Home > inflation
Inflation or deflation? Noriel Roubini says “deflation now, but maybe big inflation in a few years”
Wednesday, October 28th, 2009 | Economics | Permalink | No Comments |
Index Universe - Nouriel Roubini: Big Crash Coming:
IU.com: When you say “stay away from risky assets,” many people hear that and think, “Aha, gold!”
Roubini: I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
Inflation or deflation? Terry Coxon says “Inflation, but later”
Saturday, October 24th, 2009 | Economics | Permalink | 1 Comment |
Zero Hedge - Guest Post: When Will Inflation Really Hit Us?:
Previously - Inflation or deflation? The man with the dollar printing press says “inflation”
Inflation or deflation? The man with the dollar printing press says “inflation”
Tuesday, October 20th, 2009 | Economics | Permalink | No Comments |
People are debating whether the United States is going to experience inflation or deflation. Ben Bernanke, the chairman of the U.S. Federal Reserve bank, has always intended to fight any hint of deflation with a massive dollar printing campaign. It’s hard to see how he can avoid overshooting attempts to stop deflation and crossing over into inflation.
Bernanke’s plan is a matter of public record since his time as a Federal Reserve governor before taking the reins of the Fed from Alan Greenspan in 2006. This speech is available from the the Federal Reserve archives (my emphasis in bold):
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002Deflation: Making Sure “It” Doesn’t Happen Here
As I have mentioned, some observers have concluded that when the central bank’s policy rate falls to zero–its practical minimum–monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The Fed has targeted and maintained an effective zero percent interest rate since December, 2008, forcing itself into a liquidity trap. Continuing from the 2002 speech:
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But 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 essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Gold has risen from $300 in 2002 when Bernanke gave this speech to $1050 today. Gold prices rise when there is public mistrust of government fiscal and monetary policy, and when people expect the money supply to be inflated on a large scale.
Issuing more dollars makes each dollar worth less. It isn’t so much that gold is going up, but that the value of and demand for dollars is falling. This is a difficult idea for most people: we tend to think of prices of things going up and down in dollars. You also have to realize that the price of dollars goes up and down in terms of things - gold, land, stocks, etc. During inflation dollars are worth less so it takes more of them to buy those things. Continuing from the speech:
Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.
And in fact the Fed is now engaged in a massive open market purchase of U.S. Treasury and agency debt. Without those purchases the U.S. would be at the mercy of domestic purchasers and foreign governments to buy the $7 trillion in debt we sold in fiscal 2009, which included $1.4 trillion in new debt. All is going according to Ben’s plan. See Federal Reserve has bought 100%+ of 2009 mortgage market. Continuing:
Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers.
Which fits well into the theory that today’s high stock prices are caused - not by fundamentals or earnings, which are in the toilet - but by an excess of dollars floating around and chasing those stocks. See More on the Federal Reserve’s effect on stock markets.
And if you’ve ever wondered why people call him Helicopter Ben:
A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.
Previously - Inflation or deflation? How about hyperinflation
Inflation or deflation? How about hyperinflation
Monday, October 19th, 2009 | Economics | Permalink | No Comments |
W.C. Varones quoting John Mauldin:
“There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.
“According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively.
Got gold?
Previously - Inflation or deflation? Shadowstats says “inflation”
Inflation or deflation? Shadowstats says “inflation”
Wednesday, October 14th, 2009 | Economics | Permalink | 1 Comment |
In comments to Inflation or deflation? No deflation since U.S. left gold standard in 1971 someone comments that we’re seeing deflation this year, leading to things like the lowering of the minimum wage in Colorado.
Except that we’re not seeing deflation this year. We’re still seeing inflation. Here’s why.
The government’s formula for calculating inflation was changed in the Clinton era to reduce reported inflation. Carter and Reagan had made small adjustments that likewise had reduced reported inflation. It’s to the government’s benefit to underreport inflation, because the official Consumer Price Index figure contributes to Social Security benefit increases, automatic government employee pay raises, etc.
That change in the CPI formula makes the current CPI discontiguous with the historical inflation/deflation chart shown here because you’re talking apples and oranges. You can’t compare official government CPI figures for 1950 and 2009 because the formulas for calculating CPI were different in those time periods.
Enter Shadowstats.com. They run current data to calculate CPI using the pre-Clinton formula. Using the pre-Clinton methodology we’re still at 2% inflation, not the official 2% deflation figure.
