Tag Archives: inflation

Why American Consumers Are About To Be Blindsided By An Inflationary Shockwave

While unsuspecting U.S. consumers continue to expect low, sub-2% inflation according to the latest YTD low breakeven rate, little do they know they are about to be blindsided by a coming inflationary shock, according to a new WSJ report which notes that many U.S. consumer staple and industry-leading companies are either already in the process of raising prices, or have set concrete plans to do so in the very near future. 

Once these price increases are passed through to consumers, it will likely mark the end to a long period of “low inflation” that the Fed has constantly leaned on as an excuse to keep rates low for nearly a decade.

Take Clorox for example, which is raising prices on everyday products like cat litter. Coca-Cola also reported higher prices for the past quarter. Mondelez International also plans to raise prices in North America next year according to an interview with its CEO on Monday. The food giant said that it is passing along rising costs, including ingredient and transportation costs, to consumers.

Airlines are also passing on costs as they are paying about 40% more for jet fuel than they were a year ago. Delta, JetBlue and American have all raised fees, fares, or both. Trucking costs were up 7% annually in September and private sector wages and salaries in the September quarter rose 3.1%.

Arconic was able to widen its operating margins this past quarter on its aluminum products by using tariffs to justify price hikes. Manufacturers are paying about 8% more for aluminum and 38% more for steel than they were a year ago. Looming potential tariffs with China to the tune of $200 billion also continue to weigh on input costs. 

Even such supposedly immune to day-to-day price fluctuation companies as Apple, recently raised prices on its new MacBook Air and iPad Pro products by between 20% and 25%.

The list goes on: Steve Madden said it would be raising prices on handbags and other products that it imports from China. It’s looking to shift production to other countries to avoid tariffs and said that products made in China could rise as much as 10% in price.

An interior designer working for Whiski Kitchen in Royal Oak, Michigan was cited by the Journal as stating that she was paying 15% more for quartz countertops made in China also as a result of U.S. tariffs. She’s also paying about 10% more for imported cabinets. 

Sherwin-Williams and PPG, both in the paint manufacturing business, stated in recent weeks that they would continue to raise prices to cover rising costs for input materials like titanium dioxide. Sherwin-Williams raised prices by as much as 6% this month.

Sherwin-Williams Chief Executive John Morikis said last week that “Raw material inflation has been unrelenting and accelerating.”

Food companies are also hiking prices. McDonalds’ 2.4% SSS comps in Q3 were a result of higher burger prices. Chili’s Restaurants raised the price of its two entree and an appetizer deal from $22 to $25 in the quarter. Habit Restaurants saw its prices rise by 3.9% in May of this year, even while traffic declined 3.4%. Hershey also has plans to sell candy in packaging next year that will raise its price per ounce. 

“Retailers understand that when costs go up, something has to give,” said Michele Buck, chief executive of Hershey, last week. 

https://www.zerohedge.com/sites/default/files/inline-images/chart%202_2_0.jpg?itok=6sMVfAyO

In today’s Manufacturing ISM report, a respondent encapsulated the above sentiment:

“Tariffs are causing inflation: increased costs of imports, increased cost of freight and increased domestic costs from suppliers who import.”

While inflation still technically remains near the Fed’s 2% target, if you believe the CPI number, which as we have discussed previously woefully under counts true inflation which is as much as three times higher than the Fed’s hedonically adjusted, politically motivated number, prices are set to move higher as a result of labor shortages, while headwinds for prices include the recent strength of the dollar, making imports cheaper. And then there are tariffs.

It’s obvious that higher prices will “work” alongside the Fed’s rate hikes to help dampen the United States economy further. Not only that, but higher prices could cause even more damage if the Fed sees raising rates as the main solution to inflation exceeding its expectations.

Diane Swonk, Grant Thornton’s chief economist, previewed what will happen next best: “We might see a pop of inflation in the first quarter.”

Once that happens in what is already a rising rate environment in which the president has made it clear he is solidly against any more Fed tightening, we wonder just what Powell’s next move will be when even higher prices force his bluff?

Source: ZeroZedge

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What Turkey Can Teach Us About Gold

If you were contemplating an investment at the beginning of 2014, which of the two assets graphed below would you prefer to own?

https://www.zerohedge.com/sites/default/files/inline-images/1-gold.png?itok=RqzcFr6tData Courtesy: Bloomberg

In the traditional and logical way of thinking about investing, the asset that appreciates more is usually the preferred choice.

