You can’t avoid all the news about inflation, interest rates, slowing economy, debt crises, trade wars, currency problems, etc. These items should be in the news, but are we getting the facts from all the talking heads, or are the issues being talked around to avoid what’s really going on?
Consider the following:
1. The government’s calculation of inflation, with some exceptions, relies on the Core CPI only, currently reported around 2.1%.
2. The Core CPI excludes food and energy, two essential elements of life that have increased substantially, even during the Great Recession.
3. The Standard CPI includes food and energy, and is used for instance by the SSA in calculating benefit rates. According to the US Government, the Standard CPI inflation rate is 2.4%, which would lead us to believe that food and energy contribute only .3%.
4. In 2011 food prices were up 4.5%, and in 2014 up 3.3%, and for all other years from 2008 to 2018 varied from 1.1% to 1.8% annually. Similarly energy costs have inflated an average of 1.7% annually in this same period.
5. The CPI is offered as a measure of price inflation, a reflection of supply and demand, taxes, tariffs and other regulatory interventions.
6. The government’s inflation calculations for CPI do not consider monetary inflation, which is a measure of the increase in the money supply.
7. From 2008 – 2018 there are so many varying reports that most economists are at a loss to estimate monetary inflation accurately; given the trillions of dollars created by the Fed and the US Treasury under QE out of thin air, the common consensus is that during this period the money supply at least tripled. Consider for example that before the Great Recession, the Feds balance sheet was about $1T; by 2016 it rose to $4.5T, and then came down to about $3.8T in 2019. Most of that was due to QE, a creation of liquidity (i.e. money supply) literally by decree.
8. Prior to 1959 inflation calculation was primarily focused on monetary inflation as it was assumed that price inflation was simply a market driven phenomenon which varied up and down over time due to supply and demand; subsequently inflation insistently rose on an annual basis, leading to a differentiation in calculations of price and monetary inflation.
9. Monetary inflation has a lag time effect as there are many variables that can affect the timing of its impacts such as expanded credit, asset bubbles, currency devaluation, apparent growth, conspicuous consumption, etc.
These are just some of the common facts and data available that, when viewed in the context of what we hear and read in the news, should cause us to ask some apparent questions:
1. If inflation is so stubbornly holding at 2.1% or lower, which the Fed sees as a problem, and except for the last 18 months average income growth remained about the same rate as inflation, why is it the news and political campaigns lament that wages and salaries can’t keep pace with the cost of living?
2. Why isn’t the government, the news and political campaigns not talking more about monetary inflation, which compared to price inflation is the 800 pound gorilla in the room?
3. What is the correlation between price and monetary inflation; does the latter have some impact on the former?
4. If the Fed and UST have combined their efforts to triple the money supply under QE, where did it all go?
5. With such an expansion of the money supply, which usually results in ready credit, why isn’t there a real expansion of plant and industry, traditionally a measure of real growth?
6. Also with such an expansion of the money supply, there should be a good spread between short term and long term interest rates, but why are these two near an inversion?
8. Why does the Fed consider inflation to be a good thing?
So, my thought process tells me that we are not getting the full story when you connect all the dots on the above. Let’s use some common sense and basic economics to decipher some of this stuff:
- Obviously, just looking at what we paid for something a decade ago compared to today tells us that we have had about 20% inflation over that time.
- Average wages and salaries increased hardly at all over that same period. Based on this, I see little benefit with inflation.
- We have not had any meaningful shortages of supply to our demand, so I see little real market forces creating simple price inflation. What is readily apparent is that the dollar simply does not buy what it used to, so it is devalued, and that is a reflection of monetary inflation. That’s the correlation between the two, i.e. prices went up because we inflated the money supply and made the dollar worth less. We should not convolute that fact with comparisons to other currencies that have fared worse than the dollar; while it’s true that a strong dollar means we can buy imported goods at a lesser cost, the bottom line is still that we are paying more on an absolute basis than we did a decade ago.
- Interest is a reflection of a time preference on the money we have. If we have more than enough to sustain ourselves, we have excess money in hand, i.e. capital.
- Now we have the decision of what to do with this excess money; we can spend and consume, or save for future benefits. Thankfully we find ourselves in this position and welcome the decision process we need to go through. We look at our options and decide if we invest in our company, buy stocks or bonds, deposit in savings accounts, buy a new car…etc. OK, but all of these choices are influenced by the cost-benefit of our options.
- The stock market is volatile, bonds provide record low yield and savings accounts have near meaningless interest rates all thanks to the UST and Fed manipulation; given this situation we are likely to spend and consume.
