Wednesday, August 4, 2010

Huh? No Inflation?

Does anyone really believe that?  Does Banana (Republic) Ben Bernanke really believe that?  If Bernanke truly believes that there is no inflation in the system, then he is a complete idiot.  If he understands the truth but continues to pontificate about no inflation, then he is a psychopathic serial liar.  In either instance he should be removed from the Fed.

But I digress.  I think by now most people understand that the Government-reported Consumer Price Index is not only a complete farce, but is a complete insult to the intelligence of anyone paying attention or not on entitlement program payments.  The most rediculous measure of price inflation, and the one that Bernanke insists on shoving up our ass, is the "core" CPI reading, which excludes food and energy.  Ummm, let's see.  If I don't eat and I don't heat my home or drive my car, then I don't have to worry about inflation.

Let's take a look at some charts and you can decide if you think price inflation is building in the system:

Heres' the CRB Commodity Channel Index, and index of 28 global commodities - it happens to be up 58% since its December 2008 low (please click on the charts to enlarge):

Feeder Cattle - Up 25% since December

Hogs - up 95% in the last year

Oil - up 37% in the last year

Orange Juice - up 93% in the last year

Wheat - up 57% since July 2010!

Anyone NOT see price inflation?  I was having a conversation with someone who has been a long-time goldbug the other night.  He mentioned that he was worried about deflation.  I asked him to explain to me where he was seeing deflation, other than in the price of housing.  He could not point out any examples. 

What's more baffling to me is that those who are making the deflation argument point to debt destruction and the money supply.  Can someone explain to me where there is ANY debt destruction occurring?  Yes, the financial sector has experienced a big decline in debt outstanding, but that's STRICTLY because the Fed, aka Banana (Republic) Ben Bernanke, has monetized over $1 trillion of bad assets from the banks and banks have shifted $100's of billions of debt to the Treasury via TARP (yes Virginia, most of the TARP money has not been repaid). 

We know that the U.S. Government debt outstanding is going to approach $14 trillion by the end of the year.  It began 2010 just below $12 trillion.  And here's the household mortgage debt, once again:

I'd love for a deflationist to explain to me where there is bona fide debt "destruction" occurring in the system...As for the money supply, my colleague and friend, "Jesse," wrote a blog a few weeks ago in which he presented the money supply as determined by the Austrian School of Economics.  Here's the link to his essay, which contains the definition of the Austrian's "True Money Supply," TMS.  And here's the chart:

Well, there you have it.  The two pillars beneath the deflation argument turn out to be pillars of sand.  Overall the level of debt in the system is not being "destroyed," and the money supply is not contracting in the way the Orwellian metrics are presented by the Fed.  Yes, the value of your home is crashing, but that may be the only real asset falling in price.  Well, golf course green fees and country club memberships are dropping in price too.

I know that based on my personal experience with the overall cost of living of my life, it seems to get more expensive every month.  But just wait until the price of the commodities above begin to work their way through the producer channels and into the grocery store, gas station, utility bills etc.  And soon we will feel the effects of the healthcare legislation (unless of course you are one of Obama's chosen category to receive healthcare which is paid for by the rest of us).   Oh ya, and then there's this:

That shows those nefarious excess bank reserves.  The Fed has been paying the banks interest on those reserves as a means of keeping QE1 from flooding the system and unleashing another source of price inflation:  more dollar devaluation.  That money shown above is printed money that has not hit the economy yet. However, in a futile attempt to pull the economy out of its current cliff-dive, the Fed has indicated it may stop paying interest on this money.  I suspect the money will be put to use financing Treausury issuance and into the stock market.  But since Government deficit spending is inflationary, this money will contribute to what I believe will be an acceleration in price inflation.  Rest assurred, however, that the Government reported measure of inflation will not show much, if any price increases.