However, the chart above depicts the same asset expressed in two different currencies. The orange line is gold priced in U.S. dollars and the teal line is gold priced in Turkish lira. The y-axis is the price of gold divided by 100.

Had you owned gold priced in U.S. dollar terms, your investment return since 2014 has been relatively flat.  Conversely, had you bought gold using Turkish Lira in 2014, your investment has risen from 2,805 to 7,226 or 2.58x. The gain occurred as the value of the Turkish lira deteriorated from 2.33 to 6.04 relative to the U.S. dollar.

Although the optics suggest that the value of gold in Turkish Lira has risen sharply, the value of the Turkish Lira relative to the U.S. dollar has fallen by an equal amount. A position in gold acquired using lira yielded no more than an investment in gold using U.S. dollars.

https://www.zerohedge.com/sites/default/files/inline-images/2.1.png?itok=ZFZyUtVc
Data Courtesy: Bloomberg

This real-world example is elusive but important. It helps quantify the effects of the recent economic chaos in

This real-world example is elusive but important. It helps quantify the effects of the recent economic chaos in Turkey. Turkey’s economic future remains uncertain, but the reality is that their currency has devalued as a result of large fiscal deficits and heavy borrowing used to make up the revenue shortfall. Inflation is not the cause of the problem; it is a symptom. The cause is the dramatic increase in the supply of lira designed to solve the poor fiscal condition.

A Turkish citizen who held savings in lira is much worse off today than even two months ago as the lira has fallen in value. She still has the same amount of savings, but the savings will buy far less today than only a few weeks ago. Her neighbor, who held gold instead of lira, has retained spending power and therefore wealth. This illustration highlights the ability of gold to convey clear comparisons of various countries’ circumstances. It also illustrates the damage that imprudent monetary policy can inflict and the importance of gold as insurance against those policies.

Penalty

Using Turkey as an example also helps illustrate why we say that inflationary regimes impose a penalty on savers. Inflation encourages and even forces people to spend, invest or speculate to offset the effects of inflation. Investing and speculating entail risk, however, so in an inflationary regime one must assume risk or accept a decline in purchasing power.

Most people think of inflation as rising prices. Although that is the way most economists represent inflation, the truth is that inflation is actually your money losing value. Inflation is not caused by rising prices; rising prices are a symptom of inflation. The value of money declines as a result of increasing money supply provided by the stewards of monetary discipline, the Federal Reserve or some other global central bank.

This is difficult to conceptualize, so let’s bring it home in a simple example. If you live in a country where the annual inflation rate is a steady 2%, the value of the currency will decline every year by 2% on a compounded basis. At this rate, the purchasing power of the currency will be cut in half in less than 35 years.

Now consider a country, like Turkey, that has been running chronic deficits, printing money rapidly to make up a revenue shortfall, and begins to experience accelerating inflation. The annual inflation rate in Turkey is now estimated to be over 100% or 8.30% per month, a difficult number to comprehend. The value of their currency is currently falling at an accelerating pace so that what might have been purchased with 500 lira 9 months ago now requires 1,000 lira.

Put another way, for the prudent retiree who had 10,000 lira in cash stashed away nine months ago, the inflation-adjusted value of that money has now fallen to less than 5,000 lira.  If inflation persists at that rate, the 10,000 will become less than 1,000 in 29 months.

Believe it or not, Turkey is, so far, a relatively mild example compared to hyperinflationary episodes previously seen in Germany, Czechoslovakia, Venezuela, and Zimbabwe. These instances devastated the currencies and the wealth of the affected citizens. Fiscal imprudence is a real phenomenon and one that eventually destroys the financial infrastructure of a country. For more on the insidious role that even low levels of inflation have on purchasing power, please read our article: The Fed’s Definition of Price Stability is Likely Different than Yours.

Summary

There are over 3,800 historical examples of paper currencies that no longer exist. Although some of these currencies, like the French franc or the Greek drachma disappeared as a result of being replaced by an alternative (euro), many disappeared as a result of government imprudence, debauching the currency and hyperinflation. In all of those cases, persistent budget deficits and printed money were common factors. This should sound worryingly familiar.