Previously - Inflation or deflation? No deflation since U.S. left gold standard in 1971
Inflation or deflation? No deflation since U.S. left gold standard in 1971
Friday, October 9th, 2009 | Economics | Permalink | 6 Comments |
Areas of the chart in purple are inflation. Areas in red are deflation.
In 1971 Richard Nixon closed the gold window. U.S. dollars could no longer be converted to gold. There was no longer a relationship between dollars and gold. The U.S. was off the gold standard. Since then we’ve never experienced a sustained deflation.
That’s been the consistent argument of iTulip founder Eric Janszen. See his article, The truth about deflation:
There were a very brief few months of deflation after WWII as the government attempted, Paul Volcker style, to wring inflation out of the post WWII economy. But note the deflation scale in this post-Bretton Woods period has now changed from the post-gold standard era where deflations exceeded 30% in some periods. Since then, no more 30% deflations. Rarely, for short periods when deflation has happened since Bretton Woods deflation has only once exceeded 10% in one month and has generally been limited to less than 5%.
Take-away: No gold standard, no deflation spirals. Ever again.
I tend to agree. It seems like once you can print worthless toilet paper money to your heart’s content there’s no reason to have deflation.
China moves to become a global currency
Thursday, October 8th, 2009 | Economics | Permalink | No Comments |
Telegraph - China calls time on dollar hegemony
You can date the end of dollar hegemony from China’s decision last month to sell its first batch of sovereign bonds in Chinese yuan to foreigners.
Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.
“It’s the tolling of the bell,” said Michael Power from Investec Asset Management. “We are only beginning to grasp the enormity and historical significance of what has happened.”
Gold hit an all time nominal high on Sept. 30
Thursday, October 1st, 2009 | Economics | Permalink | No Comments |
Goldmoney: “An important event occurred yesterday, September 30th. Though it has received little attention, it warrants mention, and for this reason, I now highlight it. Yesterday gold closed on the Comex in New York at $1,008.00. It was gold’s highest ever monthly close.”
That was gold’s highest price in nominal terms (not adjusted for inflation). USA Gold: “The inflation-adjusted price of gold at its 1980 peak is just over $2350 — that leaves a considerable amount of headroom just on the basis of making up for past inflation, let alone the prospect of continued inflation.”
Good times.
Where do you put money if you’re concerned about bank failures?
Thursday, September 24th, 2009 | Economics | Permalink | 10 Comments |
Over on this post Placebo has a question:
I’ve noticed you’ve posted quite a bit on banks failing. So where are you parking your money in light of this widespread problem? I know gold is one place …
Thanks!
Right now the FDIC is still guaranteeing everything. I don’t think anyone needs to panic as long as their accounts are FDIC-insured. Keeping your money in the bank is still safer than keeping it in your mattress where robbers and fire can take it. Bear in mind that the government recently stopped its temporary protection of money market accounts, so you may want to move money markets to an FDIC account or Treasuries.
Having said that, here are some things I’ve done in light of bank failures and other potential problems. All of my amateur investment advice is worth exactly what you paid for it.
Diversification
Over the years the money for the entire family - my wife and I, our children, my mother, and my brother - wound up in the same bank. That’s too many eggs in one basket. My wife and I recently opened a vacation and Christmas savings account at a credit union so that not all of our money is in one bank. As our CDs mature we’re going to move some of them to the credit union.
Incidentally, we’re discovering that the credit union has much better interest rates than our bank. So besides the protection of putting our eggs into different baskets we’re earning more interest.
Pre-payments
A few months ago I made an advance payment on the car. If the banks went totally wonky I’d have a month to get things straightened out with my car payment. That extra payment is also a form of savings - if I couldn’t pay my other bills I could call Honda Finance and tell them to not withdraw money from my checking account that month. I need to do the same thing with the mortgage.
Naturally you should pay off credit cards, not just now but always. You should never let money linger in your savings account at 0.5% when you have a credit card balance of 10%. Even in good times that’s bad math. In really super bad times it’s worse - the bank behind the savings account balance might disappear, but the credit card company behind your debt balance never will.
A little in cash
I keep a little more cash in my wallet than I used to a year ago. After payday I typically get $200-300 in cash from the bank.
In general, most people are too dependent on plastic for day to day expenses. It isn’t just bank failures that are a potential problem. A few years ago one of the satellites that processed credit cards stopped working. Some travelers found themselves out on the road with no way to buy enough gas to get to the next gas station, much less get home. If there’s a natural disaster that knocks out power no one will be able to take plastic. It’s been reported in some recent disasters and hurricane evacuations that ATMs ran out of money and there was no one around to refill them.
