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Getbig Main Boards => Politics and Political Issues Board => Topic started by: Soul Crusher on January 09, 2010, 09:57:36 AM
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INFLATION, THE HIDDEN TAX
by Lawrence Wilson, MD
© December 2009, The Center For Development
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In his classic book, The Economic Consequences of the Peace (1920), John Maynard Keynes observed:
“Lenin (the founder of the former communist Soviet Union) was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”.
Many people do not realize that inflation is with us, and it is an extremely destructive hidden tax, especially on the poor of all nations of the world. Inflation reduces the buying power of your money, so you become poorer, even if you have the same amount of money in the bank or in your pocket.
Suppose, for example, the inflation rate is 3.5%. If you have $30,000.00, in ten years it will only buy $20,550.00 worth of goods. If the inflation rate is 5.5%, (which is closer to reality, as inflation is often underestimated by the government’s measurements), your $30,000.00 is worth only $16,650 in ten years. This should be enough to scare anyone. Let us explore what inflation is and why it is occurring.
WHAT EXACTLY IS INFLATION?
People believe that inflation is rising prices. That is not quite true. Inflation means there is more money out there chasing the same number of goods and services. As a result, the value of the money is diluted. One result is higher prices. There are also other negative consequences, as we will explore below.
Inflation is like if a person were to slowly add water to our gasoline. You might not notice the difference at first. But after a while, the gas would not power your car as well and eventually it would not work at all. Your gasoline would no longer have the value it had before. Another common analogy is that it is like adding a little water to the milk that is sold in the store. For a while, no one might notice at all. However, the milk is less nutritious, and won’t taste quite right. Eventually, the people wake up and realize the milk is not nearly as good, although it might still look okay.
Since the money is diluted, it does not work as well and it takes more of it to buy things. For example, good, solid money 100 years ago could buy a nice house for about $20,000.00. Today, with the diluted money, it takes $200,000.00 or more to buy the same house. Higher prices are just a way we express the fact that the diluted money of today does not buy as much.
INFLATION AS A HIDDEN TAX
Inflation is actually an old, secret method of taxing the people without their knowledge. This may sound strange because no one talks about inflation as a tax. However, I will explain.
When extra money is printed up and put into circulation, it costs the government very little. The only cost is that of printing. Each paper bill of any denomination from $1 To $1,000 or more costs less than fifty cents to manufacture. So it is almost free money for the government.
They just run the printing press and it suddenly exists. It seems like they can create value out of nothing. It is wonderful for the government, which is why most governments do it all the time. Most nations, by the way, do it far more than the United States. We are not used to inflation, but in other nations of Africa and Asia, it is business as usual.
The government can then lavish the money on all their favorite projects without worrying about the people complaining, because the money seems to be “free”.
However, it is not free. What it does is to slowly dilute the money that is in existence already, like diluting the milk in the analogy above. So all the money the people already have, including all their savings, salaries and all the rest, slowly start to be worth less. In this sense, inflation is a very hidden tax, or way the government confiscates the people’s real wealth.
If the government gave its new printed money to each of us to spend, it wouldn’t be so bad. Then at least we would all have more of the diluted or less valuable money. But they never do this, as a rule. They give it their favored friends and projects. Everyone else is just cheated out of some of their wealth. This is indeed a sneaky way to tax people because:
· It happens so slowly that few people see it.
· It is hidden, as there are no tax forms to fill out or taxes added to your purchases or bills.
· Unlike other taxes, no one seems to force you to pay up on April 15 or any other day
· People actually feel richer because often their salary and the price of their house goes up. In fact, many actually have more money, but of course all that cash is worth less.
· Inflation does not require any new laws that people could debate and vote down. Thus it happens silently and secretly.
WHY, THEN, ARE SOME PRICES LOWER TODAY?
Inflation has caused the price of land, cars, houses, energy and other things to rise dramatically over the past 50 years or so. However, a few items seem to be getting less inexpensive today, like computers and even clothing. This is occurring for several reasons:
1. New technology has dramatically reduced production costs in some areas. This helps keep some prices low.
2. Innovation reduces the cost of certain items like electronics. For example, today’s computers are simply much more advanced than those of 10 or even 5 years ago. We get more for our money.
3. Lower wages that are paid to workers in nations such as China, India, Vietnam and others also help keep prices down.
4. Our trading partners such as China, Japan, Canada and Europe are all inflating their currencies. In fact, some are doing so faster than we are in the United States. We are in a curious situation with competitive destruction of the currencies by a number of nations. This keeps the cost of many foreign goods lower, as well.
5. As more nations become developed and join the family of industrializing nations, more goods and services are being offered. In this sense, the larger amount of printed money is not chasing the same number of goods and services. Instead, the number of goods and services is also increasing. This also offsets some tendency for inflation.
6. A deceptive reason for some lower prices today is the goods are not as high quality. For example, I have some older bed linens, for example, and even coats that were left to me by my parents when they died. They are much better made than most linens today, and have lasted far longer. This concept is sometimes called planned obsolescence. It is a fancy way of saying that things are made cheaply. It is not all bad, because it enables us to buy the most energy-efficient new things, for example. However, it wastes a lot of resources and creates a lot of extra garbage, at times, as people throw away equipment that breaks quickly, for example.
THE DARK SIDE OF INFLATION
Printing paper money that is not backed by gold and silver has many other negative effects connected with ever-higher prices and price instability. Here are just a few:
· Businesses and individuals cannot plan for the future nearly as well. They simply cannot depend on stable raw material and other prices. Instead, they are forced to hoard goods, buy things they may not need but can use as bargaining chips and do other things that are costly and often counterproductive.
· Businesses are often far more afraid to take risks in inflationary times. They simply don’t know what the future will bring. This is terrible, because businessmen taking risks is critical for innovation, research and development of new products and new technologies.
· People lose faith in the government and in each other. Everyone has a tendency to believe that everyone else is cheating them. This causes social unrest, crime, violence, and other social problems.
· Because planning is so difficult, maintaining a business or even a household becomes far more difficult. This causes many more bankruptcies, foreclosures, loss of homes and businesses and other very disruptive effects on society.
· As social unrest grows, strikes, protests and riots occur more frequently because so few people understand inflation and how to cure it. Anger mounts and civil society disintegrates.
· Inflation encourages people to go into debt. After all, when the time comes to repay your loan, you can do it with inflated and less valuable dollars. It is like borrowing good quality gasoline and being allowed to repay it in diluted gasoline. This favors those who are not the productive people in society and it punishes those who save their money. This is not at all healthy for society.
· It is very tough for the working and middle classes in particular. They often depend on their labor, which is just not bringing them as much money as it did before. They don’t have assets that appreciate with inflation such as large homes and some stocks. Thus the poor people are hurt the most. Even beggars and those on welfare are hurt badly as they find their limited means just won’t buy as much as before.
· People who are used to saving some money find they cannot save money or the money they have saved is worth much less. They also feel cheated and become angry and fearful.
