Inflation in what we need; deflation in what we want

(10 am. – promoted by ek hornbeck)

 You’ve all seen the headlines: Gas prices are headed for record highs and inflation is tame.

How do you reconcile the two?

 Most people fall back to blaming “speculators”. But if that sounds like an over-simplified cop-out, its because it is.

 To blame rising prices on speculators is like blaming getting hurt on crashing your car.  While its true you got hurt in a car crash, you don’t respond by outlawing car crashes, or in this case, speculators. It would be useless to do either.

 Instead, you outlaw the reason why the car crashed. For instance, outlaw poorly-made brakes.

  When it comes to rising energy prices, you look at why there are so many darn speculators.

  Most of the time, economists, politicians, and the financial media will tell you half-truths. Things that are true, without telling you the implications. A lot of people on the blogosphere will repeat these half-truths because they don’t know any better.

  I consider these to be worse than just lies.

 I’m going to tell attempt to give you the whole picture, and it will without a doubt anger a few people.

 First of all, let’s look at the big charts.

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 We all know that gas prices are as high as we’ve ever seen them for this time of year. But you might not know that all types of fuel are near records in price.

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A 431% increase in 10 years. Are you kidding me?!? That’s insane.

 And it goes way beyond that.

Look at food prices.

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 You’ll notice that its down from last year’s record, when you put it into historical context it still looks pretty bad.

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A 109% increase in 10 years. That’s some serious inflation, and goes a long ways towards explaining the global social unrest.

 So while the price of iPads, cell phones, and other Chinese-made junk is steady or falling, the stuff you can’t do without like food and energy is hitting record highs.

 But what about other stuff that is deflating? What about housing?

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 It may not be at absolute bottoms, but it is still at depressionary levels. While this may be good for a minority of home buyers, it is terrible for the majority of Americans who are home owners. What most people need is for home prices to rise, not deflate.

  Let’s not forget about the most important number of all to the average working stiff: his/her paycheck.

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 While food and energy are hitting record highs, your paycheck is experiencing deflation.

 So why is that? Why are some things deflating and other inflating?

To answer that you need to look at the most inflationary numbers of all.

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 There are few things in economics that will bring out the irrational anger of the ignorant faster than talking about inflation.

 Many will point out that the two charts above are a measurement of debt. That is true, but it is almost pointless because debt is money these days. Thus when the central bankers expand their balance sheets by dramatic amounts they are in effect printing money, and we are talking about many Trillions here.

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 Printing money is inflationary. No one really disagrees with this statement. Many disagree that we are living in an inflationary environment. Why is that?

  The simple reason for this conflict is that we are seeing extreme amounts of both inflation and deflation in the global economy today.

 Consumer goods and wages are in a deflationary environment because we have free trade agreements with third-world countries that shoot or imprison labor union organizers.

  Housing is in a deflationary environment because of the burting of a huge credit bubble that continues to hobble banks around the world.

 Normally these factors alone would put us into a deflationary spiral not seen since the 1930’s.

  But we aren’t because the global central banks are printing money like there is no tomorrow.

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 Now here’s the important part: the inflationary impact of central bank money printing is not spread evenly. This is because of the nature of money printing.

 Let’s take a fictional economy that has $500 in the entire economy. The price of goods is reflected accordingly.

  Then someone prints another $500. That inflation will leak out, but not at first. The first person with the new bills will be able to buy goods at the “old” price. The person furthest from the source of the new money will lose by a nearly equal amount as the first person gained, because the last person will pay for goods at the “new” price with the new money fully integrated into the economy.

  This is an over-simplification, but the lesson here is generally true.

 It also applies to today’s money printing by the central banks. The people closest to the central banks are buying assets at the “old price”. These people are TBTF Wall Street bankers. You can’t get any closer than being a primary dealer.

  Well guess who the biggest food speculators are? TBTF Wall Street banks.

 Who is manipulating energy prices? TBTF Wall Street banks.

  They are standing near the Fed’s money tap and using that cash to buy stuff that you need so much that you’ll pay any price to get it.

  The people furthest from the money printing are the big losers here because they are paying the “new price” for goods. Those people are you and me – working people. By the very nature of a paycheck, our money is old before it reaches us.

 The lesson here is simple: the central banks efforts to battle deflation by printing money is making the global wealth inequality worse.

 Now some will get upset and yell that we can’t give into deflation, so we have no choice but to print as much money as possible. But yelling will not change the fact that money printing has negative consequences, and we must face up to the consequences. Denial has no place for the enlightened.

  There is also the fact that no one complains about deflation in consumer goods. Thus not all deflation is a bad thing. Wouldn’t it be nice if energy and food prices were deflating too? It would make your paycheck go further.

  So it’s a mistake to say that we must fight deflation at all costs. It’s a knee-jerk reaction from people who haven’t really thought this through.

 The current situation is untenable. By maintaining the status quo we are by default making the rich richer and the poor poorer. It’s long past time that we fought anything “at all costs”.


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  1. Are the same ones that stand to lose. The average informed  consumer is not affected if the money printing does not materialize and as you said actually enjoys a rising purchasing power.

    However by the BLS measure we are not hitting Bernanke’s target inflation rate, excluding food and energy. The key point here is food and energy are rising causing a slow down in the rest of the economy as more and more household income go towards those two sectors.

    By the FED’s target measure then he will have no other choice but to increase the “printing” to achieve his target rate thus causing more unemployment, more slowdown and still higher prices.

    “We are so screwed” ~ me 2/29/12

  2. you could change the location of the money tap.

  3. Position limits.

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