In an emergency where no one can take plastic many stores will run out of change. Avoid hundred dollar bills. Don’t depend entirely on twenties, either. Fives and ones are very useful, particularly now that many vending machines can take ones. Likewise, it’s good to have a roll of quarters in your emergency supplies for vending machines and payphones.
You say you won’t need a payphone because you have a cell phone? Think again. In the event of an extended power outage cell phone towers exhaust their batteries, rendering your cell phone useless. We now keep CB radios in both cars along with a roll of quarters.
A little more in cash
I’ve also moved a little more money to cash in a safe deposit box at the bank. Not a lot, but enough so that if we couldn’t use the debit card or credit card we’d be able to pay for gas and food for a couple of weeks. The safe deposit box is inside an alarmed, fireproof vault that’s hurricane- and earthquake-proof and that’s under the watch of an armed guard during bank hours. We also keep important documents and a backup hard drive in the box. Cost is $35 per year, a bargain.
The contents of the safe deposit box aren’t part of the banks assets, so they aren’t subject to bank losses. However, if the bank is shut by regulators you won’t be able to access the safety deposit box until the bank re-opens. Typically the bank is shut down before the weekend and the FDIC re-opens it after the weekend. However, there’s a possibility that might not be true in the event of some unforeseen series of events or national crisis. It’s something worth thinking about. Once again, don’t put all of your eggs in one basket.
What about inflation?
Inflation - not bank failures - are why you should move a portion of investment and savings intended for later use to something besides cash. Typically that means things like retirement funds or college funds with a long investment horizon.
Gold
For inflation protection gold is excellent and is on a roll. China, Russia, and Middle Eastern states are buying gold to get rid of their dollars. Hong Kong is recalling its gold to put into its own vaults. Barrick, the world’s largest gold miner, issued several billion dollars in new stock to close its gold short position. More arguments for gold can be found in this Doug Casey interview.
Think of gold as insurance. It might or might not dip a little in the next few months or next year, but it won’t get wiped out and it could do phenomenally well. The conditions that will cause gold to do well will cause a massive writedown in many of your dollar-denominated assets (which for most of us is all of our assets), which makes it an excellent hedge against not just inflation but against an extreme event like the collapse of the U.S. dollar.
Physical possession of metal is best because it doesn’t involve any counterparty risk. American Precious Metals Exchange sells bullion for a small premium over the spot price. The spot price assumes you’re moving gold within the assayed gold vault system in 100 ounce bars, so it’s fair to charge a premium over spot for things like U.S. gold double eagles or Canadian maple leafs.
For those of us investing in 401Ks there are ETFs (Exchange Traded Funds), which are traded like stocks but are based on holding commodities rather than shares of a company. I have shares of GLD, CEF, and GTU in my 401k and I’d like to add some SGOL. A conservative position might be 10-15% of your long-term investments.
Absolutely avoid leveraged and inverse ETFs, which are intraday plays for traders, not long-term investors. If the name mentions 2x or 3x it’s leveraged. Run away.
Other commodities and metals
I also have some other metals and energy ETFs, including SLV, OIL, UNG, and a little platinum. In the event of inflation commodities and metals should rise. Diversification here seems prudent. I wouldn’t mind picking up some uranium and some broad food commodities.
TIPS
Another, more conservative option is TIPS - Treasury Inflation-Protected Securities. They’re secured by the U.S. Treasury, just like traditional Treasury notes. The difference is that TIPS have a variable rate. They pay a low base interest rate plus the official U.S. government inflation rate.
Bear in mind that TIPS aren’t 100% inflation-proof for two reasons. One, the government manipulates the official inflation rate, whose definition keeps getting revised. (No, really. See Shadowstats.com. The official inflation rate hasn’t kept up with rising costs of health care, education, energy or assets in forever. Subsequently Americans have much less purchasing power now than they did a few decades ago.) Two, once inflation really gets going the government will likely shut the door on TIPS sales the same way they shut down inflation-adjusted Series I Bonds.
Still, TIPS are a simple, safe investment with no real downside that I can see. I have about 10% of my 401K in these via Vanguard Inflation-Protected Securities (VIPSX). Get ‘em while you can.
Three tales of inflation
Tuesday, September 15th, 2009 | Economics | Permalink | 9 Comments |
Mises.org - Inflation and the Fall of the Roman Empire:
Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to a pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated — debased.
But the real crisis came after Caracalla, between 258 and 275, in a period of intense civil war and foreign invasions. The emperors simply abandoned, for all practical purposes, a silver coinage. By 268 there was only 0.5 percent silver in the denarius.
