Thursday, August 19, 2010

Huh? No Inflation?

The mass of men lead lives of quiet desperation - Henry David Thoreau

This article from Bloomberg News this morning grabbed my eyeballs:  "Dollar Dinners From ConAgra Threatened By Costs."  Heck, I didn't even know there was such an item.  It looks to be the food-stamp- family-equivalent of Ramen Noodles for college students (I did a baked potato with melted cheese and hot sauce for variety when I was at the U of Chicago grad school).  At any rate, if you read through the article, it would appear that ConAgra can no longer keep the price point at a buck by cutting costs and will have to either raise the price somewhere between 20% and 50% or reduce the size and quality of the portion.  Here's the article link:  No Inflation?

So I decided to update some prices of select everyday commodities - the kinds of goods that the Government conveniently overlooks when calculating its PPI/CPI metrics.  This should be eye-opening: measured over the last 12 months, prices of all these items have increased by:  copper 37%, corn 35%, pork bellies (bacon anyone?) 350%, cotton 74% and heating oil 33%.  The last one bummed me out because I hate a chilly home and winter is coming.  Here's the data link if you want to check my numbers:  LINK

Let's be clear about one thing.  The true definition of inflation is not higher prices of assets, goods and services. Prices in the system that we observe and experience are nothing more than the manifestation of the underlying cause, which is currency devaluation from an increase in the money supply in excess of a country's real economic output.  You can't look at this over a short period of time.  Take a look at this long term graph of the basic money supply measure, MZM, which is now one of the popular money supply metrics now that the Fed has hidden M3,  the real money supply metric used by every other Central Bank:

So ya, over the past few months, the money supply appears to have contracted - slightly (although, it can be argued that MZM under-reports the true money supply, see this  LINK and this True Money Supply  if you care to be enlightened).  Just think about the cost of a cadillac or a college education in 1970 vs. now.  An even better measure of the money devaluation that has occurred is that since roughly the mid-1980's, it takes a 2-income household to maintain the same standard of living that a 1-income household could maintain back in 1970.  In fact, stripping away the benefits of technology, a lot of analysts would argue that the overall standard of living today with 2-income households is lower than with 1 in 1970.  THAT's inflation/dollar devaluation at work.  That miniscule drop in MZM that has deflationists chasing their own tail in what can be termed "intellectual sloppiness" is not going to undo the damage of over 50 years of money supply expansion.

One other point to which I would like to draw your attention.  You can see from the above chart the increase in money supply has accelerated since 1995.  In theory, that increase in money supply should have been backed by a concomitant increase in the GDP.  Of course, this was not even close to being the case.  What resulted was the series of paper asset bubbles, each one ultimately inflicting more damage on our system.  (emerging market debt, internet/tech stocks, housing - housing is a "paper" bubble because it was fueled by the mortgage bubble - and now the Treasury bond bubble, which some would call ultimately the dollar bubble).

Another way to look at the devaluation of the dollar is to measure it against the price of gold.  After all, up until FDR did his magic in 1933, anyone could exchange their dollar bills for gold or silver at the Fed "window." In 1971, when Nixon completely shuttered the gold window, thereby completely unleashing the dollar from its tether to to gold, the price of gold was $35. This chart shows what has happened since then:

As you can see, the price of gold has increased 3500%, or the dollar has lost 97% of its value since 1971.  Again, try to think about the long term affects of this insidious, long term devaluation of the dollar.  My parents bought the home I grew up in 1969 for about $45k.  The last sale I heard about around the peak of Denver real estate was $450,000.  Given the devaluation of the dollar vs. gold, they would have been much better off taking that $45,000 and buying gold and renting.

Let's tie this back to the opening comments about the surprisingly large 12 month price increases in basic commodities. I would argue that a significant portion of the money that the Fed/Treasury has printed and injected into the system since the credit crisis of 2008 has flowed into commodities.  This would be a natural place, besides gold and silver (up 31% and 37% respectively over the last 12 months), for printed money to flow into, as they represent consumable, depletable goods which have value to everyone and could ulitmately be used in a barter system if/when the dollar is ultimately rejected as a medium of exchange.  Are you better off holding gold, silver and select commodities or holding paper dollars backed by a Government that would be insolvent if it weren't for its ability to use the printing press?  What about the folks who depend on those $1 meals from ConAgra?  If I were one of them, I would rush out and buy as much of what is left for a $1 as would fit in my freezer before the price goes up or the content of the package is reduced. 