Modern day central banks function by employing a steady dose of propaganda arguing against the risks of deflation and in favor of the benefits of a “modest” level of inflation. The Fed’s Congressional mandate is to “foster economic conditions that promote stable prices and maximum sustainable employment” but promoting stable prices evolved into a 2% inflation target. The math is not complex but it is difficult to grasp. Any number, no matter how small, compounded over a long enough time frame eventually takes on a parabolic, hockey stick, shape. The purpose of the inflation target is clearly intended to encourage borrowing, spending and speculating as the value of the currency gradually erodes but at an ever-accelerating pace. Those not participating in such acts will get left behind.

In the same way that rising prices are a symptom of inflation attributable to too much printed money in the system, deflation is falling prices due to unfinanceable inventories and merchandise pushed on to the market caused by too much debt. Contrary to popular economic opinion, deflation is not falling prices caused by a technology-enhanced decline in the costs of production – that is more properly labeled as “progress.” The Fed is either knowingly or unknowingly conflating these two separate and very different issues under the deflation label as support for their “inflation target”. In doing so, they are creating the conditions for deflation as debt burdens mount.

Gold, for all its imperfections, offers a time-tested, stable base against which to measure the value of fiat currencies. Accountability cannot be denied.  Despite the unwillingness of most central bankers to acknowledge gold’s relevance, the currencies of nations will remain beholden to the “barbarous relic”, especially as governments continue to prove feckless in their application of fiscal and monetary discipline.

Source: Authored by Michael Lebowitz via RealInvestmentAdvice.com| ZeroHedge

Their Plan: Pay All Future Obligations By Impoverishing Everyone

The only way to pay all these future obligations is by creating new money.

I’ve been focusing on inflation, which is more properly understood as the loss of purchasing power of a currency, which when taken to extremes destroys the currency and the wealth/income of everyone forced to use that currency.

The funny thing about the loss of a currency’s purchasing power is that it wipes out every holder of that currency, rich and not-so-rich alike. There are a few basics we need to cover first to understand how soaring future obligations–pensions, healthcare, entitlements, interest on debt, etc.–lead to a feedback loop which will hasten the loss of purchasing power of our currency, the US dollar.

1. As I have explained many times, the only possible output of the way we create and distribute “money” (credit and currency) is soaring wealth/income inequality, as all the new money flows to the wealthy, who use the “cheap” money from central and private banks to lend at high rates of interest to debt-serfs, buy back corporate shares or buy up income-producing assets.

The net result is whatever actual “growth” has occurred (removing the illusory growth that accounts for much of the GDP “growth” this decade) has flowed almost exclusively to the top of the wealth-power pyramid (see chart below).

2. Much of the “growth” that’s supposed to fund public and private obligations is fictitious. Please read Michael Hudson’s brief comments for a taste of how this works: The “Next” Financial Crisis and Public Banking as the Response.

The mainstream financial media swallows the bogus “growth” story without question because that story is the linchpin of the entire status quo: if it’s revealed as inaccurate, i.e. statistical sleight of hand, the whole idea that “growth” can effortlessly fund all future obligations goes up in flames.

Combine that “growth” has been grossly over-estimated with an increasing concentration of wealth and income in the top .1% of 1%, and the only possible conclusion is there’s less available to pay fast-rising obligations out of what’s left to the bottom 99.9%.

3. We’ve been paying our obligations with debt for the past decade. Look at the chart below of the debt to GDP ratio–it has skyrocketed as GDP has inched higher while debt has exploded. (Remove the fictitious “growth” in GDP and the picture worsens significantly.)

https://www.zerohedge.com/sites/default/files/inline-images/debt-gdp2.png?itok=ngrFbGtM

Look at the chart of federal debt and explain how the steepening trajectory of debt is sustainable in a stagnating real economy with stagnating wages for the bottom 95% of the populace.

https://www.zerohedge.com/sites/default/files/inline-images/US-debt1-17.png?itok=pjxq533w

4. Recall that the federal, state and local governments pay interest on all the money they borrow to fund deficit spending, i.e. every dollar spent above and beyond tax revenues. All that interest is an increasing obligation that must be paid in the future. Borrowing more to pay interest increases the interest payments due in the future–a classic self-reinforcing runaway feedback loop.

5. Politicians get re-elected by increasing entitlements and obligations without regard to how they will be funded. “Growth” will effortlessly take care of everything–that’s the centerpiece assumption of all conventional economics, free-market, Keynesian and socialist alike.