Prices in this period rose in most parts of the empire by nearly 1,000 percent. The only people who were getting paid in gold were the barbarian troops hired by the emperors. The barbarians were so barbarous that they would only accept gold in payment for their services.
FOFOA - Gresham’s Ghost:
Henry VIII and Edward VI, during their reigns, drastically debased the silver coinage of the kingdom through both weight and purity. In 1544, young King Edward VI issued a coin containing just one third silver and two thirds copper — equating to .333 silver, or 33.3% pure. The result was a coin copper in appearance, but relatively pale in color. A shocking debasement considering England’s first silver coins were .999 pure, followed by .925 which later came to be known as sterling silver.
Then, in 1552, a penny’s weight was cut to only 8 grains (0.52 g). The penny began at 22.5 troy grains of fine silver and was reduced to 15 grains around 1420, then to 12 grains in 1464, and 8 grains in 1552.
Theodore Dalrymple in City Journal - Inflation’s Moral Hazard:
In a naive way, I assumed that since most people’s income tended to rise with inflation, there was nothing to worry about. I did not suffer personally because of it, nor did most of the people I knew. If a product once cost y and now cost 10y, what did it matter, so long as your income had gone up by ten times, too? Since people seemed better off, at least measured by what they could consume, one could even assume that incomes had risen faster than inflation.
Yet this was a crude way of looking at things, as my father’s fate should have instructed me. He sold his business in the sixties, at the end of the period of price stability that had reigned throughout his life, for what then seemed a large amount of money. He was a man who, for both temperamental and ideological reasons, held a deep contempt for financial speculation and wheeling and dealing, with the result that he did nothing as inflation inexorably eroded his savings. He grew poorer and poorer through the remaining 30 years of his life, and might have sunk into poverty had he not moved into a house that I owned. And this after reaching a level of wealth that, relatively speaking, was greater than I shall probably ever know.
For a while, I was angry about what seemed my father’s improvidence and lack of foresight. As the current financial crisis has conclusively demonstrated, however, not everyone is blessed with foresight, not even those whose livelihood depends primarily on the claim of possessing it. My father was born of a generation that saw money as a store of value, a far from dishonorable notion—and one that, when it reflected reality, helped give a lot of people peace of mind. And as I reach the age when inflation might cause me some embarrassment, even hardship, my sympathy with my father’s plight has grown. I am no longer young enough to fight another day, economically speaking: the destruction of my wealth by inflation would be final. In an aging population, more and more people are in my position, which helps explain why an age of prosperity can be an age of anxiety, even without a financial crisis.
Previously
Martenson on the Federal Reserve’s “shell game”
Thursday, August 27th, 2009 | Economics | Permalink | No Comments |
This one is a doozy. I can’t say I understand every bit of what’s going on in this one, but here’s the takeaway. Martenson’s thesis is that the Federal Reserve is monetizing more debt than previously realized, which would lead to inflation faster than previously thought.
The Fed mechanism he proposes is to let foreign central banks swap agency debt for higher-grade U.S. Treasury debt via the Federal Reserve Custody Account. That would serve to shore up everyone’s books while devaluing the dollar by effectively “printing” more dollars (realizing of course that the printing is really a bookkeeping operation).
Many people have said the Fed would have to inflate, but if Martenson is right they’re doing it faster than realized because they’re doing it in a stealthy way that’s escaped attention. This is addition to the non-stealthy way they’ve been inflating the money supply by buying $300 billion in Treasuries this year and reflating the money supply by purchasing over a trillion dollars in bad bank securities and agency debt.
Here are Martenson’s conclusions for what this would mean:
The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt. This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.
This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency. The difference is in the complexity of the game being played, not the substance of the actions themselves.
When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.
One possible result of the abandonment of these efforts is a wholesale flight out of the dollar and into other assets. To US residents, this will be experienced as rapidly rising import costs and increasing costs for all internationally-traded basic commodities, especially food items. For the rest of the world, the results will range from discomforting to disastrous, depending on their degree of dollar linkage.
Under these circumstances, “inflation vs. deflation” is not the right frame of reference for understanding the potential impacts. For example, it would be possible for most of the world to experience falling prices, even as the US experiences rapidly rising prices (and hikes in interest rates) as a consequence of a falling dollar. Is this inflation or deflation? Both, or neither? Instead, we might properly view it as a currency crisis, with prices along for the ride.
