Editorial
Inflation: Washington is Blind to Main Street's Biggest Concern
Journalists, politicians and economists all seem to agree that the biggest economic issue currently worrying voters is unemployment. It follows then that most believe that the deciding factor in the presidential race will be the ability of each candidate to convince the public that his policies will create jobs. It seems that everyone got this memo...except the voters.
According to the results of a Fox News poll released last week (a random telephone sample of more than 1,200 registered voters) 41 % identified "inflation" as "the biggest economic problem they faced." This is nearly double the 24% that named "unemployment" as their chief concern. For further comparison, 19% identified "taxes" and 7% "the housing market" as their primary concern. A full 44% of women, who often do more of the household shopping and would therefore be more sensitive to prices changes, identified rising prices as their primary concern. My most recent video blog addresses this topic in detail.
While these statistics do not surprise me, they should shock the hell out of the establishment. According to the Federal Reserve, inflation is not a concern at all. Time after time, in front of Congress and the press, Fed Chairman Ben Bernanke has said that inflation is contained and that it is below the Fed's "mandated" rate of inflation (whatever that may be). The Bureau of Labor Statistics is saying the same thing. The measures they use to monitor inflation, such as the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE), show annual inflation well below 2%. In fact, the GDP price deflator used by the Commerce Department to calculate the second quarter's 1.3% annual growth rate assumed annual inflation was running at just 1.6%.
In fact, Bernanke thinks inflation is so low that he is actually worried about deflation, which he believes is a more dangerous issue. As a result, he is recommending policies that look to raise the inflation rate, not just to combat the phantom menace of deflation but to boost the housing market and reduce unemployment. He mistakenly believes these problems are the ones that concern Americans the most.
If inflation really is as subdued as the government claims, how is it that so many people are concerned? It's not as if the media or political candidates are fanning the fears of rising prices. In fact, given the media's preoccupation with the housing market, the fact that nearly seven times as many Americans worry more about rising food prices than falling home prices shows just how large the inflation problem must be. Yet most economic observers continue to swallow the government's inflation propaganda hook, line and sinker. In fact, although the Fox poll came out last week, I did not read or hear a single story on this topic, even from Fox news itself, which appears to not have noticed the significance of its own data.
For years my critics have always attempted to discredit my inflation fears by pointing to government statistics showing low rates. However, I have long maintained that such statistics underreport inflation, and the results of this poll seem to confirm my suspicion. There are only two possible ways to explain the disconnect. Either the government is correct and consumers are worried about a non-existent problem, or the consumers' concerns are real and the government's statistics are not. From my perspective, it seems that it is far more likely that consumers are in the right. If so, we are in a lot of trouble.
If annual inflation is actually higher than 3%, which would certainly be the case if consumers are so worried about it, then we are already in recession. Had government used a 3% inflation deflator (rather than the 1.6% that they actually used) to calculate 2nd quarter GDP, then growth would have been reported at negative .1% rather than the positive 1.3%. I believe that if the government used more accurate inflation data over the past several years, it is possible that we would have seen no statistical recovery from the recession that began in the fourth quarter of 2007. This would help explain why the "recovery" has failed to create jobs or lift personal incomes.
The Fed's zero percent interest rate policy is predicated on the assumption that there is currently no inflation. If this is not accurate, then they are making a major policy mistake. The Fed is easing when it should be tightening. If inflation is such a major concern now, imagine how much bigger the problem will become once the Fed achieves its goal of pushing the rate higher. More importantly, how much tighter will future monetary policy have to be to put the inflation genie back in her bottle? If inflation becomes so virulent before the Fed realizes its mistake, then it may be forced to raise interest rates significantly. U.S. national debt is projected to reach $20 trillion within a few years. As a result, a 10% interest rate (which would be needed to combat 1970's style inflation) will require the U.S. government to pay about $2 trillion per year in interest on the national debt. This will absolutely upend all economic projections.
Since 10% interest rates will likely crush the economy, not to mention the banks and the real estate market, tax revenues will plunge and non-interest government expenditures will go through the roof. Assuming we try to borrow the difference, annual budget deficits could go much, much higher from the already ridiculously high levels that they have reached during President Obama's term. Annual deficits of $2 trillion, $3 trillion, or even $4 trillion, would result in a sovereign debt crisis that would force the Federal Government to either default on its obligations or inflate them away. Given the tendency for politicians to prefer the latter, voters who think rising prices are a problem now should just wait until they see what is waiting down the road!
Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Metals.
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Posted by Libertarian Jerry on 10/17/12 09:21 PM
Another kind of inflation is downsizing product size and or content. Where a pound container of coffee is now 10.5 ounces or a half gallon of ice cream is now a quart and a half or a 14 ounce bag of salad is now 10 ounces. The price may stay the same but the amount of product in the package will shrink. Also you'll often find quality products substituting cheaper ingredients. A good example of downsizing is gallons of spring water. Yesterday I went grocery shopping and found,to my dismay,that gallons of bottled spring water now read 105 ounces on the container instead of 128 ounces(gallon). The price was still the same,but somewhere in the shuffle I lost almost 20% of the product. I don't know if this kind of statistic is included in the inflation calculations of the Federal Government,but it should.