And one more point I'd like to make.  There's a reason gold keeps moving higher.  It is the ultimate barometer of currency devaluation, which is the tautological twin of price inflation.  Gold has increased nearly 450% since its $250 bottom at the start of the decade.  If you don't think that's a measurement of the devaluation of the U.S. dollar, that's fine - but you are wrong.  But here's an article of interest from the world's second largest - formerly largest until China took over - buyer of gold.  It turns out that India is experiencing double-digit price inflation:  Rampant Inflation In India.  I got news for you in case you haven't figured this out:  expect that the demand for gold from India will accelerate this year.  I would surmise that is why the nearly 100,000 gold contract COT liquidation has produced only an 8% price correction.  Historically a massive COT liquidation produced 20-40% price corrections.  Got gold?


  1. Tell that to Max Keiser who keeps patting himself on the back for calling deflation. The wheat explosion is a shocker! Early signs of Weimar.

  2. I am fully convinced that deflationists must live in their mother's basement and have never set foot inside a grocery store.

  3. wheat is up dramatically this last month due to fire and water issues in Russia. But there is a real supply issue driving prices.

    there are a bunch of short term moves which makes some of the data a little more difficult to analyze. which is why its good to take a step back and look at long term charts to see trends. I know you do that but it needed to be said.

    back to zzzzzzzzzzzzzzzzzz

  4. I am curious about the divergence between oil and gold prices. They once moved together (somewhat) but have diverged since the latter part of 2008.

  5. Supply issue is an understatement Hal...enjoy the read.


  6. bix, sometimes they correlate, sometimes they diverge. you can plot the movement using $gold:$oil you'll the variation in the gold/oil ratio over time. both markets are highly manipulated, so that affects it as well.

  7. yeah Hop--our little globe had around 7 billion inhabitants at the beginning of this decade. Forecast was for 8 Billion in 2020--but that came from the US govt so the real number could be plus or minus big time. There is also data suggesting the rate of growth is slowing. But still growing. People have to think about birth control.

    We know the life style is improving in far east--using more resources. We are using more land for housing and less for harvesting.

    So demand for necessities will grow while supply will be challenged. Its also the necessities that Dave has pointed out that's increasing in price--little things like food and energy. Another reason for a big war.

    all sorts of interesting dynamics over the next decade. Sure wish our leaders would lead and think proactively. Hey--lets throw money at the highway program to expand the number of lanes.

    Our little suburban area intersection is 6 lanes wide--4 would have been more than enough.

    what a mess.

  8. Asset deflation, with cost of living inflation... Worst of both worlds.

  9. I am completely baffled as well Dave. I don't know where these fruits get their information from. What charts are they reading? It's typical pre-election propaganda to make everyone feel snug that these guys are actually doing something. They couldn't tell livestock from preferred stock. As Nassim Taleb so eloquently stated before the crash: Banks (and the Government I might ad) hire dull people and train them to be even more dull. If they look conservative, it's only because their loans go bust on rare, very rare occasions. But (...)bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.

    The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events "unlikely".

  10. Orange juice consumption has been down since Atkins. Easy short..?

  11. just had to weigh in on this excellent post which seems to me to effectively put to the silver bullet into the Shedlock/Denninger deflation bogey man. this is one of the Golden Truth's BEST among many outstanding pieces. are these guys just shills and chart painters following the Bernanke propaganda mill or are they seriously deluded? neither prospect seems to allow them any due respect or honest consideration.

  12. Thanks YF! I take a lot of shit, but all it takes is one comment with feedback like that to make this blog worth my time!

    My 1 yr anniversary was July 24th! Forgot out that LOL.

  13. I think the whole 'flation argument is a crock. People get married to these "religions" and their egos are in denial when they are so obviously mistaken. It is not going to be an either/or thing, but the worst of both worlds, IMHO.

  14. Congrats, Dave! I've been an avid reader for 6 months, and the gold just keeps on flowing!


  15. I agree with you Dave. Since 2008, I have been convinced that we will have hyperinflation, not deflation. That move in wheat is impressive, but I haven't been surprised at the increase in food prices because I thought the price was low considering the small stockpiles. I think a lot of the projections for food production were optimistic to say the least.