· Basically, it impoverishes the people and ruins the health of society.
· It also tends to destroy democratic principles and substitutes a welfare type of state that rewards its friends and punishes its enemies by withholding money. This leads to distrust, anger and often revolution and decay of society.
PREVENTING INFLATION
Inflation is really the most terrible of crimes. The American founding fathers knew this well and did their best to prevent it. The United States of America, among all nations, is perhaps the only one that has written into its Federal Constitution that “no state shall … make any thing but gold and silver coin a tender in payment of debts”. - Article I, Section 10.
This was put into the Constitution specifically to prevent inflation. Unfortunately, this intent was violated almost 100 years ago. The American people need to find Supreme Court and other justices who actually understand the intent and the wisdom of the original Constitution so as to prevent the government from violating this important clause concerning the nation’s money.
All paper money in America, by law, must be redeemable in gold or silver. This was the case for years. Old dollar bills printed before 1913, or perhaps even later, all were required to state “Redeemable in Silver”.
You might ask, how is it possible that our government can just ignore the Constitution? It is largely because the people are totally ignorant of the Constitution. It is taught poorly if at all in public school. Also, there is a prevailing attitude that the Constitution is just an old piece of paper. Judges have ignored its intent, often at whim, and their understanding of it is limited.
Finally, there is much corruption in the government. We have elected many representatives who care more about money or power than they do about following the law. I hope this will change as more people understand inflation, and that our leaders need to be held accountable for their actions.
The only way to prevent inflation, as far as I know, is to have an honest government that is not permitted to print endless amounts of money. The best way to do this is to have a gold standard, or something similar, so that the government is forced to put some value behind their paper money.
WHAT CAN A PERSON DO ABOUT INFLATION?
Live healthfully. The reason for this is that when inflation really hits, the health care system will be cut back. This is especially the case if it is a government-run system. Costs will rise and the government usually just cuts back services to save money. This website is full of articles on how to live healthfully and prevent most diseases.
Call and write your representatives in the state and federal governments. Tell them:
· They must stop spend so much money.
· They must work to get the nation out of debt.
· They must not print more paper money, or just create electronic book entries, also called “monetizing the debt”.
· They must return the nation – all nations - to a precious metal standard, like the gold or perhaps a silver standard. This would effectively prevent the government from just printing money because all the paper money would have to be backed by some precious metal. This means that anyone could turn in their paper dollars for real gold or silver coins that cannot be faked or just ‘printed up’ at random.
Inflation hedges. These are investments, basically, that tend to hold their value in a time of inflation. They include any tangible items that are useful to people, such as cars, houses, tools, equipment, land or real estate, electronic devices that don’t go out of date quickly, even good clothing, shoes and other real goods.
Another inflation hedge is to own some gold or silver in some form, since its value usually goes up with inflation. Finally, if someone has extra money to invest, one could talk with an accountant or financial counselor about other investments that are likely to increase in value if inflation gets worse. These might be selected stocks or other things. Be very careful with investment advisors, however, as many are not honest.
Also, do not live beyond your means. Save some money in the form of coins or other tangible goods.
THE ACTUAL SITUATION TODAY
Today’s inflation is unique, in a way, because almost all nations are inflating their money. It is like a competitive race to see who can destroy the currency fastest. However, this has hidden benefits for everyone. If only one nation inflates its money, that nation would be doomed. Many people say this about the USA, for example. However, today most nations are inflating their money and the USA is just starting to ‘go with the crowd’.
Therefore, I believe the doomsayers are absolutely wrong about the downfall of the USA. Instead, all prices will rise slowly, most likely, although gold and silver prices could climb faster. In fact, they have tripled since around 1991, along with a few other prices like health care costs and land values in some places.
Worldwide inflation tends to “spread the misery” so it will not be as devastating for any one nation, most likely. However, it still causes instability which is always bad.
A few hidden benefits of inflation include:
· It may bring some people back ‘down to earth’, so to speak, forcing them to think about their purchases, their investments, and what is real and what is fluff in their lives. This is actually a spiritual benefit that unfortunately usually requires some pain and deprivation.
Inflation often follows a period of prosperity where people get lax and allow the government to violate the law, as has happened in America. So it is a wakeup call for many people that eventually is helpful for society if it can return to sound monetary and governmental policies.
· It is good for some businesses that borrow money. They can repay with cheaper dollars, so at least it seems like a benefit. Unfortunately, interest rates usually rise in inflationary times, so borrowing tends to cost more, offsetting some of the benefit.
· Inflation tends to teach a good lesson, which is not to trust the government. This is a lesson I think most Americans and others around the world need to learn. It was clear to the founders of America, but liberal teachers and leaders have convinced many people that government is benign, when it is never the truth. To paraphrase George Washington, I believe he stated that “Government is force. It may be necessary, but government is never good.” Thomas Jefferson expressed the same idea when he wrote “that government is best that governs least”.
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When any of these idiot politicians talk about spending more money we dont have, remember this article.
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I blame aliens. They're obviously tied into this CT somehow ;D
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I blame aliens. They're obviously tied into this CT somehow ;D
Ha ha. This is one of the better articles I have posted and should be read by everyone.
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Bump -
With the news out of the Fed today - this article needs to be bumped.
Reminder to me - go buy more ammo, toilet paper, tooth paste, razors, toilitries, etc.
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I blame aliens. They're obviously tied into this CT somehow ;D
240 - was I correct over a year ago posting that? Yes or no?
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"They" need inflation and will do anything to get it, anything. And with Madman Ben signaling that he wants more inflation means we, the not middle class or millionaire or connected person, will be in deep shit.
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"They" need inflation and will do anything to get it, anything. And with Madman Ben signaling that he wants more inflation means we, the not middle class or millionaire or connected person, will be in deep shit.
We are royally screwed TBH - I said so from day 1 and am more convinced than ever. and I don't blame only the govt and people like bwen, obama, timmy, etc. I blame all of us.
Whether its the teachers demanding more and more pay and benes and pensions, the cops doing the same thing, endless welfare for everyone, endless food stamps and UE, state govts refusing to cut spending, state govts refusing to maturely deal with the pension tsunami, mature adults acting like children on our unfunded liabilities in entitlemkent programs, endless wars and foregin committments, etc,
BOTTOM LINE IS THAT THERE IS SIMPLY NOT ENOUGH MONEY OR GROWTH IN THE ECONOMY TO SUSTAIN OUR PONZI SCHEME ECONOMY AND SPENDING.
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I've said it before, the govt. has stated that it needs 5% growth to meet all spending and borrowing expectations.
5% is a million miles away right now.
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The only thing I do think that might work, but will never happen, is to sell off some of our natural gas to foreign sources and have it go directly to paying down the debt, shrink govt by 50%, lower taxes, end the EPA, mass tort reform, end govt pension system, etc.
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I've said it before, the govt. has stated that it needs 5% growth to meet all spending and borrowing expectations.