6. The core constituencies of politicians are government employees and contractors, as these interest groups are funded by the government, which is nominally managed by elected officials and their appointees. Nobody’s more generous (or demanding) than those feeding directly at the government trough. (By “contractors” I mean the vast array of Corporate America cartels that feed off government spending: defense, Big Pharma, Higher Education, etc.)

7. The obligations that have been promised are expanding at a nearly exponential rate, as healthcare costs continue to soar and the number of government pensioners is rising rapidly. This chart illustrates the basic dynamic: the tax revenues required to fund these obligations are far outstripping the income and wealth of the bottom 95% of the populace.

https://www.zerohedge.com/sites/default/files/inline-images/taxpayers-pensions.png?itok=Pxot12Tl

Consider this chart of real GDP per capita. Real GDP is adjusted to remove inflation from the picture, so this is supposed to be “real growth.” How many people are demonstrably 19% better off than they were in 2000?

https://www.zerohedge.com/sites/default/files/inline-images/GDP-per-capita10-17.png?itok=oy1jbuA5

Not many, judging by the decline in family financial wealth since 2001:

https://www.zerohedge.com/sites/default/files/inline-images/assets-family1017a.png?itok=q2ptNEML

Income increases flow disproportionately to the top .1%. Adjusted for real-world inflation, the bottom 95% have actually lost ground:

https://www.zerohedge.com/sites/default/files/inline-images/inequality-NYT8-17a%20%281%29_1.png?itok=nBmjhhR7

Here’s the uncomfortable reality: the means to pay all these future obligations— the real-world economy, and the wealth and income of the vast majority of the populace– are far too modest to fund the fast-expanding obligations,which include interest due on the ever-increasing mountain of public and private debt.

The current “everything” asset bubbles have temporarily boosted the wealth and income of corporations and the wealthy, but all bubbles eventually pop as the marginal elements that are propping up the expansion weaken and implode.

Once the asset bubbles pop, the illusion that “taxing the rich” will pay for all the obligations pops along with the bubble. And as I’ve noted many times, those at the top of the wealth-power pyramid wield political power, so they have the means and the motive to limit their tax burden to roughly 20% or less–(sometimes much less, as in zero.)

That 20% is an interesting threshold, as once federal tax burdens rise above 20%, the higher taxes trigger a recession which then crushes tax revenues.This makes sense– if I pay an extra $2,000 annually in higher junk fees and taxes, that’s $2,000 less I have to invest or spend.

Put these dynamics together and you get one outcome: the federal government cannot possibly pay all its obligations out of tax revenues nor can it raise taxes high enough to do so without gutting tax revenues via a recession.

The only way to pay all these future obligation is by creating new money, which in a stagnant, dysfunctional economy can only reduce the purchasing power of the currency, in effect robbing every holder of the currency of wealth and income.

https://www.zerohedge.com/sites/default/files/inline-images/bolivar-USD6-18_0.png?itok=FFAm1Hn9

Here’s the end-game, folks: Venezuela. The nostrum has it that “the government can’t go broke because it can always print more money.” True, but as the wretched populace of Venezuela has discovered, there is a consequence of that money-creation to meet obligations: the destruction of the currency, and thus the wealth and income of everyone forced to use that currency.

Source: by Charles Hugh Smith | ZeroHedge

Boom: Argentina raises interest rates to 40%

https://ichef-1.bbci.co.uk/news/660/cpsprodpb/10F50/production/_101165496_gettyimages-501612114.jpg

Argentina’s central bank has raised interest rates for the third time in eight days as the country’s currency, the peso, continues to fall sharply.

On Friday, the bank hiked rates to 40% from 33.25%, a day after they were raised from 30.25%. A week ago, they were raised from 27.25%. The rises are aimed at supporting the peso, which has lost a quarter of its value over the past year.

Analysts say the crisis is escalating and looks set to continue.

Argentina is in the middle of a pro-market economic reform programme under President Mauricio Macri, who is seeking to reverse years of protectionism and high government spending under his predecessor, Cristina Fernandez de Kirchner. Inflation, a perennial problem in Argentina, was at 25% in 2017, the highest rate in Latin America except for Venezuela. This year, the central bank has set an inflation target of 15% and has said it will continue to act to enforce it.