If that concerns you, read the whole thing. I’m still trying to get my head around it, but it would explain some oddities in inflows other people have noted. Here’s the Wikipedia definition of monetization:
Monetization is the process of converting or establishing something into legal tender. It usually refers to the printing of banknotes by central banks, but things such as gold, diamonds and emeralds, and art can also be monetized. Even intrinsically worthless items can be made into money, as long as they are difficult to make or acquire. Monetization may also refer to exchanging securities for currency, selling a possession, charging for something that used to be free or making money on goods or services that were previously unprofitable.
And agencies in this case seem to be Fannie Mae and Freddie Mac bonds.
Fed official: “The Fed’s strategy is aimed at promoting a future rise in inflation”
Tuesday, August 25th, 2009 | Economics | Permalink | No Comments |
I’m still trying to understand what this statement means:
Financial markets have not fully understood that the U.S. Federal Reserve’s pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.
“I don’t think markets have really digested what that means,” St Louis Fed President James Bullard said in an interview.
The Fed’s strategy is aimed at promoting a future rise in inflation, which should provide an immediate boost in activity in anticipation of a future boom, but that hasn’t happened, Bullard said.
Postage increasing faster than inflation
Monday, August 24th, 2009 | Economics | Permalink | 2 Comments |
Wall Street Journal - A Better Way to Go Postal: The justification for the Postal Service’s monopoly is long past:
If the cost of a postage stamp had risen at merely the rate of inflation since 1950 when a stamp cost two cents, today you could send a first-class letter for 30 cents. Instead the cost rose in May to 44 cents from 42 cents.
These higher prices have corresponded with worsening service. The mailman used to deliver twice a day in urban areas, but now Postal Service Chief Executive John Potter says he wants to stop Saturday service to reduce costs. No private business in America could continually raise prices, lose billions of dollars and then hope to win back customers by promising poorer service.
Most employees have no-layoff clauses, the starting salaries are about 25% to 30% higher than for comparably skilled private workers, and the fringe benefits are so expensive that the Government Accountability Office says $500 million a year could be saved merely by bringing health benefits into line with those of other federal workers. Mr. Potter has to set aside $5 billion a year just to pay for health insurance. Postal management now wants to “save” money by not advance-funding those obligations, and Congress is likely to say yes. But that doesn’t save a dime; it simply creates even larger unfunded liabilities down the road.
You could draw different conclusions from that graph. You could say that the cost of postage - like education and health care - is rising faster than the rate of inflation. Another conclusion might be that the Consumer Price Index - the government’s measure of inflation - understates actual inflation, as many people have long believed. Neither conclusion speaks well of our government’s role in the economy.
Sugar prices surge to 28 year high
Wednesday, August 12th, 2009 | Economics, Home Life | Permalink | No Comments |
Sugar rush could push price to 30-year high:
LONDON/NEW YORK (Reuters) - Sugar prices are poised to hit 30-year highs on a perfect storm of huge Indian imports and tight supplies, and the rally may not be enough to stimulate larger output as a credit crunch grips top producer Brazil.
The benchmark spot sugar contract in New York scaled a 28-year peak this week of 22.44 cents a lb and refined sugar futures in London charged to a record high as weak monsoon rains in leading consumer India stoked talk of hefty imports in 2009/10.
After hearing about this I bought 30 pounds of sugar when I was at the grocery tonight. Why not? It only cost 16 bucks, the price is poised to increase, sugar keeps for years, and now it’s one more thing I won’t run out of anytime soon.
The stock market rally is being inflated by easy Federal Reserve money
Tuesday, August 11th, 2009 | Economics | Permalink | No Comments |
Any number of blogs I read have been saying that the recent stock market rally is based on nothing but loose money provided by the Federal Reserve to banks and other financial institutions. The stock market P/E ratios are crazy and the price increases are accompanied by tiny volumes. No one in their right mind would buy into this market unless they had lots of money lying around and nothing to do with it.
I’m amazed to see that even Reuters and CNN realize this is a rally built on cheap money provided by the Fed, just as the housing bubble was built on cheap money provided by the Fed.
CNN - Stocks: The latest Fed bubble:
Though liquidity is admittedly a nebulous concept, there’s no question that central bankers around the globe have poured huge amounts of money into the markets to ease the financial crisis. Given free money, investors’ appetite for risk shoots higher and they gobble up stocks.
But surely all the free, cheap money (”quantitative easing” is the central banks’ preferred term) won’t cause inflation, right?
Fed officials have stressed that they will start to unwind their financial support programs at the earliest sign of inflation. Given the cost of cleaning up after the last bubble, Becker writes that “this time, policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble.”