5% is a million miles away right now.
We can't achieve 5% growth, or anything close tot hat so long as we have economy killing regs, epa, hostile labor laws, etc etc. In a global economy, businesses will simply set up shop elsewhere.
Shit - just go persue my thread on how Obama is killing the economy. Every day we have more and more job killers being tossed our way.
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The only thing I do think that might work, but will never happen, is to sell off some of our natural gas to foreign sources and have it go directly to paying down the debt, shrink govt by 50%, lower taxes, end the EPA, mass tort reform, end govt pension system, etc.
We should be exploiting our massive natural gas reserves and begin to convert it into fuel for our cars and transportation fleets.
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We should be exploiting our massive natural gas reserves and begin to convert it into fuel for our cars and transportation fleets.
GigantorX - the more i have been reading lately - whether its Creature from Jekyll Island, Econ books, DSouzas book, Hayek, and many other items the last 2 years, I have come to the conclusion that we are basically FUCKED!
When you tally it all together and take a macro view of everything, like Celente does, I really don't see where we are going with all of this.
We simply don't have the will anymore to be honest about our issues and do what is necessary to thrive.
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Food prices about to EXPLODE - Thank you Obama and Ben
http://www.businessinsider.com/food-inflation-in-the-september-cpi-2010-10#comment-4cb87cc67f8b9a39621a0000
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BUMP
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Hey Mal - do you see what we are talking about yet?
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Guys:
If you want a real doom and gloom article on the economy as a result of our money printing schemes - check this out.
http://www.businessinsider.com/eric-sprott-keynesianism-2010-10
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The Fed's 'tax on the consumer'
CnnMoney ^ | October 28, 2010: 8:45 AM ET | By Hibah Yousuf, staff reporter
Investors have been cheering the prospect of the Federal Reserve pumping more money into the economy, but some experts warn it may wind up hurting consumers' wallets.
Ever since Fed Chairman Ben Bernanke pledged that the Fed would take "unconventional measures" to keep the economy afloat, the S&P 500 has climbed more than 11%.
Those 'unconventional measures' would likely be another round of asset purchases, known as quantitative easing, or QE2 for short. The move is designed to boost the economy and lower interest rates. But it would also add further pressure on an already weak U.S. dollar.
Since Bernanke's comments in August, the dollar index has dropped 7%, while commodities have surged. Crude oil has jumped 14%, while gold has spiked 8%. Prices for cotton, corn, sugar, wheat and coffee also have all hit new highs during the past two months.
Ultimately, those lofty prices will trickle down to consumers in the form of higher prices for coffee, bread, pizza, gas, clothing and more.
"The problem I have with QE2, is it behaves like a tax on the consumer," said David Giroux of T. Rowe Price. "People want to believe it's a free lunch for the economy, but it's definitely not. Next year, we're going to be paying more at the gas pump and the grocery store."
American households already spend $340 billion a year on gasoline, according to U.S. economist Paul Dales of Capital Economics. Since late August, the price of a gallon of gas has jumped 4.8%.
All it would take is another 10% increase, and the average cost per gallon would rise above $3, adding $51 billion a year to your household tab, he said. Even a modest 5% rise in food prices would force a family to add about $350 a year to their grocery budget.
(Excerpt) Read more at money.cnn.com ...
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Inflation is like if a person were to slowly add water to our gasoline. You might not notice the difference at first. But after a while, the gas would not power your car as well and eventually it would not work at all. Your gasoline would no longer have the value it had before.
(http://www.jaguarenterprises.net/images/em/angel2.gif)
Ummm... you do know I've got the perfect solution for that don't you?
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(http://www.jaguarenterprises.net/images/em/angel2.gif)
Ummm... you do know I've got the perfect solution for that don't you?
i thought you were into gold now/
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Inflation Is Rampant In Tuition, Healthcare And Property Taxes
Charles Hugh Smith, Of Two Minds | Dec. 1, 2010, 11:06 AM | 819 | 14
Here is my simple definition of rampant inflation: you're paying a lot more money for the same item/service but the quality/quantity is the same or lower--and your income is stagnant/declining. We are constantly told that inflation is near-zero, but the basket of goods selected for measurement seems not to include healthcare/health insurance, college tuition or property taxes.
These costs are skyrocketing, and they are non-trivial expenses, running into the tens of thousands of dollars per year. I have addressed the difference in scale of expenses for the wealthy and the "middle class" before. For instance, $10,000 per year for healthcare insurance is a massive percentage of the after-tax income of a household earning $60,000 a year, while it is a modest percentage roughly equivalent to the sums spent eating out and traveling for a household earning $160,000 a year.
The same scale differences are present in all measures of inflation. Onions might well have declined over the past year, which means that the $30 I spent annually on onions declined to $29--a grand savings of $1.
Even a 10% decline in natural gas costs would only yield a modest $50 reduction in costs for my household. Let's say another household consumes a lot more natural gas, and their savings would total $200 a year.
Compare these modest reductions due to deflation with the thousands of dollars in increases in big-ticket items like tuition, property taxes and healthcare.
Take property taxes. Nationally, according to the Census Bureau report on state and local tax revenues, total property taxes in the U.S. rose from $225 billion in 1998 to $476 billion in 2009 -- an increase of 111% over a time period that saw costs rise 32% (i.e. Bureau of Labor Statistics calculated inflation from 1998 to 2009 at 32%).
So nationally, property taxes rose at a rate that was triple that of inflation.
My own property taxes rose 25% from 2004 to 2010, while inflation in that period was officially 16%. So my property taxes rose at a rate that was 50% ahead of inflation. This is for property in California, supposedly protected from increases above 1% per annum by Proposition 13. (Local voters can approve additional parcel taxes, and they regularly do when presented with "save our schools, libraries, etc." tax increases.)
These increases amount to several thousand dollars a year. Medical insurance (stripped-down basic coverage from Kaiser) and our property taxes take a huge percentage of our after-income tax income. Whatever items now cost less than a few years ago are essentially trivial in cost over a decade (how many TVs am I going to buy every decade?), while the increases in healthcare and property taxes amount to several thousand dollars a year. Together, those increases above the "official" low rate of inflation add up to $50,000 over a decade.
Here is a typical example of how property taxes have doubled in the San Francisco Bay Area (this is not our house, but one picked from zillow.com):
A modest house valued at $270,000 in 2004 paid $5,090 in property taxes. (Please note California is a "low tax state," according to those anxious to raise all state taxes.)
The house was sold in July 2005 for $725,000 (near the top of the bubble) and property taxes promptly jumped to $10,977. By 2010, taxes had climbed to $12,193: a grand a month.
The utility value of the house remained unchanged. There was still the same number of rooms and square footage. The owners received no "hedonic" improvements; they're just paying $12,000 annually in property taxes instead of $5,000.
Tuition to the public universities and colleges in California has skyrocketed. Tuition to attend the University of California system was $1,820 annually in the 1990-91 school year; the tuition for the 2011-12 academic year is $12,151.