‘Aggressive steps’

Despite the twin rate rises, the peso, which was fixed by law at parity with the US dollar before Argentina’s economic meltdown in 2001-02, is now trading at about 22 to the dollar.

https://ichef-1.bbci.co.uk/news/624/cpsprodpb/504C/production/_101165502_argtousd-nc.png

“This crisis looks set to continue unless the government steps in to reassure investors that it will take more aggressive steps to fix Argentina’s economic vulnerabilities,” said Edward Glossop, Latin America economist at Capital Economics. “Risks to the peso have been brewing for a while – large twin budget and current account deficits, a heavy dollar debt burden, entrenched high inflation and an overvalued currency.

“The real surprise is how quickly and suddenly things seem to be escalating.”

Mr Glossop said “a sizeable fiscal tightening” was planned for 2018, but it might now need to be larger and prompter. “Unless or until that happens, the peso is likely to remain under pressure, and there remains a real risk of a messy economic adjustment.” Argentina’s president Mauricio Macri is a controversial figure in a country that is still strongly divided ideologically. But among international investors he is unanimously praised. Since coming to office, he moved swiftly to end capital controls and re-establish trust in economic data coming from Argentina. However, he is not winning a crucial battle in the country – the one against inflation. Markets are taking notice and there has been a sell-off of the peso. The opposition wants to stop Macri from removing subsidies in controlled prices, such as energy and utility tariffs, which may bring more inflation in the short term but could help bring it down from above 20% now to about 5% by 2020.

Friday was a day for emergency measures – a massive hike to 40% in interest rates and another promise to bring down government spending.

Investors still believe Macri has a sound plan to recover Argentina, but they are not convinced he can see it through.

By Daniel Gallas, BBC South America Business Correspondent

***

Argentina Raises Interest Rates To 40% To Support Their Currency

https://d33wjekvz3zs1a.cloudfront.net/wp-content/uploads/2016/05/Paradox-of-Bell-Curve.jpg

Argentina has just raised interest rates to 40% trying to support the currency. I have explained many times that interest rates follow a BELL-CURVE and by no means are they linear. This is one of the huge problems behind attempts by central banks to manipulate the economy by impacting demand-side economics. Raising interest rates to stem inflation will work only up to a point and even that is debatable. The entire interrelationship between markets and interest rates has three main phase transitions and each depends upon the interaction with CONFIDENCE of the people in the survivability of the state.

https://d33wjekvz3zs1a.cloudfront.net/wp-content/uploads/2016/02/IntSprd-MA.jpg

PHASE TWO: Raising interest rates will flip the economy as Volcker did in 1981 ONLY when they exceed the expectation of profits in asset inflation provided there is CONFIDENCE that the government will survive as in the USA back in 1981 compared to Zimbabwe, Venezuela, Russia during 1917 or China back in 1949. In other words, if the nation is going into civil war, then tangible assets will collapse and the solution becomes assets flee the country.

In the case of the USA back in 1981, the high interest rates worked because we were only in Phase Two where there was no civil war or revolution so the survivability of the government did not come into question. Hence, Volcker created DELATION as capital then ran away from assets and into bonds to capture the higher interest rates. Then and only then did rates begin to decline between 1981 into 1986 reflecting the high demand for US government bonds, which in turn drove the US dollar to record highs and the British pound to $1.03 in 1985 resulting in the Plaza Accord and the creation of the G5 (now G20).

So many people want to take issue with me over how the stock market will rise with higher interest rates. It is a BELL-CURVE and you better begin to understand this. If not, just hand-over all your assets to the New York bankers now, go on welfare and just end your misery.

https://d33wjekvz3zs1a.cloudfront.net/wp-content/uploads/2018/05/Argentina-Peso-Y-5-5-2018.jpg

https://d33wjekvz3zs1a.cloudfront.net/wp-content/uploads/2018/05/Argentina-Merval-Y-5-5-2018.jpg

Here are charts of the Argentine share market the currency in terms of US dollars. You can see that the stock market offers TANGIBLE assets that rise in local currency terms because assets have an international value. Here we can see the dollar has soared against the currency and the stock market has risen in proportion the decline in the currency. I do not think there is any other way that is better to demonstrate the BELL-CURVE effect of interest rates than these two charts.