But it’s clear that bankers are loath to pull back on their support for the financial system before it’s clear the economy has staged a stronger recovery. And the Fed has a long and painful history of ignoring asset price inflation.
“The central bankers have this textbook belief that the only inflation is the kind that appears in consumer price indexes,” said Simons. “They don’t believe what they’re doing could cause an asset price bubble.”
But comparing the bankers with a driver pulled over for speeding for the umpteenth time, Simons said, “At some point, you have to say maybe your speedometer’s broken.”
Yep. See here:
Germany considers issuing dollar liabilities to hedge against falling US$
Thursday, July 16th, 2009 | Economics | Permalink | No Comments |
Barron’s - Springtime for German Dollar Borrowing?
THE WORLD’S MAJOR GOVERNMENTS are getting edgier about having their assets mainly in dollars. But they’re caught in a conundrum: They’re damned if they dump their dollar holdings and damned if they continue to add to them.
One solution: instead of reducing dollar assets, why not issue dollar liabilities? If you’re worried about the U.S. currency losing value and its special status, those debts would get paid off in cheaper dollars.
That’s the tack that Germany apparently is mulling. According to a Bloomberg report issued Friday — and missed in most quarters, including here, but caught by the ever-perspicacious Stephanie Pomboy of MacroMavens fame — Deutschland is considering the sale of dollar-denominated debt. If the greenback loses value against the euro, Germany would save money by borrowing in dollars.
It’s one thing when China and Russia are saying they don’t trust the U.S. not to start the printing processes and cause dollar devaluation. It’s another thing when it’s Germany.
Great Depression vs. Now: inflation more likely now
Wednesday, June 24th, 2009 | Economics | Permalink | No Comments |
Solid bars are from the Great Depression 9/1929 to 4/1931. Shaded bars are from 10/2007 to 05/2009 (except the green GDP numbers, which are from 10/2007 to 01/2009). Stock market peak was 10/2007.
We didn’t see crazy inflation during the Great Depression, but with all of the money floating around in 2009 we might see it now. In the current depression the Federal Reserve has gone insane pumping up the money supply.
Former IMF chief calls for higher U.S. inflation
Monday, May 11th, 2009 | Economics | Permalink | No Comments |
Telegraph - Ken Rogoff says Fed needs to set inflation target of 6pc to help ease crisis:
Professor Kenneth Rogoff, former chief economist of the International Monetary Fund, said the threat of debt deflation called for revolutionary measures as an insurance policy. “Excess inflation right now would help ameliorate the problem. For that reason, it would be far better to have 5pc to 6pc inflation for a couple of years than to have 2pc to 3pc deflation,” he told the Central Banking Journal. The Fed has shifted tentatively to an inflation target, but one anchored nearer “stability”.
A number of economists have begun to make similar calls for a radical shift to deliberate monetary debasement, although few have gone as far as suggesting 6pc. Such proposals cause a furious political reaction because they amount to a forced shift in wealth from savers to debtors.
Prof Rogoff – one of the few economists who recognised the gravity of this crisis early on – admits that his policy is fraught with danger because it could lead to an overshoot down the road, “ending up with 200pc inflation”.
Someone described inflation as a negative interest rate on savings. If you don’t spend your paper money it becomes worth less and less every year. It’s a government’s way to force you to spend money when you’d rather not. And of course it’s also government’s way to make it easier for them to repay their debts using debased money. Both ideas appeal to the U.S. government in the position it finds itself. Inflation here we come.
Inflation is on its way
Wednesday, May 6th, 2009 | Economics | Permalink | No Comments |
Allen H. Meltzer op-ed in the New York Times - Inflation Nation:
Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year’s first quarter, it rose 2.9 percent — a sure sign of inflation.
Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.
When will it come? Surely not right away. But sooner or later, we will see the Fed, under pressure from Congress, the administration and business, try to prevent interest rates from increasing. The proponents of lower rates will point to the unemployment numbers and the slow recovery. That’s why the Fed must start to demonstrate the kind of courage and independence it has not recently shown.
Milton Friedman often said that “inflation was always and everywhere a monetary phenomenon.” The members of the Federal Reserve seem to dismiss this theory because they concentrate excessively on the near term and almost never discuss the medium- and long-term consequences of their actions. That’s a big error. They need to think past current political pressures and unemployment rates. For the next few years, they cannot neglect rising inflation.