According to the BLS inflation calculator, $1 in 1990 equals $1.67 in 2010. If UC tuition had matched inflation, then tuition should now be about $3,040 a year, not $12,000.Tuition has quadrupled, even when adjusted for inflation.
The State University system has also seen tuition jump:
Image: California State University
So while clothing and electronics may have declined by a few hundred dollars a year per household, tuition for a four-year university now costs $40,000 more -- and that's not counting student fee increases. So while a laptop might be a few hundred bucks less, and clothing might be a little less, it costs $50,000 more to send your child to a state university. That is not "low inflation."
As for healthcare--if you buy your own healthcare insurance as a business owner or self-employed worker, then you know the drill--huge annual increases, year after year, recession or not. Our household medical insurance costs have doubled in a few years, and that's for stripped-down coverage (no dental, eyewear, drug coverage, etc.) and higher deductibles on every category.
Add the thousands of dollars more per year for property taxes and health insurance, and you are talking sums of money which are orders of magnitude greater than the modest reductions in expenses for other items as measured by the Central State. Most households are reaping extremely modest savings on clothing, electronics, and the other items which are a bit cheaper, while the increases in healthcare, property taxes and education are running in the thousands of dollars annually.
I may have saved a few dollars on onions and shirts, but we are paying $5,000 more per year for property taxes and healthcare insurance. If these costs were increasing at the official low rate of inflation (1.1% per annum), then they would be registering increases of a few hundred dollars every decade, not thousands of dollars more every few years.
"Low inflation" doesn't add up when you consider the tens of thousands of dollars in increases stacking up in tuition, taxes and healthcare. I have addressed some of these issues before:
Does Healthcare Reform Address Rising Inequality? (September 17, 2010)
Wall Street's "Recovery" Leaves Main Street Mugged in the Gutter (November 17, 2010)
Tags: Inflation, California, Taxes | Get Alerts for these topics »
Read more: http://www.businessinsider.com/inflation-is-rampant-in-tuition-healthcare-and-property-taxes-2010-12#ixzz16yulIimb
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Don't Believe The Fed, Inflation Is Theft From The Middle And Lower Classes
The Business Insider ^ | 11/29/2010 | Mike "Mish" Shedlock
Deflation is often natural, but inflation is a real threat
In Unthinking Economic Parrots and Deflation Fighting Madness I trashed unthinking writers who parrot the Fed's misguided beliefs about the importance of inflation expectations and why falling prices are bad.
I specifically quoted one parrot who said "Deflation is particularly damaging to economic growth as consumers delay purchases until prices fall further."
This was my rebuttal.... The ineptitude of Japan's policies hoping to combat deflation is staggering. Worse yet, unthinking economic parrots talking about the "economic damages of deflation" have no idea what they are even saying.
I wish economic writers had the ability to think rather than parrot ideas espoused by Keynesian clowns.
Series of Questions If your refrigerator conks out, will you buy a new one or wait 6 months to take advantage of lower prices? If the transmission on your car fails will you wait 6 months to get it fixed?
If your pantry is bare, will you wait 1 month to buy food even if you expect food prices to drop? If you need a new winter coat, will you wait and if so, how long?
The answer to that last question is "Perhaps for a bit, but you will not wait 3 years even if you expect prices will be even lower 3 years from now."
Short of assets like stocks, bonds, and housing (and except for periods of hyperinflation) it is tough to cite any examples where inflation expectations mean a damn thing.
(Excerpt) Read more at businessinsider.com ...
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Bump.
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Interesting read. Wonder if the Obama nuthuggers have read it.
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You Call It Inflation, I Call It Theft
Mar. 3 2011 - 5:05 pm | 1,096 views | 0 recommendations | 3 comments
By BILL FLAX
http://blogs.forbes.com/billflax/2011/03/03/you-call-it-inflation-i-call-it-theft
On my daughter’s birthday, she received a crisp new $5 bill, which she promptly deposited in her piggy-bank. Never foregoing an opportunity to expound on free market principles, I warned about her susceptibility to a subtle means of theft even more devious than a burglar breaking in at night against whom you might get a clear shot.
Usually, when she asks why it’s, “Because I told you so!” But for inflation, because Washington wills it, that explanation hardly suffices. And as often as economic prognosticators prescribe currency debasement as some miraculous panacea, her question is a good one. Why do we suffer inflation?
I searched online for “benefits of inflation.”
Inflation Spurs Growth – The theory goes something like this: Since savers realize the value of their money will erode, they spend more quickly thus stimulating the economy. If we believe tomorrow brings higher prices, we buy today. Basically, we spend before the monetary authorities steal our money’s value. Hmm.
The proponents of consumption-based stimuli overlook the essentiality of saving. While burying your money in the ground wastes its talents, most save via bank accounts or through the purchase of capital assets. Thus saving makes investment capital available for new businesses hiring new workers and creating new products that sustain and beautify life. The accumulation of capital drives growth.
Inflation discourages saving. Inflation buries capital into the ground as people flee toward real estate as a protective hedge. Inflation stymies growth.
Inflation Decreases Debt Burdens – If we borrow say, $14 trillion and then cheapen our debt through dollar devaluation, the repaid lenders can’t buy as much thanks to diluted dollars being returned to them. Inflation essentially harms savers for the benefit of borrowers. Every dollar borrowed requires a dollar saved. The economy gains nothing by such mischief.
Generally, borrowers aren’t responsible for this debauchery so it’s not fair to label it theft. In government’s case, dilapidated debts at least rise to the level of fraud. Why does Washington willfully reward the profligate by cheating the prudent? Ah yes, because they exude profligacy.
Inflation Increases Asset Values – As the dollar falls, the price of our assets raises commensurately. Stocks, real estate, etc. surge. That sounds wonderful, but their value increases against what? Since the prices for everything else rise too all we’ve secured is a nominal gain for tax collectors to confiscate. We derive no real benefit.
A stock that cost $20 thirty years ago would need to fetch over $50 today just to match the CPI, understated as it remains. If it now costs $40, you pay the IRS on the $20 nominal gain even as your stock actually lost value. Washington thus rewards itself for its own reckless monetary policy. The more they inflate, the more they take.
A similar phenomenon nails your wages. As your salary increases, you pay more taxes even as you can afford less. A two percent raise increases your tax bill two percent, but if prices also rise only the IRS derives any benefit.
Inflation Offsets Unemployment – The Philips Curve, the illusion that increasing inflation decreases unemployment, remains a staple of macroeconomics even as few still publicly acknowledge its role. Bernanke, Geithner et al remain smitten by the Philips Curve.
To succeed, this essentially entails deceiving workers. Since the price of labor, your wage, is less elastic than many other costs, businesses can raise prices quicker than can employees increase their salary demands. As businesses raise prices to cope with inflation, the cost of labor proportionally lowers. Thus, in Keynesian theory, more workers can be hired as inflation dilutes your pay.