To those who doubt that the stock market can rise with rising interest rates, I really do not know what to say. Keep listening to the talking heads of TV and all the pundits who claim only gold will rise and everything else will fall to dust. Then we have the sublime blind idiots who never look outside the USA and proclaim the dollar will crash and burn not the rest of the world so buy gold and cryptocurrency you cannot spend and certainly with no power grid.

https://d33wjekvz3zs1a.cloudfront.net/wp-content/uploads/2016/05/London-Destroyed.jpg

PHASE THREE

Is when no level of interest rate will save the day. Capital simply flees the political state for the risk of revolution or civil war means that tangible assets which are immovable will not hold their value such as companies and real estate. This is the period that Goldbugs envision. At that point, the value of everything will even move into the extreme PHASE FOUR where even gold will decline and the only thing to survive is food. There, the political state completely collapses and a new political government comes into being.

Source: By Martin Armstrong | Armstrong Economics

***

Meanwhile, the following is an analysis update on the pending 2021 LIBOR reset that will affect trillions in debt and derivative instruments across the globe…

 

“It’s Foolish to Believe The Endgame is Anything But Inflation…”

Authored by Kevin Muir via The Macro Tourist blog,

I am going to break from regular market commentary to step back and think about the big picture as it relates to debt and inflation. Let’s call it philosophical Friday. But don’t worry, there will be no bearded left-wing rants. This will definitely be a market-based exploration of the bigger forces that affect our economy.

https://www.zerohedge.com/sites/default/files/inline-images/20180323-keith.png?itok=y_3ovh1C

One of the greatest debates within the financial community centers around debt and its effect on inflation and economic prosperity. The common narrative is that government deficits (and the ensuing debt) are bad. It steals from future generations and merely brings forward future consumption. In the long run, it creates distortions, and the quicker we return to balancing our books, the better off we will all be.

I will not bother arguing about this logic. Chances are you have your own views about how important it is to balance the books, and no matter my argument, you won’t change your opinion. I will say this though. I am no disciple of the Krugman “any stimulus is good stimulus” logic.

https://www.themacrotourist.com/img/posts/05/20180323-krugman.jpg

The broken window fallacy is real and digging ditches to fill them back in is a net drain on the economy. Full stop. You won’t hear any complaints from me there.

Yet, the obsession with balancing the government’s budget is equally damaging. In a balance sheet challenged economy the government is often the last resort for creating demand. Trying to balance a government deficit in this environment (like the Troika imposed on Greece during the recent Euro-crisis) is a disaster waiting to happen.

Have a look at these charts from the NY Times outlining the similarity of the Greece depression to the American Great Depression of the 1930s.

https://www.themacrotourist.com/img/posts/05/20180323-greece1.png

https://www.themacrotourist.com/img/posts/05/20180323-greece2.png

https://www.themacrotourist.com/img/posts/05/20180323-greece3.png

Now you might look at these charts and say, “Greece spent too much and suffered the consequences. Ultimately they will be better off taking the hit and reorganizing in a more productive economic fashion.” If so, you probably also still have this poster hanging in your room at your parent’s house where you grew up.

https://www.themacrotourist.com/img/posts/05/20180323-austrian.jpg

Personally, I don’t want to even bother discussing the possibility of this sort of Austrian-style-rebalancing coming to Western democracies. Yeah, it might be your dream, but it’s just a dream. I have Salma Hayek on my freebie list, but what do I think of my chances? About as close to zero without actually ticking at the perfect zero level. It’s not a “can’t happen,” but it’s certainly a “it’s not going to happen in a million years.”

Governments were faced with a choice during the 2008 Great Financial Crisis. Credit was naturally contracting, and the economy wanted to go through a cleansing economic rebalancing where debt would be destroyed through a severe recession. Yet, governments had practically zero appetite to allow this sort of cathartic cleansing to happen. Instead, they stepped up and stopped the credit contraction through government spending and quantitative easing.

I believe that government spending is not all bad, and at times, it plays an important role in our economy. I am a huge fan of Richard Koo’s work. When economies’ interest-rate policies become zero bound, governments are crucial in engaging in anti-cyclical spending. All debt is not bad. Take debt your company might issue for instance. Borrowing a million dollars to invest in capital equipment to make your firm more productive is a much different prospect than taking out a loan to engage in a Krugman-inspired-all-you-can-drink-party-headlined-by-the-Killers. Sure, the party sounds like fun, but it’s not going to benefit your firm past one night of excitement. Governments shouldn’t perpetuate unproductive pension grabs by workers, but instead actually spend money on infrastructure that will make the economy more productive. During the 1950s Eisenhower invested in the American highway system, helping America secure its place as the world’s most economically dominant country. Today that sort of infrastructure spending would be shouted down as irresponsible. Well, not continuing to invest in your country’s productive capacity is the irresponsible part.