Warren Buffett on gold, and a response
Thursday, April 30th, 2009 | Economics, Quotes | Permalink | 15 Comments |
“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
– Warren Buffett
In response, LargoWinch applies the same logic to fiat currency: “It comes in abundance from trees with little to no efforts, we print as many as we want and assign whatever “value” to it, but we make certain that it contains official looking faces and logos so that we can pay people (yes, with “it”) to stand around guarding it.”
And unlike Buffett’s preferred investment, stocks, the accounting for gold is much simpler: you weigh it with a scale. Gold won’t go up forever, and there will be a time to sell, but it’s a heck of a hedge against dishonest companies who are cooking the books and dishonest politicians who are debasing the currency through inflation.
Wharton prof: Real fiscal crisis is yet to come
Monday, April 20th, 2009 | Social Security | Permalink | 1 Comment |
Knowledge @ Wharton - A Thought for Tax Day: The Real Fiscal Crisis Is Yet to Come:
Knowledge@Wharton: Do we have to dig ourselves out of the national debt before we can address Social Security or Medicare?
Smetters: No. In fact, ideally, it would be in some ways just the opposite. Social Security and Medicare are much bigger problems, and the longer that we delay those, the more those problems [will] snowball. In particular, every year that we delay reform on either of those programs it adds about another $2 trillion to the present value shortfalls of both programs. So just a one-year cost of delay is about the size of the record deficit that we’re going to have this year….
Knowledge@Wharton: So, whatever we do for Social Security, the bottom line is that it has to cost a lot less than it does now.
Smetters: Yes. You can certainly raise some tax revenue in some places. People have talked about increasing the maximum taxable wage cap [currently $106,800]…. That’s not going to… help a lot in present value, because those people will eventually collect more benefits. They’re not going to collect as much… as they paid into the system, but it’s still not going to be super-effective…. People have [also] talked about taxing fringe benefits like health care and so forth. But the fact of the matter is that these benefits are growing faster than inflation. We have to bring Social Security benefit growth rate closer to [the rate of] inflation for it to be a sustainable system. And that’s the easy problem.
Medicare is the tough one.
Knowledge@Wharton: Medicare is tougher, why? Because … people [are reluctant] to give up benefits that have to do with their health care?
Smetters: Medicare is tough for two reasons. One, the shortfall in Medicare is six to seven times larger than in Social Security. Social Security is a major problem; Medicare is a crisis. You add both of those… shortfalls together and you’re getting something that’s … between $80 and $120 trillion in total present value shortfalls. … People can’t even imagine how big that number is. If you took the total value of the United States, except for the people (all the land, houses, buildings, everything that’s non-perishable, your washer and dryer, cars, and so forth), it has about a value of about $50 trillion. So we’re talking about a shortfall of twice the value of the value of the U.S. except for the people. Now, the value of the people is about three times that. We’re just talking about biblically large shortfalls. We’ve never seen this type of problem.
Bill Fleckenstein on fiat currencies and inflation
Monday, April 13th, 2009 | Economics | Permalink | No Comments |
“In a social democracy with a fiat currency, all roads lead to inflation.”
– Bill Fleckenstein
Adjusted for inflation, prime interest rates were negative from 2002 to 2005
Friday, March 13th, 2009 | Economics | Permalink | No Comments |
Lots of people, me included, think that the main cause of the real estate bubble and credit bubble were the interest rates set by the Federal Reserve under former Chairman Alan Greenspan. Those interest rates were kept too low for too long. It turns out that the interest rates were so low that once you factored in inflation the interest rates were negative. The Federal Reserve under Greenspan was paying banks to borrow money.
Greenspan recently surfaced to defend his record and distance his decisions from the current mortgage mess and collapse. For his trouble he’s getting attacked further, just as he deserves.
Greenspan lays out his case that the Fed’s easy money policies can’t possibly be to blame for “the U.S. housing bubble that is at the core of today’s financial mess.” It is long-term interest rates that determine “the prices of long-lived assets,” such as housing, he writes. And those rates, which stayed low as a result of a “global savings glut,” are out of the Fed’s control.
Control, yes. Influence, no.
“Why not try raising short rates if long rates are too low?” asks Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. “The recession was over in 2001. Why did he take so long to start to raise the funds rate?”
Greenspan is selective in arguing his case. By any measure, the overnight fed funds rate was too low earlier in the decade. The real funds rate, which is the nominal rate adjusted for inflation, was negative for three years, from October 2002 to October 2005, a longer stretch than in the mid-1970s. And we know how well that turned out.
