Tag Archives: Inflation

The State of the Economy, by Paul Craig Roberts

Paul Craig Roberts takes apart contemporary government “economics” and “economic statistics.” From Roberts at paulcraigroberts.org:

Dear Readers: We live in a Matrix of Lies in which our awareness is controlled by the explanations we are given.  The control exercised over our awareness is universal.  It applies to every aspect of our existence.  In the article below I show that not only is our understanding of the economy controlled by manipulation of our minds, but also the markets themselves are controlled by official intervention.  

In brief, you can believe nothing that you are officially told.  If you desire truth, you must support the websites that are committed to truth.

The State of the Economy

Paul Craig Roberts

The story line is going out that the economic boom is weakening and the Federal Reserve has to get the printing press running again.  The Fed uses the money to purchase bonds, which drives up the prices of bonds and lowers the interest rate.  The theory is that the lower interest rate encourages consumer spending and business investment and that this increase in consumer and business spending results in more output and employment. 

The Federal Reserve, European Central Bank, and Bank of England have been wedded to this policy for a decade, and the Japanese for longer, without stimulating business investment.  Rather than borrowing at low interest rates in order to invest more, corporations borrowed in order to buy back their stock.  In other words, some corporations after using all their profits to buy back their own stock went into debt in order to further reduce their market capitalization!  

Far from stimulating business investment, the liquidity supplied by the Federal Reserve drove up stock and bond prices and spilled over into real estate.  The fact that corporations used their profits to buy back their shares rather than to invest in new capacity means that the corporations  did not experience a booming economy with good investment opportunities. It is a poor economy when the best investment for a company is to repurchase its own shares.

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The Ugly End of Globalization, by MN Gordon

There will a price to pay for fake money and all-too-real debt. From MN Gordon at economicprism.com:

Sometime in the fall of 2018 a lowly gofer at the New York Stock Exchange was sweating  bullets.  He’d made an honest mistake.  One that could forever tag him a buffoon.

After trading sideways for most of the spring, the Dow Jones Industrial Average was on the move.  When it closed at 26,828 on October 3, it appeared the Dow was but one trading day away from eclipsing 27,000.  Everyone, including Jim Cramer, just knew it was about to happen.

And this was precisely what the NYSE gofer feared most.  For he’d failed to procure Dow 27,000 hats.  What a shame it would be for Wall Street’s most revered index to notch this historic milestone with no commemorative hats for floor traders to put on while they go bananas.

But then a miracle happen.  The Dow didn’t go up; rather, it went down.  A week later, to the gofers relief, the Dow 27,000 hats arrived…in advance of Dow 27,000.

And now, nearly eight months later, Dow 27,000 remains elusive.  After pulling back in October of last year, the Dow made another run at it last month.  But, again, fell short.  Hence, the hats remain stowed away in a box in the back of a broom closet.

By our estimation, that’s where the Dow 27,000 hats will stay until about 2050 – or even later.  Moreover, when it’s finally time to pull them out, we suspect Wall Street cheerleading will have long since gone out of style.  What a waste of perfectly good hats.

But fear not.  All’s not lost…

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‘Workarounds’ Galore: How Real Americans Deal with ‘Real’ Inflation, by Bill Rice Jr.

Switching from an item or service to a lower-priced item or service doesn’t register in the inflation statistics, yet Americans increasingly resort to such workarounds because their dollars don’t go as far as they used to. From Bill Rice Jr. at oftwominds.com:

t’s the list of workarounds – always growing, never shrinking – that’s telling us the true story of inflation in America.

Today I’m publishing a guest post by writer Bill Rice, Jr., on “real inflation,” which as everyone knows far exceeds the “official” inflation rate of 2%. Bill and I corresponded earlier this year when he was researching and writing his recent article What Does Your Toilet Paper Have to Do With Inflation? Manufacturers have been engaging in “shrinkflation,” leaving consumers paying more for less, but stealthily. (The American Conservative magazine)

Bill’s extensive list of links (50 Dots…) follows his essay. Thank you, Bill, for sharing your insightful research with Of Two Minds readers.

‘Workarounds’ galore: How real Americans deal with ‘real’ inflation By Bill Rice, Jr.

While working on a story on inflation and shrinkflation, I quickly zeroed in on the concept of “workarounds” as an alternative, perhaps superior, way to gauge the true state of our economy. I define workarounds as the changes individuals or families (or businesses) must make in their daily living to adapt to a world of rising prices. If nothing else, these examples, taken in the aggregate, challenge the conventional wisdom that inflation is “low” or “contained,” or that the economy is just fine, thank you.