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Posted by mava on 10/17/12 04:05 PM
dave jr.,
"My question is, can they control, prevent hyper-inflation or are we in the "end game"."
Answer: Yes, it is the end game.
I've been following Peter Schiff since 2003 and find him the only economist who is consistently correct on everything he says and forecasts. Reading from his article, again, we have: "Federal Government [will be forced to] to either default on its obligations or inflate them away."
Inflating away, this time, doesn't mean happily. It means that there will be a hyperinflation and the end of the dollar. Everyone who paid back their debts will find themselves to be the patsies, again.
Peter also mentions "the Fed's "mandated" rate of inflation (whatever that may be)". He is too polite to say what that means. I am not so polite, so I will.
Imagine yourself owning a robot. This robot you have is actually goes to work every morning, does the regular 8 hours at the joint, and then drives itself home before it stores itself in a garage closet for the night of recharging.
You receive the paycheck this robot earns. Out of this paycheck, you pay for the electricity to recharge it's batteries, repairs and maintenance. You also pay for necessary upgrades, if they are going to improve YOUR bottom line, and you make deductions toward replacing the robot at the end of it's service life.
What do you do with the rest of the paycheck? Do you spend it on entertaining the robot? May-be on improving his quality of life? I bet, you don't. You keep the rest of the money for yourself. Let us say, that you end up keeping 80% of the pay that it earns for you.
That, my friends, is the "mandated rate of inflation", yes, that 80% would be exactly what you would be hell bent on mandating.
The mandated rate of inflation that the FED says is necessary for a healthy economy is exactly what they need to keep for themselves, to just keep you going on. Despite the profits that you make, the income that you earn, the relentless advances of technology and the economy, the FED is only giving you just enough to recharge yourself and bring up a replacement workers - your children. You getting no benefits whatsoever. You keep no earnings beyond and above what is necessary to sustain yourself and replace yourself.
You are a robot of the FED.
But, the FED only charges 2%, right?
LOL! That is why the discrepancy! Look around. The only representation of true banking these days is what is called "Loan Shark". These individuals still practice true banking, not "Fractional Reserve Banking" (counterfeiting). Because of that, they must charge TRUE, REAL interest. The hidden but REAL rate of inflation is many times what the FED says. That is why the Loan Shark charges such an outrageous interest! It is nothing uncommon, had you known the real rate of inflation. But, because you only know the fake rate, the real interest of a Loan Shark seems unrealistically high!
That rate, is very close to what the FED actually extracts from you through inflation. It is not 2%. It is closer to 20%. It might be much more than that. It is very unlikely be less than that.
So, robot, you thought you pay your 15% in taxes and that was it? Nope. You actually pay at least 20% of everything you make before the taxes are even calculated.
This is what the mandated, Keynesian rate of "necessary" inflation really means.
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Posted by Danny B on 10/17/12 10:38 AM
dave jr is right about the balancing act.
The U.S. had a huge manufacturing sector but, was losing market share to low-wage competitors. The solution was obvious,,,, lower domestic wages. With a declining workforce, any newly printed money was NOT going to flow into wages. It had to flow into commodities and emerging economies. The end result of money printing was, lower wages.
It also caused inflation in emerging economies.
American wages , as expressed in gold, silver or wheat took a nosedive. On the ground, we view that as price inflation. Big, Bad, Bald Ben Bernanke is trying to lower American wages and still keep commodity prices from rising commensurate to the increased money supply. He's also trying to even things out a bit by causing emerging (low wage)market wage-and-price inflation.
Some dingbat in D.C. seems to think that Bernanke can print currency and pointedly drive it into RE and pointedly NOT drive it into commodities. This new money has been easily directed into stocks and bonds but, that is a different story. This same group of dingbats also seems to believe that the FED can somehow create jobs. The West is trying to push the global RESET button and still keep a comfortable standard of living.
France currently seems to be the most deluded country.
I suspect that Ben can keep price inflation somewhat at bay by continuously deflating labor. Prices won't go up much for now but, fewer and fewer people will be working.
Bond returns are massively negative but, investors can't completely desert the bond market because of a lack of alternatives. That is another balancing act for Ben. He drives down interest rates to keep debt service low but, at the same time, he drives away investors. How long can he balance the show?
Wait for the debt-ceiling and fiscal-cliff to throw him out of whack.
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Posted by dave jr on 10/17/12 08:07 AM
I should qualify my statement,
"I do not believe there can be any semblance of a recovery without rampant price inflation, again market driven."
I am referring to a recovery of free markets. What we can easily be transitioned into right now, is a command economy. Game over.
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Posted by dave jr on 10/17/12 07:53 AM
Tightening vs. easing. We have tightening but it is driven by the private sector. The market is trying to correct. If not yet in default, people and companies are paying down debt and not borrowing. To continue the harvest, the fed has no choice but to ease.
Once the harvest is over, I do not believe there can be any semblance of a recovery without rampant price inflation, again market driven. The fed can manipulate only so long before the fiat blows up in their face. My question is, can they control, prevent hyper-inflation or are we in the "end game".
Also, we have been enduring price inflation of commodities including energy, and at the same time price deflation in labor. The BLS has a variety of ingredients to pick and choose from when cooking the books. The delicate balancing act is entertaining and a distration as the field is being tipped, and the harvest continues.