Remember this when you hear some self-proclaimed friend of the working man imploring that we accept inflation as a means to expand employment. They peddle pay cuts for workers in real terms versus free marketers who promote wealth generating growth. Growth affords higher living standards for all. Inflation silently erodes living standards.
Inflation Promotes Exports – While few non-economists still accept the Philips Curve, the crowd espousing inflation as a facilitator of exports proves more enduring. Exporters love dollar debasement.
In theory, if the dollar falls then anything priced in dollars becomes cheaper for someone holding say, euros. But the dollar and the euro are merely measuring sticks. The underlying transaction involves trading our goods. Currency is a tool; a ticket of exchange. Currency simplifies trading relative to bartering. You may not want my output, but you definitely want my dollar so that you can acquire what you do want.
For illustrative purposes only, ignoring taxes, regulatory burdens, and transportation costs or differing local tastes, if the dollar equals the euro and it takes a dollar to buy a dozen eggs then it too will take a euro to buy those eggs. Purchasing price parity.
But as the dollar plummets, a euro is now worth more. Thus it takes more dollars to buy eggs, but it still takes but one euro. Domestic eggs didn’t become cheaper in euros. This isn’t some mysterious or complicated economic theory or even subject to debate. It’s elementary school mathematics: the transitive property. If A equals B and B equals C then A too must equal C. Making A not equal B doesn’t change the value of C.
Markets are not perfect and as well as the arbitragers perform, timing differences remain. Gutting the dollar never makes eggs cheaper in euros other than timing discrepancies, which can make or break producers. Firms whose inputs are denominated in one currency and their outputs in another frequently get jilted.
As the dust settles, things must balance, but if you bought a dozen eggs yesterday in dollars to sell them tomorrow in Euros, the dollar’s lack of certainty promotes intrigue. Inflation wobbles the scale hindering international commerce.
When parties trade of their own volition, by mutual consent and to mutual advantage, both expect to gain and both should, assuming an honest scale. When Washington deliberately engineers a false balance, the likelihood that someone gets harmed rises dramatically. Cheating your trading partners can win the day, but isn’t a successful long term strategy.
Like the Philips Curve, promoting exports by debasing the currency effectively pokes the pendulum. The inflation driven exhilaration proves fleeting as the pendulum swings back like a wrecking ball. Some latch onto the pendulum as it soars higher, but others get whacked as it returns.
Inflation is deceitful and ineffective. It swindles savers, fleeces lenders, pumps taxes higher and triggers malinvestment. It doesn’t reduce unemployment; it whittles away your wage. Nor does inflation promote exports, but it does make international trade more frightening.
If inflation succeeded, it would be merely dishonest. But as history proves, it never works. Neither Bush, nor Obama’s weak dollar policies did anything to alleviate the overblown “trade deficit” and much to undermine growth. There is no evidence that inflation fosters exports or employment.
As Washington plunders the value of our property and expropriates the product of our labor, inflation reduces us to servitude. Debasement is a despicable ploy the government uses to rob you blind. Period.
So what do I tell my children?
StarRemovePickunPick
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Frustrated Crowd To NY Fed Chief: 'I Can't Eat An iPad'
Source: TalkingPointsMemo.com
New York Federal Reserve President William Dudley on Friday tried to calm people's nerves about rising food prices by reminding them that other products -- like iPads -- are getting cheaper.
"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," Dudley said in Queens, Reuters reports. "You have to look at the price of all things."
But better iPads don't put food on the table, audience members reminded him. "When was the last time, sir, that you went grocery shopping?" one person asked. And, perhaps most succinctly, another told him, "I can't eat an iPad."
Yahoo's The Lookout points out that food prices have been rising since November 2009, and that consumers should expect to pay 4 percent more for food this year.
Read more: http://tpmlivewire.talkingpointsmemo.com/2011/03/frustr...
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Wholesale prices rise 1.6 pct. Biggest jump in food costs in 36 years (Dollar devaluation)
WashingtonPost ^
Posted on Wednesday, March 16, 2011
WASHINGTON — Wholesale prices jumped last month by the most in nearly two years due to higher energy costs and the steepest rise in food prices in 36 years. Excluding those volatile categories, inflation was tame.
The Labor Department says the Producer Price Index rose a seasonally adjusted 1.6 percent in February, double the 0.8 percent rise in the previous month. Outside of food and energy costs, the core index ticked up 0.2 percent, less than January’s 0.5 percent rise.
Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose.
(Excerpt) Read more at washingtonpost.com ...
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Obama = Carter
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Wholesale prices rise 1.6 pct. Biggest jump in food costs in 36 years (Dollar devaluation)
WashingtonPost ^
Posted on Wednesday, March 16, 2011
WASHINGTON — Wholesale prices jumped last month by the most in nearly two years due to higher energy costs and the steepest rise in food prices in 36 years. Excluding those volatile categories, inflation was tame.
The Labor Department says the Producer Price Index rose a seasonally adjusted 1.6 percent in February, double the 0.8 percent rise in the previous month. Outside of food and energy costs, the core index ticked up 0.2 percent, less than January’s 0.5 percent rise.
Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose.
(Excerpt) Read more at washingtonpost.com ...
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Obama = 3X worse than Carter
Fixed
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US Cost of Living Hits Record, Passing Pre-Crisis High
Published: Thursday, 17 Mar 2011 | 4:09 PM ET Text Size By: John Melloy
Executive Producer, Fast Money
One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while with deflationary forces keeping the cost of living relatively low. That’s not the case.
A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely-watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.
“The Federal Reserve continues to focus on the rate of change in inflation,” said Peter Bookvar, equity strategist at Miller Tabak. “Sure, it’s moving at a slower pace, but the absolute cost of living is now back at a record high in a country that has seven million less jobs.”
The regular CPI, which has already been at a record for a while, increased 0.5 percent, the fastest pace in 1-1/2 years. However, the Fed’s preferred measure, CPI excluding food and energy, increased by just 0.2 percent.
“This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs,” said Stephen Weiss of Short Hills Capital. “Perhaps the best way to look at this is to calculate a moving average over a certain period of time in order to smooth out the peaks and valleys.”
The so-called core CPI is used by the central bank because food and energy prices throughout history have proven to be volatile. However, one glance over the last two years at a chart of wheat or corn shows they’ve gone in one direction: up. And many traders say Fed Chairman Bernanke’s misplaced easy money policies are to blame.
Over time, the Bureau of Labor Statistics has made changes to the regular CPI that it feels make it a better measure of inflation and closer to a cost of living index. It improved the way it averages out prices for items in the same category (e.g., apples) and also uses the often-criticized method of hedonic regression (if you're curious, you can learn more about that here) to account for increases in product quality.
In 2002, the BLS created this often-overlooked cost of living index in order to account for the kinds of substitutions consumers make when times are tough. It is supposed to be even closer to an actual “cost of living” measure than the regular CPI.