  16. Hey Jennifer. I just don't see how the U.S. debt-load can be addressed other than with the printing press. There's just no way this country can ever grow out its deficits and debts. Unfortunately I think this will end even more badly than it did for Germany. You know, the German public did not have debt the way the U.S. public does.

    I just can't believe that a lot of these deflationists don't understand what is really going on. It reminds of my finance prof at U of Chicago (Richard Leftwich), who would equate the deflationists to "the drunk who gets off the bench and looks for his lost wallet under the street lamp because that's where the light is shining." LOL

  17. Dave, you cock eyed ignoramus, wheat prices going up is a supply side phenomenon and nothing to do with money supply.

  18. ROFLMAO. Ummmm, okay. To be sure, there is a supply component to the move in wheat prices given the Russian situation. But then explain the big move in all the other charts. It would be impossible to do a differential analysis on the price affect on wheat between supply and money supply. My bet is that the price of wheat would be up quite a bit w/out the Russian situation.

    But you bring up an excellent point: the example using wheat shows just how fragile the supply situation is with commodities globally, and when compounded by the massive liquidity flood that's been dumped into the global financial system, the wheat situation shows just how explosive prices can be if an exogenous shock is introduced.

    Thanks for pointing that out, even though - truth be told - you didn't realize you were pointing that out!

  19. "Anonymous said...
    Dave, you cock eyed ignoramus, wheat prices going up is a supply side phenomenon and nothing to do with money supply."

    That is correct. But easy money is allowing speculators to exacerbate the problem.

  20. Dave, I think reading this article should make your day... Goes well with that Craig Roberts article you posted:

  21. Debt destruction is coming from all those people walking away from their houses and credit cards. Money is created by making loans, when these loans vaporize, at least partially, wallah, there's your deflation/debt destruction. The Fed has been trying to balance this with QE and other ways, and now we watch to see how exactly this particular "bubble" will burst.

  22. Anonymous, you are looking at HALF of the equation. Please go do some due diligence on the numbers. The Federal Debt is increasing at a greater rate than the private sector debt is declining? Why? Because that mortgage debt is not being "destructed." It is being SHIFTED to the Government. The Government is monetizing that debt. Why? Because the banks will not take a loss on bad mortgage loans.

    You CAN'T just look at the fincial sector debt reduction. You have to look at the total picture.

  23. Dave,
    This is a great article. I am the Co-Founder of Wall St for Main St. We're a new investor education and financial education startup. Please check us out if you are on Facebook. We posted your article there a few min ago and are going to start discussing it now. Most people do not check the TMS or Austrian Money Supply. The divergence between Shadowstats M3 and Austrian Money Supply is large and quite alarming!
    Even with his calculations of M3 dropping like a rock, John Williams' reconstructed CPI still shows greater than 6% price inflation in the CPI.

  24. Food, fuel and water prices will likely continue to rise -- sector inflation. Housing, electronics, discretionary items will continue to fall. All until people are only buying food, fuel and water. And yes the only way to purge debt is through austerity + higher taxes and less government spending.If there is hyperinflation it will end quickly and an even greater collapse or purge will take place. That's the law of gravity and the law of economic physics. Gold has a special place in all of this because it has multiple modes of appreciation and depreciation. 20% of all assets in gold, stay liquid and get ready for the white knuckle ride of your life.

  25. Bill,
    That's a very good summary. People have to have food, energy and water. You can only cut back, skrimp or trade down so much.

  26. We are in and heading for more DEFLATION!

    That deflation is in terms of GOLD, the only real money in circulation today.

    Just look at prices today in terms of gold.

    What is ahead? Massive deflation in terms of real money.



  27. The real economy is dead. Take a look at the recent small business optimsim index which declined again in July. Small businesses cannot offset weakness in the US with international sales. Get ready for QE 2.