Bad Government Brings Bad Inflation

Inflation like "dragons" lurking within the "cave" of money-printing programs

PIMCO's Gross warns investors of looming inflation
Excerpt:

"The future price tag of printing six trillion dollars' worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold," Gross wrote.

Gross, whose Pacific Investment Management Co. had $1.92 trillion in assets as of September 30, 2012, referred to a speech in 2002 by Federal Reserve Chairman Ben Bernanke in which Bernanke said that the United States could print an unlimited amount of dollars "at essentially no cost."

Gross countered in his letter that the cost will be inflation, which will weaken the returns on long-term bonds and eventually risk assets such as stocks and high-yield bonds, and also hurt businesses.

Gross likened inflation to "dragons" lurking within the "cave" of money-printing programs. "Zero-bound interest rates, QE maneuvering, and ‘essentially costless' check writing destroy business models and stunt investment decisions which offer increasingly lower ROIs and ROEs," Gross wrote, referring to returns on investment and equity.

Comment: Image Source: Jack MacGown's Cave Dragon

The Fed’s “Dirty Little Secret”

The Fed’s “Dirty Little Secret”

Excerpt:

The dollar hit its lowest level since July 2008 Thursday, putting more pressure on savers, people living on a fixed-income and all consumers facing soaring commodity prices, most notably in energy.

Somewhere, Ben Bernanke is probably smiling.

Yes, Bernanke — and Treasury Secretary Tim Geithner — talked tough about the dollar this week but "currency depreciation is always a central bankers dirty little secret," says Vincent Reinhart, a former director of the Fed's Division of Monetary Affairs. "They don't mind some depreciation at time…The trick is to generate some depreciation but not a lot."

It depends on your definition of "a lot"…

Since Bernanke took office on Feb 1, 2006, the dollar's purchasing power has fallen 11%, and its down 21% in the past decade and 82% since the U.S. got off the gold standard in 1971, according to Miller Tabak.

Apparently, that doesn't count as "a lot" or "too much" depreciation for Bernanke's tastes.

"A design principle of Federal Reserve policy is to get inflation up — to create more dollars so inflation doesn't fall anymore; that's associated with currency depreciation," Reinhart explains. "Nothing the Fed chairman or Secretary of Treasury says is going to change that. [But] they've got to say 'a strong dollar is in the national interest' because they don't want to be seen as promoting a weak dollar."

Comment: My first job out of college (actually was 2 years after graduation) was as a new hire as a sales trainee with IBM in 1973. My starting salary was $ 9,600. That was enough to buy a brand new Plymouth for $ 4,200 and rent a nice apartment in Tampa Florida. In 1974 Kathee and I got married (December 28th). We purchased a new home (3 bedroom, LR, dining room, den, 2 car garage, 2 bath) for $ 42,000. (The two years after college before IBM: 1 year with Campus Crusade for Christ, 1 month at chemical plant, 2 months as a Summer ministry intern, and 6 months teaching adult education at Chattanooga Public Schools.) (see earlier post for our first house)

Chart of the Day: inflation-adjusted median price of a single-family home in the United States over the past 41 years

Inflation-adjusted median price of a single-family home in the United States over the past 41 years

Excerpt:

For some perspective on the all-important US real estate market, today's chart illustrates the inflation-adjusted median price of a single-family home in the United States over the past 41 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased -- increased. That brings us to today's chart which illustrates how the inflation-adjusted median home price is currently 38% off its 2005 peak. That's a $100,000 drop. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (8.5% loss). Not an impressive performance considering that more than three decades have passed. It is worth noting that the median priced home is currently in the bottom half of a price range that existed from the late 1970s into the mid-1990s.

Comment: Click through to link for ability to subscribe to Chart of the Day.

Inflation Actually Near 10%?

Inflation Actually Near 10% Using Older Measure

Excerpt:

After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter's web site, Shadowstats.com.

"Near-term circumstances generally have continued to deteriorate," said John Williams, creator of the site, in a new note out Tuesday. "Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead."

The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze "flaws in current U.S. government economic data and reporting...net of financial-market and political hype."

Investors are anxiously awaiting the release of March's CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.

"Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation," said Williams, citing a 10 percent jump in gasoline prices in March, in the note.

"While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually," wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams' statistics.

Comment: When you factor in the cost of gasoline ....

Bill Gross: Entitlements Key To Cutting Federal Budget Deficit

Pimco’s Bill Gross: Entitlements Key To Cutting Federal Budget Deficit

Excerpt:

If the U.S. government was a corporation, Gross maintains, “then it would probably have a negative net worth of $35-$40 trillion.”

Without big cuts in entitlements, Gross paints a not-so-rosy picture. He writes:

“Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”

Gross has essentially sold-off his Treasury holdings in the Total Return Fund.