“For example, pork and beef are two separate CPI item categories,” according to the BLS web site. “If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The C-CPI-U (Chain Consumer Price Index) is designed to account for this type of consumer substitution between CPI item categories. In this example, the C-CPI-U would rise, but not by as much as an index that was based on fixed purchase patterns.”
“As the cost of living increases, we are headed toward a bigger problem with the slowing of housing permits,” said JJ Kinahan, chief derivatives strategist at thinkorswim, a division of TD Ameritrade. “As the staples start to cost more, this could lead to a quick slowdown in the auto and technology sectors as an iPad is an easy thing to pass on if you are paying more for your gas and food and need to cut back somewhere.”
To be sure, it’s nearly impossible to get a perfect “cost of living” measure, and the BLS acknowledges this on their web site: “An unconditional cost-of-living index would go further, and take into account changes in non-market factors, such as the environment, crime, and education.”
Still, states will be cutting back services drastically this year at the very same time they are raising taxes in order to close enormous budget deficits and avoid a muni-bond defaults crisis. So while it may be the missing link to a perfect cost of living measure, one can assume that Americans will be paying more for unquantifiable services such as police enforcement and education, but getting them at a lesser quality.
Bottom line: The cost of living for Americans is now above where it was when housing prices were in a bubble, stock prices at a record, unemployment low and consumer confidence was soaring. Something has gotta give.
For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.
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John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.
http://www.cnbc.com/id/42130406
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Companies raise prices on food, shoes, diapers (Heinz, Nike & Kraft)
CNNMoney.com ^ | March 20, 2011 | Annalyn Censky
Look out! From Huggies diapers to Nike shoes, Americans are about to get less bang for their buck on some of the biggest brands.
This week, paper-products maker Kimberly-Clark announced plans to raise prices on diapers and toilet paper later this summer. Nike said it would increase prices on their shoes. And food companies Kraft, Smuckers and Heinz recently announced price hikes on some of their brands.
"The increases are necessary to offset inflationary pressure from higher raw material and energy costs," Kimberly-Clark (KMB, Fortune 500) said in a press release.
Huggies diapers and Pull-Ups prices will rise by 3% to 7%, the company said. Cottonelle and Scott 1000 toilet paper will rise about 7%.
Kraft Foods (KFT, Fortune 500) raised its price on Maxwell House coffee by 22%, or 70 cents per pound, after Smuckers (SJM) said last month it would raise the price of Folgers by 10%.
The increases come as major brands struggle to keep their profit margins intact, amid surging costs on raw materials. Producer prices rose 1.6% in February alone, the the biggest jump in nearly two years, according to government data released Wednesday.
Until recently, producers and retailers resisted price hikes, fearing they would lose customers during a still-sluggish economy and high unemployment.
(Excerpt) Read more at money.cnn.com ...
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STOP THE DENIAL: Inflation Is Accelerating, Consumers Are Getting Squeezed
John Mauldin, Thoughts From The Frontline | Mar. 20, 2011, 8:36 AM | 2,785 | 42
Actual gas prices in San Francisco last month.
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What happens when the Fed is finished with QE2? I have been letting that filter into my thinking lately as I look at the economic landscape and the data we have seen the past few weeks.
Correlation is not causation, as I often say, but all we can do is look back at what happened last time and speculate about the future.
A very dangerous occupation, but your fearless analyst will plunge on ahead into the jungle of a very hazy future. You come with me at your own risk!
Quickly, a big Mauldin thanks to those who already bought my book, Endgame, as it made the New York Times bestseller list yesterday, earlier than I thought it would. That would be my 4th, and that and my kids are about my only small claims to fame. I have ruthlessly promoted the book to you, and so this week I resist my inner promotional demon and simply provide a link to
http://www.amazon.com/exec/obidos/ASIN/1118004574/frontlinethou-20 where you can read the reviews and buy the book if you have not, or get it in your local stores. At the end of the letter, I note that I will be at a book launch party in London Monday evening, and would love to have you stop by. Details below. And now to this week’s letter.
The End of QE2?
The Fed committed to buying $600 billion of Treasuries between the beginning of QE2 in November and the end of June. June is 3 months away. What will happen when that buying goes away? The hope when QE2 kicked off was that it would be enough to get the economy rolling, so that further stimulus would not be deemed necessary. We’ll survey how that is working out, with a quick look at some recent data, and then we go back and see what happened the last time the Fed stopped quantitative easing.
First, the guy on the street is getting squeezed. Real US consumer spending slowed in January and looks like it did only marginally better in February. The Fed argues that inflation is mild, as they prefer to look at “core” inflation (inflation without considering food and energy). If you look at it that way, they are right. And in normal times, I can kind of see why we strip out energy and food, as they are very volatile price points and can move a lot from month to month.
But that argument gets a lot weaker when your main policy, that of significant quantitative easing, is perhaps CAUSING the rise in food and energy (as well as weakening the dollar)! If the Fed policy is at least contributing to the cause of total inflation, arguing that food and energy don’t count doesn’t hold water. Let’s look at the following chart from economy.com.
In particular, notice the rise in the last three months since the beginning of QE2. Inflation is running at over 5% on an annualized basis. Companies like Kimberly (diapers, etc.), Colgate, P&G, and others all announced 5-7% price increases this week. These are companies that provide staples we all buy. Those prices matter. Even Wal-Mart will have to pass those increases on. To say that food and energy don’t matter misses the point. These items have real economic impact.
As my friend David Rosenberg wrote this morning:
“In February, there was no inflation at all in average weekly wage-based earnings but there was 0.5% inflation in consumer prices, meaning that real work-related income was crushed 0.5% and has now deflated in each of the past four months and in five of the past six months, during which it has contracted at a 2.3% annual rate. Once the effects of fiscal stimuli wear off, this negative income trend will show through in a much more visible slowing in real consumer spending that we doubt the markets have fully discounted. So far, what has happened in equities has been treated as a financial event – just wait until the economic event follows suit. And it’s not only fiscal stimulus that is soon to subside. We still have that 86% correlation over the past two years between movements in the Fed balance sheet and the direction of the S&P 500 – this too will come home to roost before long, whether or not we end up seeing a resolution to the crises in Japan, Libya or Bahrain.”
He goes on to give us this chart:
How’s that QE2 thingy working for you, Mr./Ms. Average Worker? Prices up, income down? And remember, most workers got the equivalent of a 2% pay hike with the temporary boost in Social Security, which goes away at the end of the year (and without which the economy and consumer spending would be even worse!).
Maybe that’s why New York Fed Chief William Dudley got heckled this week. (Courtesy of the Agora 5 Minute Forecast:)
“Dudley – a 21-year vet of Goldman Sachs – stepped out of his bubble to explain Fed policy to real people in Queens.
“It might not have been the first time Dudley attempted to gain the trust of the hoi polloi, but we’re pretty sure it’ll be the last. The details here were reported widely. We divined the scene from a Reuters report.