Of course, then again, this is how the hyperinflationary price escalation got started in Weimar Germany and, recently, in Zimbabwe.  No inflation?  Better check your premises because the facts do not contradict reality.  And the reality is that the deflationists are wrong.  To conclude, gold is going to go MUCH higher as this drama unfolds.

Late edition. I just read this piece by Egon von Greyerz LINK - Good read I thought this chart was a perfect addition to what I presented above:


  1. So Dave, where in Denver do you buy your heating oil?

    "This should be eye-opening: measured over the last 12 months, prices of all these items have increased by: ...and heating oil 33%. The last one bummed me out because I hate a chilly home and winter is coming."

    May I suggest natural gas?

  2. LOL. Dude, Natgas is up 66% since Sept 2009. That's worse than heating oil.

  3. Many bloggers/analysts rely people will realize there is high inflation therefore people will start buying gold/silver.

    My understanding is whatever rate of inflation is, all you need is some manipulated government statistics and massmedia repeating the housing or fabulous story about deflation, or Bernanke's worries about deflation threats.

    And 85+ % of people will stick to deflation fiction, to their dollars, and they will never buy any metal.

  4. Good observation stibot. It's like Thoreau said: "most of mankind lives in quiet desperation..."

  5. The Vietnamese currency is undergoing the early stages of hyperinflation. Stores are prepping themselves for the eventual daily price hikes. Gold is moving ever higher along with the dollar. Economic policies to increase real estate values has been a disaster for the import picture since most real estate development costs require imported materials. Thus countless current account deficits are finally taking its toll as foreign direct investments decline regardless of what gov't data shows. Within the next year, I expect civil unrest to spring up, most likely after the Tet holidays when you begin to easily see 20% annualized inflation. Some food products such as milk/milk byproducts especially foreign imported baby formula have already been growing at such rates. Coupled with an economy short dollars, banks commonly lend in dollars at a 5% rate (amazing that default risk is not factored in). Of course, this is merely a prelude for the eventual dollar collapse.

  6. That's great color. Thanks and please keep your comments coming!

  7. First--CPI should be changed to CSI (consumer spending index) since it only counts what consumer spends and not any real price index and is sans energy and food --but this is a reminder because Dave, in many instances here you are preaching to the choir-just enlightening us a bit more.

    Second (and thanks for bearing with me on this) when I was a kid in the 1950's my Dad used to take me out on Sundays to sell taffy apples on corners in the suburbs to pick up a little more cash (10 cents each, 2 for a quarter and most people asked for 2). Anyway, that taffy apple is now smaller and is 99 cents--and I do not see any technological improvements in the taffy apple-consequently its a great index to inflation

    Third--I am currently booking my winter flights to my get away residence. 3-4 years ago a round trip was under $200--now a bit over 300 and does not include checked luggage fee, boarding early fee, seats up front, meals (yeah-they used to be included) or potty pass. So I ask where is that inflation.

    Transparency, my tuchis.

    tks for bearing with me.

  8. I've never believed gold is a hedge against inflation (or any kind of 'flation for that matter.) It's a hedge against corruption and bad judgment.

  9. This chart shows Wal Mart stock has been flat line for a decade. If we had a real growing economy wouldn't the largest retailer in the land show some growth? My conclusion is we have been in a long term depression with the whole system going tits up in 2008 and they are still able to maintain the illusion. Just amazing!!;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

  10. Dave,

    This chart from John Williams shows negative GDP since 2000. It really fell off the cliff when the housing-ATM bubble bust. This along with the Wal Mart flat line chart makes a good case for a long term stealth depression.

    BTW, the only reason Wal Mart was able to stay flat is because they are a predatory company that feeds off the carcass of small business people all across America.

    Joe M.

  11. Spot-on Joe. The other aspect about Walmart's revenues/earnings one needs to consider is gasoline sales. They refuse to break out gasoline sales, but their top line has certainly benefitted greatly over the past couple years from price inflation in gasoline.

  12. My local Walmart jacked milk from $1.98 for a great value gallon to $2.48, despite the declining DOW. Nothing makes sense!