He says that if sitting before Congress, he would say something like:

“I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.”

Comment: Note comment on inflation

Here comes Inflation?

Wal-Mart CEO Bill Simon expects inflation

Excerpts:

U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products, the head of Wal-Mart's U.S. operations warned Wednesday.

The world's largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.

Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate."

Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.

"Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along," Long says. "Except for fuel costs, U.S. consumers haven't seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory."

Consumer prices — or the consumer price index — rose 0.5% in February, the most since mid-2009, largely because of surging food and gasoline prices. Core inflation, which excludes volatile food and energy costs, rose a more modest 0.2%, though that still exceeded estimates.

Comment: Wouldn't surprise me. You see it in gasoline, smaller packaging for food, etc

Inflation Zero

2010, a Year of No Inflation

Excerpt:

On Friday, the Labor Department will release the inflation number for August. Economists are expecting an increase of about 0.2 to 0.3 percent over July’s Consumer Price Index. If that’s correct, it won’t be nearly enough to reverse a remarkable period in which prices have barely risen at all.

Over the last two years, inflation has been zero. Over the last year, it has been just 1.3 percent. Over the last six months, it has been below zero — negative 0.7 percent.

Since the Labor Department started keeping records in 1947, there have been only six six-month periods when prices have fallen more than that. All of them were in 1950, an unusual time when prices were falling even though the economy was growing.

Comment: What is still strongly inflationary: tuition and health care costs

How Robust the Recovery?

Comment: Interesting article on the jobs report, inflation, unemployment benefits, et cetera

The 2010 Recovery

Excerpts:

Jobs

The jobs market does seem to have turned a corner, with the Labor Department's survey of businesses reporting 162,000 new jobs in the month, plus modest upward revisions in January and February. One bright spot is manufacturing employment, up 17,000 in March and now up for three straight months, as well as a modest uptick in average hours worked to 34 in a week, from 33.9.

The companion household survey showed a heftier increase of 264,000 net jobs, rising to 1.1 million so far this year, and as we learned in the last recovery this survey tends to lead increases in what business reports in future months. The upshot is that at long last—and 13 months after the $862 billion stimulus that the White House said would keep unemployment below 8%—we should see more robust job creation in the months ahead.

Jobless Benefits

Congress keeps extending jobless benefits, and last week President Obama proposed a new subsidy for the jobless in the form of mortgage payment reductions if you're out of work. Democrats think this is good politics because they can accuse Republicans of being uncaring if they vote no.

But the irony is that these extensions only increase the incentive to delay going back to work, especially if most available jobs are temporary or pay less than their old ones.

Monetary Policy

The larger policy context is that the U.S. recovery has been built on an enormous reflation bet, both fiscal and monetary. The stimulus and its many sister subsidies (housing tax credits, cash for clunkers, etc.) have flooded the economy with government-directed cash and credit. We think marginal-rate tax cuts would have done much more for growth, as in 1983 and 2003.

The Federal Reserve has also kept and maintained an historically easy monetary policy. This was necessary for a time to offset the decline in monetary velocity in the wake of the credit panic, but the near-zero interest rate has also made it easier for banks to make money on interest-rate plays rather than actual lending. It is also contributing to higher commodity prices and distortions in the dollar bloc overseas.

Inflation

As we look beyond this year, the bill for this Great Reflation will eventually come due. Coming out of the last steep recession, in 1983, both interest rates and tax rates were coming down. Today, they are both headed up.

Taxes

A huge tax increase hits on January 1, as the Bush rates expire.

Plan to mop up excess cash

To Inhibit Inflation, Fed Offers to Set Up Interest-Bearing Deposits

Excerpt:

The Fed would create the equivalent of a certificate of deposit that pays interest to banks for keeping some of their reserves — which are currently estimated at more than $1 trillion — for up to one year. That would help offset some of the $2.2 trillion the central bank has fanned out into the economy during the financial crisis. It also would allow the Fed to quickly entice banks to take more money out of circulation in case inflation emerged as a serious threat in the near future.

The proposal was the latest sign the Fed is intensifying its efforts to scale back the vast amounts of money it pumped into the economy at the height of the crisis.

As the economy recovers, Fed officials worry that if banks keep too much cash tied up in reserves that might later lead to a boom in credit and result in inflation. Low interest rates and a weak dollar have raised concerns about rising prices, although the Fed chairman, Ben S. Bernanke, has said inflation is not a near-term danger.

Comment: Unsure how this would impact consumers.

CPI down for first time since 1955!

Consumer prices fall

Excerpt:

On a year-over-year basis, consumer prices fell 0.4 percent in March, the first 12-month decline since August 1955

Comment: Good thing because even if people have jobs they are not getting raises!