The point is that not all spending is bad, but nor is all spending good. And even more importantly, government spending should be anti-cyclical. No sense spending more when your economy is rocking. Better to save the bullets to ebb the natural flow of the business cycle.

But I digress. Let’s get back to debt.

Creating debt is inflationary, while paying down debt is deflationary. That’s pretty basic.

The easiest way for me to demonstrate this fact is to look at an area where debt has been created for spending in a specific area. No better example than student loans.

Over the past fifteen years, inflation in college tuition has exploded. It’s been absolutely bonkers. Here is the chart of regular CPI versus tuition CPI.

https://www.themacrotourist.com/img/posts/05/20180323-cpi.png

But it should really be no surprise. If we add the student loan debt versus Federal debt series, it becomes clear that a tremendous amount of credit has been extended to students.

https://www.themacrotourist.com/img/posts/05/20180323-cpiversus.png

So let’s agree that credit creation is inflationary, and by definition, credit destruction should be deflationary.

Therefore when the market pundits that I like to affectionately call deflationistas argue that this next chart is ultimately deflationary, I understand where they are coming from.

https://www.themacrotourist.com/img/posts/05/20180323-percent.png

If you assume that this debt needs to be paid back, then it’s easy to understand their argument. When debt starts to contract and this chart heads lower, this will be deflationary. And if you assume that governments start to balance their books, then there is every reason to expect that future deflation is the worry, not inflation. After all, the money has already been spent. The inflation from that spending is already in the system.

I can already hear the deflationistas argument – over 100% of GDP is unsustainable therefore credit growth will at worst go sideways, but most likely actually contract in coming years.

Really? How about Japan?

https://www.themacrotourist.com/img/posts/05/20180323-japan.png

The same argument was made at the turn of the century when Japan was running a debt that was over 150% of GDP, yet they somehow managed to push that up another 80% to 230% without causing some sort of apocalyptic collapse.

Now before you send me an angry email about the moral irresponsibility of suggesting debt can go higher, save your clicks. I understand your argument. I am not interested in debating what should be done, but rather I am trying to determine what will be done. You might believe governments and Central Banks will gain religion and start conducting prudent and responsible policies. So be it. If you believe that, then by all means – load up on long-dated sovereign bonds as they will continue to be the trade of the century.

I, on the other hand, believe that Central Banks will continue printing until, as my favourite West Coast skeptic Bill Fleckenstein says, “the bond market takes away the keys.” And even when Central Banks are mildly responsible, politicians are sitting in the wings waiting to spend at any chance they get. Take Trump’s recent stimulus program. We are now more than eight years into an economic recovery, and he just pushed through one of the most stimulative fiscal policies of the past couple of decades. Regardless of where you stand politically regarding these tax cuts, there can be no denying they were much more needed in 2008 than today.

This is a long-winded way of saying that although I agree that the creation of debt is inflationary, and that the destruction of debt is deflationary, I don’t buy the argument that any sort of absolute amount of debt means the trend has to change. I don’t look at the 100% debt-to-GDP figure and worry that the US government will somehow institute deflationary policies to pay that back. Nope, I don’t see anything but a sea of growing deficits and debts. And in fact, the larger debts grow, the less likely they are to be paid back.

How will Japan pay back their debt that is 230% of GDP? The answer is that they can’t. It will be inflated away.

It’s foolish to believe that the end-game is anything but inflation. And even though increasing debt seems scary, if there is one thing that I am sure of, it’s that they will figure out a way to make even more of it.

Rant over. And no more big picture philosophy for a while – I promise.

Black Pilled Channel

Source: ZeroHedge

Visualizing Real Inflation – A Decade Of Grocery Prices For 30 Common Items

Over the span of 2000-2016, the amount of money spent on food by the average American household increased from $5,158 to $7,203, which is a 39.6% increase in spending.

Despite this, as Visual Capitalist’s Jeff Desjardins notes, for most of the U.S. population, food actually makes up a decreasing portion of their household spending mix because of rising incomes over time. Just 13.1% of income was spent on food by the average household in 2016, making it a less important cost than both housing and transportation.

That said, fluctuations in food prices can still make a major impact on the population. For lower income households, food makes up a much higher percentage of incomes at 32.6% – and how individual foods change in price can make a big difference at the dinner table.

