bernanke's Speech on the Economy

Here is the transcript.

At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability.

My thoughts: Ha!! Credibility for maintaining price stability? The dollar has lost over 95% of its purchasing power since the Fed was created. That is called failure!!


Mish Shedlock provides some usefully commentary.

Bernanke did everything possible to mitigate his role and the Fed's role in this crisis. His unmitigated gall comes through loud and clear with this bald-faced lie:

"The Federal Reserve's actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer."

For starters, were it not for the complete ineptitude of the Greenspan and Bernanke Fed the US would not be in this mess in the first place. Second, there most assuredly is a cost to the Fed's policies.

Prices are higher, wages are not. Banks were bailed out at taxpayer expense. The Fed pays interest on reserves. That interest comes from taxpayers. The Fed's balance sheet is loaded to the gills with garbage from Fannie Mae and Freddie Mac. The Fed is not at risk on that garbage because Congress approved unlimited backing for GSE debt. That unlimited backing is over $300 billion and counting. Those losses are not all on the Fed's balance sheet of course. However let's not ignore the Fed's role in getting Congress to pass that blatantly stupid bill.

Let's also not forget the Fed cheerleading fiscal stupidity in Congress, not wanting Congress to do anything about monstrous deficits now. Keynesian and Monetarist clowns never want to do anything now. They always want to do it at the "appropriate" time, which in practice means never.

Most importantly I would like to point out the very real cost of those on fixed income, attempting to get by with higher food prices, higher gasoline prices, etc. I dare Ben Bernanke to face senior citizens and tell them there is no cost associated with interest rates at 0%.

In case you missed it please read Hello Ben Bernanke, Meet "Stephanie". That post is about the plight of those on fixed incomes struggling to get by with rising costs and CD rates at 1%.

Finally, there is an unseen cost to the stupidity of Bernanke's policies. That unseen cost is the cost associated with fostering still more speculation in the financial markets. There is another bubble in the stock market, another bubble in junk bonds, and another bubble in commodities.

We have yet to feel the ramifications when those bubble pop, and they will. Bernanke cannot see those bubbles for the same reason he could not see the bubble in housing, the bubble in credit, the rapidly rising unemployment rate, and countless other things he missed.

Bernanke is a complete fool, trapped in academic wonderland, completely oblivious as to how the real world works. To top it off, Bernanke has the gall to knowingly lie about the real world effects of his blatant stupidity.

Ben Bernanke, you are disgusting.

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Tuition Bubble

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New CPI Index

The “F” in CPI-F stands for “flat” and this index is calculated by taking the overall consumer price index and excluding more items from it, much in the same way that food and energy have been excluded from “core” inflation, the preferred measure amongst Fed economists. For CPI-F, those items that are increasing in price at a rate of more than 1.5 percent would be excluded … along with those items that are increasing in price at a rate of less than 1.5 percent and items whose prices are falling. The index currently stands at 1.5 percent. source

Inflation

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CPI and PCE

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Cartoon: Economic Think Tank

QE2 and Inflation

Stefan Karlsson writes:

It is generally assumed, and rightly so, that the new round of "quantitative easing" will generate higher inflation in the United States. But it is rarely explained just why it will do so. After all, QE2 will not be conducted by dropping dollar bills from helicopters.

Well, there are essentially three mechanisms by which it happens: higher money supply, lower money demand and lower supply of goods and services.

1) Regarding money supply, it should be noted that by lowering interest rates, QE2 will boost demand for loans. Higher demand for loans will in a fractional reserve banking system generate a higher money supply. Given a certain level of money demand and supply of goods and services, a higher money supply will result in higher price inflation.

2) Regarding money demand, higher inflationary expectations will cause people to be less willing to hold money (as its real value is expected to drop), thus reducing money demand. And lower money demand has a very similar effect on prices as a higher money supply.

It should be noted though in this context that to the extent that QE2 lowers nominal interest rates, this will increase money demand as the opportunity cost of holding money drops.

So the net effect of Fed bond purchases on money demand depends on to what extent it raised inflationary expectations more than it lowers nominal interest rates.

And it seems that the increase in inflationary expectations is this time somewhat bigger than the drop in nominal yields.