“First Dudley swore up and down that inflation was no problem. ‘When was the last time, sir,’ came a reply from the audience, ‘that you went grocery shopping?’”
“Dudley boldly proceeded to explain the concept of ‘core CPI’ – the cost-of-living measure designed for people who don’t eat or consume energy. Heh, we know firsthand how well that goes over…
“Then in a brilliant stroke, he pointed to Apple’s shiny new iPad 2 to illustrate his point. ‘Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,’ he gamely explained. ‘You have to look at the prices of all things.’
“‘I can’t eat an iPad,’ someone yelled from the crowd.”
Ouch. (For the record, I do go to the grocery store and Wal-Mart and Home Depot, as well as other less frugal venues.)
And core inflation may soon be under pressure. There were two articles yesterday, one from Yahoo and the other on Bloomberg. Both related to rising pressure on rental costs. (My recent lease renewal increase was significantly above core CPI!) (From http://realestate.yahoo.com/promo/rents-could-rise-10-in-some-cities.html)
“Already, rental vacancy rates have dipped below the 10% mark, where they had been lodged for most of the past three years. ‘The demand for rental housing has already started to increase,’ said Peggy Alford, president of Rent.com… By 2012, she predicts the vacancy rate will hover at a mere 5%. And with fewer units on the market, prices will explode.”
Look at this graph showing their projections:
Here’s what to pay attention to. Notice that since 2002 (or thereabouts) rental costs have been flat, and down of late (inflation-adjusted). If Rent.com projections are anywhere close, we could see a rise in rents of 15% by the end of 2012.
Let’s remember that 23% of the CPI and 40% of core CPI is Owner Equivalent Rent. If they are right, that adds about 3% to total CPI and 6% to core CPI! Will the Fed be telling us to focus on core inflation in 12-18 months? And those prices will start to show up steadily.
“This is a sharp change from the recession, when many Americans couldn't afford to live on their own. More than 1.2 million young adults moved back in with their parents from 2005 to 2010, said Lesley Deutch of John Burns Real Estate Consulting. Many others doubled up together.
“As a result, landlords had to reduce prices and offer big incentives to snag renters. Now that the recession is easing, many of these young people are ready to find new digs, mostly as renters, not owners. Plus, the foreclosure crisis continues unabated, and the millions losing their homes are looking for new places to live.”
Producer Prices Up 35-40% in the Last Six Months
Then let’s look at business. The Producer Price Index was out this week, and it was way up – 1.6% for the month, or an annualized 20%+. Even if you look at the last year, it was up a real 5.8%. That is inflation in the pipeline. Look at this chart from economy.com. Notice the trend since QE2 was announced in August and implemented in November.
I won’t bore you with the details, but for those interested, go to www.bloomberg.com and search for “Japan supply issues” and further on “semiconductors.” It is clear that, at least for a while, prices of electronics and tools are going to rise as one company after another is shutting its production lines down in Japan. Auto manufacturing plants in the US will have to close soon, as critical parts from Japan are not going to be forthcoming. Flat screen TVs? The iPad 2 I keep trying to find? All sorts of companies are going to get their costs squeezed even further. Remember, the above PPI numbers are from before the Japanese earthquake and tsunami and nuclear disaster.
(I was in Tokyo less than two weeks ago. I can’t imagine the stress and anguish going on there. The scope of the disaster is just shattering. I encourage my readers to go to http://american.redcross.org and donate directly to their Japanese fund or the charity of your choice.
A few details from Japan, though, gleaned from here and there. Sony alone makes 10% of the world’s laptop batteries. Japan is responsible for 30% of global flash memory, 20% of semi-conductors, and 40% of electronic components.
The point is that the Fed has created real pressure in the price pipeline, primarily on basic commodities and energy. “Crude” goods, which is basically materials before there is any value added, are up 28% from a year ago and pushing an annualized 35-40% for the last six months. Those costs are filtering in to final finished products. And when you add in the supply-related problems from the recent disaster? It is not a pretty picture for profits.
Let’s go back and look at a graph from friend Vitaliy Katsenelson, from a few weeks ago. It points out that corporate profits are back close to all-time highs as a percentage of GDP.
As the brilliant Jeremy Grantham says, and I am paraphrasing, corporate profits are among the most mean-reverting of all statistics. And this makes sense unless capitalism is broke. High profits entice competitors to come in and take market share by selling for less.
If corporate profits went back (mean-reverted) to their longer-term average, P/E ratios would be close to 24 at today’s prices. Corporations have some room to absorb some price increases, but at the expense of the bottom line.
What Happens When We Come to the End of QE2?
We have only one instance where the Fed cut back on quantitative easing, and that was last year. It is a data set of one, but it is all we have. So, let’s look at what happened. As noted by several sources (but I am looking at Rosie’s list right now), the Fed let its balance sheet contract by some 12% from late April to late August. Quoting:
“Now over that interval ...
“The S&P 500 sagged from 1,217 to 1,064….
The S&P 600 small caps fell from 394 to 330….
The best performing equity sectors were telecom services, utilities, consumer staples, and health care. In other words — the defensives. The worst performers were financials, tech, energy, and consumer discretionary….
Baa spreads widened +56bps from 237bps to 296bps…
CRB futures dropped from 279 to 267….
Oil went from $84.30 a barrel to $75.20….
The VIX index jumped from 16.6 to 24.5….
The trade-weighted dollar index (major currencies) firmed to 76.5 from 75.5….
Gold was the commodity that bucked the trend as it acted as a refuge at a time of intensifying economic and financial uncertainty — to $1,235 an ounce from $1,140 and even with a more stable-to-strong U.S. dollar too….
The yield on the 10-year U.S. Treasury note plunged to 2.66% from 3.84%…”
What will happen this time around? Is the economy strong enough to grow on its own without stimulus, or strong enough that the Fed will be reluctant to continue with QE3?
My friends at Macroeconomic Advisors have reduced their first-quarter GDP projection to 2.5%. Morgan Stanley has dropped theirs from 4.5% less than six weeks ago to 2.9% today. That is a huge drop in a short time for a forecasting model. Forecasts at other economic shops are being slashed as well. States and local governments, as I have continuously noted, are cutting more than 1% of GDP from their budgets as I write. That translates into real-world pressure on the GDP (even if it’stemporary, which I believe it to be, we live in the present).
I am not ready to use the “R” word, but Muddle Through could show up with a true vengeance this summer, with higher inflation and slower growth. I lived through the ’70s, and frankly, I would just as soon not go see that movie again.
The danger here is that the Fed (Bernanke) watches the economy slow and decides we need another round of quantitative easing. I have resisted that idea but, as I have noted, sometimes we need to think about the unthinkable.
And thus, I come to the end of the letter with a brief note on a very worrisome conversation I had yesterday with Martin Barnes, editor of the esteemed Bank Credit Analyst. Martin is one of the people I call when I want to know what the Fed might do. I guess I was looking for assurance that the Fed would not do QE3. I did not get it.