FLUCTUATING GROCERY PRICES

Today’s infographic comes from TitleMax, and it uses data from the Bureau of Labor Statistics to show the prices for 30 common grocery staples over the last decade.

https://i1.wp.com/2oqz471sa19h3vbwa53m33yj.wpengine.netdna-cdn.com/wp-content/uploads/2018/01/grocery-items-prices.jpg

Source: ZeroHedge

The Fed’s “Magic Trick” Exposed

In 1791, the first Secretary of the Treasury of the US, Alexander Hamilton, convinced then-new president George Washington to create a central bank for the country.

Secretary of State Thomas Jefferson opposed the idea, as he felt that it would lead to speculation, financial manipulation, and corruption. He was correct, and in 1811, its charter was not renewed by Congress.

Then, the US got itself into economic trouble over the War of 1812 and needed money. In 1816, a Second Bank of the United States was created. Andrew Jackson took the same view as Mister Jefferson before him and, in 1836, succeeded in getting the bank dissolved.

Then, in 1913, the leading bankers of the US succeeded in pushing through a third central bank, the Federal Reserve. At that time, critics echoed the sentiments of Messrs. Jefferson and Jackson, but their warnings were not heeded. For over 100 years, the US has been saddled by a central bank, which has been manifestly guilty of speculation, financial manipulation, and corruption, just as predicted by Mister Jefferson.

From its inception, one of the goals of the bank was to create inflation. And, here, it’s important to emphasize the term “goals.” Inflation was not an accidental by-product of the Fed – it was a goal.

Over the last century, the Fed has often stated that inflation is both normal and necessary. And yet, historically, it has often been the case that an individual could go through his entire lifetime without inflation, without detriment to his economic life.

Yet, whenever the American people suffer as a result of inflation, the Fed is quick to advise them that, without it, the country could not function correctly.

In order to illustrate this, the Fed has even come up with its own illustration “explaining” inflation. Here it is, for your edification:

https://d24g2nq85gnwal.cloudfront.net/images/domestic-external-drivers-of-inflation.png

If the reader is of an age that he can remember the inventions of Rube Goldberg, who designed absurdly complicated machinery that accomplished little or nothing, he might see the resemblance of a Rube Goldberg design in the above illustration.

And yet, the Fed’s illustration can be regarded as effective. After spending several minutes taking in the above complex relationships, an individual would be unlikely to ask, “What did they leave out of the illustration?”

Well, what’s missing is the Fed itself.

As stated above, back in 1913, one of the goals in the creation of the Fed was to have an entity that had the power to create currency, which would mean the power to create inflation.

It’s a given that all governments tax their people. Governments are, by their very nature, parasitical entities that produce nothing but live off the production of others. And, so, it can be expected that any government will increase taxes as much and as often as it can get away with it. The problem is that, at some point, those being taxed rebel, and the government is either overthrown or the tax must be diminished. This dynamic has existed for thousands of years.

However, inflation is a bit of a magic trick. Now, remember, a magician does no magic. What he does is create an illusion, often through the employment of a distraction, which fools the audience into failing to understand what he’s really doing.

And, for a central bank, inflation is the ideal magic trick. The public do not see inflation as a tax; the magician has presented it as a normal and even necessary condition of a healthy economy.

However, what inflation (which has traditionally been defined as the increase in the amount of currency in circulation) really accomplishes is to devalue the currency through oversupply. And, of course, anyone who keeps his wealth (however large or small) in currency units loses a portion of their wealth with each devaluation.

In the 100-plus years since the creation of the Federal Reserve, the Fed has steadily inflated the US dollar. Over time, this has resulted in the dollar being devalued by over 97%.

The dollar is now virtually played out in value and is due for disposal. In order to continue to “tax” the American people through inflation, a reset is needed, with a new currency, which can then also be steadily devalued through inflation.

Once the above process is understood, it’s understandable if the individual feels that his government, along with the Fed, has been robbing him all his life. He’s right—it has.

And it’s done so without ever needing to point a gun to his head.

The magic trick has been an eminently successful one, and there’s no reason to assume that the average person will ever unmask and denounce the magician. However, the individual who understands the trick can choose to mitigate his losses. He or she can take measures to remove their wealth from any state that steadily imposes inflation upon their subjects and store it in physically possessed gold, silver and private cryptocurrency keys.

Source: ZeroHedge