The look of hyperinflation

Life in Zimbabwe: Wait for Useless Money

Excerpt:

Zimbabwe is in the grip of one of the great hyperinflations in world history. The people of this once proud capital have been plunged into a Darwinian struggle to get by. Many have been reduced to peddlers and paupers, hawkers and black-market hustlers, eating just a meal or two a day, their hollowed cheeks a testament to their hunger.

Like countless Zimbabweans, Mrs. Moyo has calculated the price of goods by the number of days she had to spend in line at the bank to withdraw cash to buy them: a day for a bar of soap; another for a bag of salt; and four for a sack of cornmeal.

The withdrawal limit rose on Monday, but with inflation surpassing what independent economists say is an almost unimaginable 40 million percent, she said the value of the new amount would quickly be a pittance, too.

“It’s survival of the fittest,” said Mrs. Moyo, 29, a hair braider who sells the greens she grows in her yard for a dime a bunch. “If you’re not fit, you will starve.”

Economists here and abroad say Zimbabwe’s economic collapse is gaining velocity, radiating instability into the heart of southern Africa. As the bankrupt government prints ever more money, inflation has gone wild, rising from 1,000 percent in 2006 to 12,000 percent in 2007 to a figure so high the government had to lop 10 zeros off the currency in August to keep the nation’s calculators from being overwhelmed. (Had it left the currency alone, $1 would now be worth about 10 trillion Zimbabwean dollars.)

In fact, Zimbabwe’s hyperinflation is probably among the five worst of all time, said Jeffrey D. Sachs, a Columbia University economics professor, along with Germany in the 1920s, Greece and Hungary in the 1940s and Yugoslavia in 1993.

Making matters worse, cash itself has become scarce. Business executives and diplomats say Zimbabwe’s central bank governor, Gideon Gono, desperate for foreign currency to stoke the governing party’s patronage machine, sends runners into the streets with suitcases of the nation’s currency to buy up American dollars and South African rand on the black market — drying up Zimbabwean dollars that would otherwise go to the banks.

Because of the cash shortage, the government strictly limits the amount people can withdraw. Even so, Zimbabweans say they often wait in vain for hours at banks that send their customers away empty-handed.

Comment: I pray I never see this in my beloved homeland! The promises being made without fiscal conservatism scare me!

In a recession, prices should be falling

An Inflation Indicator Leaves the Fed in a Tough Spot

Excerpt:

A gauge of prices paid by American producers jumped 1.1 percent in March, the Labor Department said on Tuesday, sharply accelerating from a 0.3 percent increase in February.

The increase, led by a surge in gasoline and home heating oil prices, was twice what economists had expected.

The higher prices put pressure on businesses to pass on costs to consumers, though some economists said the housing slump and weakening job market could discourage businesses from raising their prices.

“Given the weak nature of domestic demand now and going forward, it is unlikely that businesses will have as much success raising prices at the consumer level as they did in the not too distant past,” Joshua Shapiro, an economist at the research firm MFR, wrote in a note to clients.

The increases did not spread to popular products like automobiles and clothing. The closely watched core measure of the Producer Price Index, which excludes volatile costs of food and energy, rose 0.2 percent in March, falling back from an unexpected 0.5 percent rise in February.

The low core rate could take some pressure off the Fed as it tries to balance rising inflation with the overall slowdown in growth. Fed officials have acknowledged that inflation remains a serious concern, but they have signaled they will continue to focus on staving off a prolonged recession.


Comment: Prices are going up because the dollar is going down! Thus all that we import goes up.

The Fed: "between a rock and a hard place"

Higher inflation makes Fed’s job a lot tougher

Excerpt:

With the economy slowing and the housing market stuck in reverse, Wednesday’s surprise pop in the government's monthly inflation data was not good news for the Federal Reserve.

The problem: Central bankers now find themselves between a rock and a hard place in trying to meet their dual goal of setting interest rates low enough to get the economy moving again while keeping rates high enough to keep prices in check.

The Fed can’t do both. But given the ongoing turmoil in the capital markets — and the risk of a credit crunch that could do even more damage to the fragile economy — Fed watchers say inflation-fighting is taking a back seat.

Comment: Add this: The need to avoid Stagflation

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Funny thing at work today:

The three rules of public speaking: know your audience, your your limitations, and keep it simple.

I was in a meeting today that was over Net-Meeting. I was in a conference room with the presenter and a guy from finance. The presentation was via PowerPoint and had over 30 slides. Midway through the meeting, my eyes were growing dim but I fought to stay awake. The finance guy to my left dozed off completely. At one time he had his head on the conference table. The humor of this kept me alert.