Now we have additional evidence of the effect of negative real rates. When financial institutions are being paid to borrow, borrow they will.
The history of the mortgage crisis is not going to be kind to Alan Greenspan.
Warren Buffet’s annual letter to shareholders
Saturday, February 28th, 2009 | Economics | Permalink | No Comments |
Forbes - Buffett Bloodied But Not Bowed:
“The economy will be in shambles throughout 2009–and for that matter, probably well beyond, ” Buffett writes.
The debilitating spiral of the credit crisis has “spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”
Buffett also warned that cities and states will follow American industries in becoming dependent on federal assistance. “Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
Despite all that, Buffett remained optimistic. “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”
You can read the entire letter in PDF here. My favorite line is “As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.”
Alan Reynolds: Fed can’t reduce money supply in time to stop inflation
Monday, February 23rd, 2009 | Economics | Permalink | 3 Comments |
I’ve been noting that the Federal Reserve’s unprecedented increase in the money supply will lead to inflation. Federal Reserve Chairman Ben Bernanke is claiming that just as soon as the economy starts to recover he’ll pull back the money supply Wizard of Oz style and - voila! - no inflation.
Alan Reynolds questions Bernanke’s claims:
If inflation catches the Fed by surprise, are they really “able to quickly reverse the actions,” as Bernanke says? How could they do that?The Fed could certainly raise the interest rates on bank reserves — the fed funds and discount rate — which is how it makes money and credit tighter in normal times. But that rationing device would not prove so effective in times like these, because banks are already sitting on a mountain of untapped reserves. Besides, once expected inflation has begun to rise, the Fed has usually moved rates up in 25-basis steps — increases so small that perceived real interest rates can continue to fall even as nominal rates rise.
To literally reverse the actions that doubled its assets since last September, the Fed would have to sell nearly a trillion dollars worth of IOUs. Unfortunately, they don’t have nearly that many Treasury securities to sell. And even if the Fed were willing sell off all of its Treasury bills and bonds, the remaining backing for Federal Reserve notes would be little better than junk bonds. Meanwhile, private and agency securities acquired since last September must be very hard to sell — or else the Fed would not have felt obliged to buy them.
The Fed’s System Open Market Account at the Federal Reserve Bank of New York holds $39.4 billion in inflation-protected Treasury bonds — more than twice its $18.4 billion stash of short-term Treasury bills. Are they trying to tell us something?
Point 1 is that you shouldn’t believe Bernanke when he claims he can snap his fingers and put the kibosh on the inflationary dragon.
Point 2 is that Reynolds notes something I hadn’t considered.
To assume, as Bernanke does, that inflation cannot possibly accelerate until “the economy begins to rebound and financial markets stabilize” is to assume stagflation is impossible, though 1973-75 and 1979-82 proved otherwise.
I keep saying that we won’t have serious inflation until after the recovery begins, that the recovery can’t begin until we hit bottom, and that we’re a long way from hitting bottom. Sounds pretty pessimistic, doesn’t it? Thing is, just like Bernanke I wasn’t considering the possibility of stagflation (a stagnant economy combined with the inflation of a red-hot economy). If that happens things could be even worse than I imagined. Dangit.
P.S. In another post Reynolds poo poos the jump in producer price inflation I mentioned last Monday.
Search
Google Custom Search
Latest Comments
- Bleg: how to cut WordPress’s CPU usage? (8 comments)
- Test your color IQ (11 comments)
- My maternal grandparents’ wedding announcement from 1913 (1 comments)
- State govt. debt: Mass. highest, Tenn. lowest (2 comments)
- GDP grew at 3.5% - the recession is over! (1 comments)
A Word from Our Sponsors
Subscribe
RSS Posts Feed
Archives by Date
Archives by Category
- A&E
- Best Of
- Blogging
- Comic Books
- Dancing Baloney
- Dear Lazyweb
- E-commerce
- East Tennessee
- Economics
- Environment
- European Union
- Family Tree - Jones Side
- Family Tree - Moore Side
- Food & Drink
- Funny Ha-Ha
- Guns
- Health Care
- Holidays
- Home Life
- Johnia Berry
- Macular Degeneration
- Media Behaving Badly
- Middle East
- Misc
- Municipal Wi-Fi
- News
- Nifty
- Photos
- Political Survival Kit
- Politics
- Polls
- Population
- PSAs
- Quotes
- Rocky Top Brigade
- Science
- Social Security
- Star Wars
- Tech
- The Usual Suspects
- Travel
- True Crime
- Word of the Day
Blu-Ray DVDs