“Look, John” (insert Scottish brogue as I paraphrase), “if the Fed sees the economy rolling over into recession they will put their mandate for employment ahead of their mandate for stable prices.”
“But that would mean higher inflation in the face of a slow economy.”
“And?” he shot back. “That would just be the price of trying to increase employment, in their minds.”
“But at some point you have to bring out your inner Volker!” I intoned. “What about the future?”
The conversation continued, but I never got my warm and fuzzy assurances. For the record, another round of QE, unless there is a true liquidity crisis (and the last QE did not qualify!), would be a disaster, at least from the cheap seats where I sit. There are all sorts of inflationary and stagflationary consequences, none of which I like.
Brief plug: This April, at my Strategic Investment Conference, the first two questions that each speaker will get at the end of their presentation will be, first, “What will happen when QE2 goes away?” and second, “Under what conditions will the Fed launch QE3?”
I will pose them to Martin Barnes, Marc Faber, Niall Ferguson, Louis-Vincent Gave, Paul McCulley, David Rosenberg, and Gary Shilling – and John Paulson has agreed to speak as well! They will be joined by Neil Howe (The Fourth Turning, and demographics guru) and George Friedman of Stratfor, as well as your humble analyst and Altegris partner Jon Sundt. I mean, really, is there a conference anywhere this year that has a line-up that powerful?
The conference is April 28-30 in La Jolla. It is filling up fast. You can register at https://hedge-fund-conference.com/2011/invitation.aspx?ref=mauldin. Sadly, it is for accredited investors only, but I will report back to you the answers from the speakers to those questions.
London, Malta, Milan, Zurich, Salt Lake, and New York
I am off to London tomorrow. I will be guest hosting Squawk Box on CNBC London at 7 AM (gasp!), then do various meetings, and that night will be with co-author Jonathan Tepper for our book-launch party at the Mint Hotels - Tower of London Hotel, 7 Pepys Street, City of London. If you can, RSVP to endgame@variantperception.com so we can have some idea of how many are coming. I know, last minute and all, but that’s my life!
The next day I fly to Malta for board meetings, then on to Milan for a public presentation, then on to Zug and Zurich, before heading back. The next weekend I am off to Salt Lake for CMG partner Steve Blumenthal’s 50th birthday bash, then to NYC on Sunday for three days of media and meetings. I will update you with the media schedule next Friday, but right now I know I am on Fast Money for the first time on Monday the 4th. That should be interesting. I am a little slower than those guys, but maybe they can slow down for the old man.
The Japanese disaster has gotten to me more than most similar tragedies. Maybe it is because I was there less than a week before the earthquake. Maybe it is the thought of all those elderly people who have lost everything, with no place to go back to, and enduring horrible weather conditions. I have had letters from readers who have friends there, and the stories they relate show a nation that has energy problems, with gas rationing, and that means that trucks have a hard time delivering food. Empty shelves are the norm, and reports of people running out of food keep coming to me.
For whatever reason, it has me thinking about how fragile life is, how short our time is, and how I need to focus on the important things, like family and friends. I do enjoy the business and my work (maybe too much!), but I need to make sure there is balance, as do we all.
The Japanese are a resilient people and will rebound, but they could use our help. Again, think about giving to the Red Cross or your own favorite charity. And let’s pray that they can figure this nuclear thing out soon.
Your getting on yet another airplane analyst,
John Mauldin
John@FrontlineThoughts.com
Read more: http://www.businessinsider.com/mauldin-inflation-accelerating-2011-3#ixzz1HC6xUMNd
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BUMP for TU
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We Are All Going To Die From Inflation Says Bill Gross
Points and Figures ^ | February 3, 2013 | Jeff Carter
Posted on Monday, February 04, 2013 6:56:29 PM by lbryce
They say that time is money. What they don’t say is that money may be running out of time.
There may be a natural evolution to our fractionally reserved credit system that characterizes modern global finance. Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a “big freeze” trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence. And too, the advancing entropy in the physical universe may in fact portend a similar decline of “energy” and “heat” within the credit markets. If so, then the legitimate response of creditors, debtors and investors inextricably intertwined within it, should logically be to ask about the economic and investment implications of its ongoing transition.
But before mimicking T.S. Eliot on the way our monetary system might evolve, let me first describe the “big bang” beginning of credit markets, so that you can more closely recognize its transition. The creation of credit in our modern day fractional reserve banking system began with a deposit and the profitable expansion of that deposit via leverage. Banks and other lenders don’t always keep 100% of their deposits in the “vault” at any one time – in fact they keep very little – thus the term “fractional reserves.” That first deposit then, and the explosion outward of 10x and more of levered lending, is modern day finance’s equivalent of the big bang. When it began is actually harder to determine than the birth of the physical universe but it certainly accelerated with the invention of central banking – the U.S. in 1913 – and with it the increased confidence that these newly licensed lenders of last resort would provide support to financial and real economies. Banking and central banks were and remain essential elements of a productive global economy.
But they carried within them an inherent instability that required the perpetual creation of more and more credit to stay alive. Those initial loans from that first deposit? They were made most certainly at yields close to the rate of real growth and creation of real wealth in the economy. Lenders demanded that yield because of their risk, and borrowers were speculating that the profit on their fledgling enterprises would exceed the interest expense on those loans. In many cases, they succeeded. But the economy as a whole could not logically grow faster than the real interest rates required to pay creditors, in combination with the near double-digit returns that equity holders demanded to support the initial leverage – unless it was supplied with additional credit to pay the tab. In a sense this was a “Sixteen Tons” metaphor: Another day older and deeper in debt, except few within the credit system itself understood the implications.
Economist Hyman Minsky did. With credit now expanding, the sophisticated economic model provided by Minsky was working its way toward what he called Ponzi finance. First, he claimed the system would borrow in low amounts and be relatively self-sustaining – what he termed “Hedge” finance. Then the system would gain courage, lever more into a “Speculative” finance mode which required more credit to pay back previous borrowings at maturity. Finally, the end phase of “Ponzi” finance would appear when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.
Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model that acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since as shown in Chart 1. (Patterns for other developed economies are similar.) While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion. Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took $4 of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.
Not only is more and more anemic credit created by lenders as its “sixteen tons” becomes “thirty-two,” then “sixty-four,” but in the process, today’s near zero bound interest rates cripple savers and business models previously constructed on the basis of positive real yields and wider margins for loans. Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene. What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion. In effect, the initial magic of credit creation turns less magical, in some cases even destructive and begins to consume credit markets at the margin as well as portions of the real economy it has created. For readers demanding a more model-driven, historical example of the negative impact of zero based interest rates, they have only to witness the modern day example of Japan. With interest rates close to zero for the last decade or more, a sharply declining rate of investment in productive plants and equipment, shown in Chart 2, is the best evidence. A Japanese credit market supernova, exploding and then contracting onto itself. Money and credit may be losing heat and running out of time in other developed economies as well, including the U.S