As of this writing, the nominal 5-year yield has dropped 21 basis points since August 31 (from 1.33% to 1.12%) while the inflation indexed 5-year yield has dropped 72 basis (from 0.14% to -0.58%) points since August 31, implying that inflationary expectations has increased 51 basis points (from 1.19% to 1.70%) during that period.

Thus, QE2 has likely reduced money demand somewhat.

3) Regarding the issue of reduced supply of goods and services, it should be noted that to the extent that QE2 reduces the value of the dollar and to the extent that companies adjust prices, it will raise import and export prices, causing a reduction in the inflow of foreign goods and services and increase in the outflow, reducing the supply of goods and services available to Americans.

A lower supply of goods and services will given certain levels of money supply and demand increase the dollar price of goods and services.

In conclusion we can clearly see that by a combination of a higher money supply, a reduction in money demand and a reduced domestic supply of goods and services, QE2 will clearly increase price inflation. The only uncertainty is just how big this effect will be.

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Cartoon: Inflation

As the Fed’s stated intention to execute QE2 lurks ever closer — plans to resume asset purchases, including Treasuries, are slated for the November 2nd FMOC meeting — even a few more than average regional Fed bank presidents are breaking rank.

According to Bloomberg, Philadelphia president Charles Plosser said unemployment is a “terrible problem,” but he flat out prefers it “to monetary-policy solutions at this point,” that increase inflation. Even more plainly, he said, “I am less inclined to want to follow a policy that is highly concentrated on raising inflation and raising inflation expectations.”

Nonetheless, QE2 will likely proceed as planned, and many already hard hit by recession will find their remaining dollars even less valuable.

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Marc Faber on Inflation

No matter what central bankers and the cheerleading, mostly useless academics who surround them pronounce in their self-created aura of infinite academic “delicacy and refinement”, under the auspices of the Fed they will do precisely one thing: print, print, and print. Sadly, as Mignon McLaughlin observed, “The know-nothings are, unfortunately, seldom the do-nothings.”...

He suggested that, like the king in a fairytale, Mr. Obama should dress up at night like a pauper and go out and talk to business people. According to Marcus, King Obama would then realize how unpopular he is and how destructive his economic policies have been for small businesses. He also suggested that the academics at the Fed and in the administration should, for once in their lives, go out and work, instead of sitting in big glass office towers and having no clue about what is ailing the economy.

Marcus then emphasized that none of the small businessmen he talked to had any plans to hire staff, because they felt there was far too much uncertainty about what kinds of regulations and laws Congress and the administration would come up with next. All his business friends and customers had told him that Obamacare would be a complete disaster for them. (It imposes on small businesses enormous non-medical tax compliance. It will require them to mail IRS 1099 tax forms to every vendor from whom they make purchases of more than US$600 in a year, with duplicate forms going to the IRS. Obamacare will also fund 16,000 new IRS agents…) Asked what he would suggest as a solution, Marcus, who looks much younger than his age and is still very alert, responded that the US would be greatly helped if Congress went on a holiday for two years, as this would prevent the government from doing even more economic damage.

read the entire essay

Mogambo Guru on Inflation

The Eternal Ugly Truth (EUT) is that 4,500 years of history has conclusively shown that any inflation in prices is Bad News (BN), especially a sustained, years-long inflation, and anything over 3% annual inflation is always Bad, Bad News (BBN). So, 5.9% inflation in prices would be considered, continuing in this vein, Really Bad, Bad News (RBBN).

If you are NOT likewise screaming in horror and surreptitiously checking to see if you have, likewise, peed in your pants as you suspect, then I assume you are either drunk, stoned, distracted, stupid, or have remarkable bladder control, or else you know very little about the Austrian school of economics – the only true theory of economics, and which can be found, free, at mises.org – and thusly I know that you have no interest in using Mogambo’s Iron Laws Of Economics (MILOE) to intelligently invest your money in gold, silver and oil when the foul Federal Reserve is creating trillions and trillions of new dollars – Every Freaking Year (EFY)! – so that the corrupt, bankrupted federal government can borrow it and spend it, also EFY! EFY!!!!

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Inflation: 1.1%

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