- If you don’t have any excess money, and credit is so plentiful and cheap, you barrow, and then spend and consume.
- The fact is most Americans have not saved, have little excess money to do so, but have continued to accumulate debt with ever constant borrowing in an artificially created credit market; this occurs on the corporate, government and personal level.
The UST and Fed justify this manipulation of both interest rates and the money supply because the thought process is that consumption is growth. However, if we simply look back just a short time in history, we would see that this thought process is obviously flawed as it led to the Dot Com Bubble of the nineties and the Housing Bubble of 2008 that caused the Great Recession. There was no real growth, just inflated bubbles that burst with catastrophic results.
When these bubbles burst, they had a deflationary effect by drying up credit, depressing spending, increasing unemployment, but at the same time the monetary inflation had devalued the dollar. Monetary inflation has been an issue throughout history. I’m sure you all remember the Stagflation of the Carter years, and the tough measures Fed Chairman Volker famously employed tightening the money supply to drive down rampant inflation. I say tough because while it worked it did in turn cause interest rates to soar, tightening credit and slowing growth; it is here that we see the interest rate relationship become evident between price and monetary inflation, but note that the Fed did not dictate interest rates at that time but instead tightened the money supply as an effective tool against inflation. Subsequent to the Volker years, including the Greenspan years, the Fed started to manipulate short term interest rates as another tool to supposedly “control” the economy.
The Fed understandably calculates the money supply in the most broad sense, i.e. more than just the M1 that accounts for basically actual cash, but other monetary assets that are convertible on demand to cash at any time or at a certain time, such as UST 2 or 10 year bonds; for the sake of discussion we simply understand that monetary inflation devalues currencies which in turn raises costs, expands credit, and fuels a false growth better looked on as conspicuous consumption, all of which causes price inflation.
The fact that this has not had the inflationary effect the Fed had hoped for is curious, but can be explained as a false flag, because the metric used is flawed because the focus has been primarily on the issue as price inflation.
So putting all this altogether we should have a healthy skepticism about the officially reported rate of inflation, and its relationship to manipulated money supply and interest rates – clearly a case that either the figures lie or liars figure……but why? Consider the following:
- We already noted that the UST and Fed justify this manipulation of both interest rates and the money supply because the thought process is that consumption is growth.
- Falsely reporting that inflation is low means the government pays less on benefits that are based on the CPI alone; ask SSA recipients and others on entitlement programs or on government salaries how that’s working for them?
- I asked earlier that given the fact that the Fed and UST have combined their efforts to triple the money supply under QE, where did it all go? The velocity of the movement of money through the economy starts with its creation, which in the case of QE was by decree, a real problem with fiat currencies, but as it came out of the UST and Fed, its first stop was the big banks who are the primary members of the Fed system, but also the primary source of funding for investments; one result we have seen with this is all the financial engineering in stock evaluations via buy backs, which is a benefit to certain elites such as the power brokers in government and Wall Street, but not real growth that creates good jobs.
- We are told that low interest rates help both companies grow and consumers spend; what it really creates is an enormous debt bubble, such to a degree that many Americans are incapable of ever paying off that debt; so what happens if interest rates go up or when the credit bubble bursts? Consider the growth in American business of what has become known as “Zombie” companies; so called because they are the walking dead, i.e. their profits are less than the interest due on their debt. They currently represent about 20% of American business, even more globally.
- Keeping inflation rates low hides the problem that the government, including the obviously politicized Fed, is running out of options when another recession hits and also in their attempt to maintain a fiat currency and the US Dollar as a reserve currency.
- The false premise that a lower dollar helps our trade balance contradicts the government’s policy that the rising trade imbalance is a justification for tariffs, the reality of which is not only inflationary but also a tax on the people it’s supposed to benefit.
It has been said by some historians that it is in the nature of myths that if enough people believe them, they become accepted as facts, a phenomenon that often underlies the causes for disasters. Apparently our government believes Americans are dumb enough to believe myths; after all, it worked in the assassination of JFK, the Vietnam and Iraq Wars, so why not with our money?
It does not take a Nobel Prize in economics to connect the dots here; objectively, meaning without allowing your politics to bend logic, anyone should see that what we are told just doesn’t add up. To have Jerome Powell in front of Congress the last couple of days actually talking about the likelihood of even lower rates because the Fed is now “data sensitive” should cause a real crisis in the Fed’s credibility. How about some sensitivity to common sense and basic economics? In my view, we should all use both of these virtues and question why we need the Fed at all.