As decades have passed, the list of workarounds families have utilized to deal with rising prices has rapidly grown.

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The US Government Debt Crisis, by Alasdair Macleod

There’s no way out if the debt hole the US government has dug itself. From Alasdair Macleod at goldmoney.com:

This article explains why the US Government is ensnared in a debt trap from which there is no escape. Its finances are spiralling out of control. In the context of a rapidly slowing global economy, the budget deficit can only be financed by QE and bank credit expansion. Do not draw comfort from trade protectionism: it will not prevent the trade deficit increasing at the expense of domestic production, unless you believe there will be an unlikely resurgence in personal saving rates. We can now begin to see how the debt crisis will evolve, leading to the destruction of the dollar.

Introduction

At the time of writing (Thursday April 24) bond yields are crashing, the euro has broken down against the dollar and equities are hitting new highs. Obviously, equities are taking their queue from bonds. But bond yields are crashing because the global economy is sending some very worrying signals. Equity investors will be hoping monetary easing (which they now fully expect) will kick the can down the road once again and economies will continue to bubble along. They are ignoring some very basic economic facts…

Regular readers of my Insight articles will be aware of strong indications that the expansionary phase of the credit cycle is now over, and that we at grave risk of falling headlong into a global credit and systemic crisis. The underlying condition is that economic actors and their bankers accustomed to credit expansion are beginning to realise the assumptions behind their borrowing commitments earlier in the credit cycle were incorrect.

That’s why it is a credit cycle. It is driven by prior credit expansion which corrals all producers into acting in an expansionary manner at the same time. Random activity, the condition of a true laissez-faire economy, ceases. Instead, credit conditions act on profit-seeking businesses in a state-managed context. Entrepreneurs take the availability of subsidised credit to be a profit-making opportunity. The same cannot be said of governments because they do not seek profits, only revenue.

If a government acts responsibly it should never have to borrow, except perhaps in an emergency, such as to defend the country against invasion. The evolution into unbacked fiat currencies has changed all that by permitting governments to finance themselves through the printing press.

There is only one way a government funds the excess of spending over tax revenue without it being inflationary, and that is to borrow money from savers. There is a downside to this. The government bids for existing savings, including those held in pension and insurance funds, diverting them from other borrowers. In the 1980s this was described as “crowding out” other borrowers and had the effect of increasing interest rates to the point where these other borrowers stop borrowing. In the post-war years, this has been the consequence of spendthrift socialism.

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(Government) Spending is Theft, by Ron Paul

All those dollars government spends come from somewhere, and government’s only revenues are explicit taxes and inflation taxes. From Ron Paul at ronpaulinstitute.org:

Imagine being robbed every time you receive a paycheck, but once a year getting some of the stolen money back because the thieves took more than they intended. Would you be happy about it? If you are like most Americans the answer is yes, since most people are grateful when they get a partial “refund” of the taxes the government withheld from their paychecks. A tax refund means more taxes were taken out of your paycheck than you legally owed — in other words, thanks to withholding you gave the government a no-interest loan.

Withholding, which was supposed to be a “temporary measure” to help finance World War II, is an insidious way of minimizing the pain of, and thus opposition to, taxes. Because people never actually get possession of the money the government withholds, they don’t miss it. Imagine how great public demand for an end to the income tax would be if every month we had to write a check to the IRS.

This year, most Americans are owing less in taxes because of last year’s tax reform. Unfortunately, the benefits of the tax cut are going to be temporary because Congress and the President refuse to cut spending. In the two years that Republicans controlled both houses of Congress and the White House, federal spending increased by approximately 7.5 percent, or around $300 billion. Thanks to the GOP’s spending spree the federal deficit will reach $1 trillion this year, while the federal debt is now over $22 trillion dollars. This does not count the almost $100 trillion in unfunded liabilities which includes over $70 trillion in future Social Security and Medicare benefits.

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How Fascism Comes to America, by Doug Casey

How does fascism come to America? Gradually, and then rapidly. From Doug Casey at internationalman.com:

I think there are really only two good reasons for having a significant amount of money: To maintain a high standard of living and to ensure your personal freedom. There are other, lesser reasons, of course, including: to prove you can do it, to compensate for failings in other things, to impress others, to leave a legacy, to help perpetuate your genes, or maybe because you just can’t think of something better to do with your time.

But I’ll put aside those lesser motives, which I tend to view as psychological foibles. Basically, money gives you the freedom to do what you’d like – and when, how, and with whom you prefer to do it. Money allows you to have things and do things and can even assist you to be something you want to be. Unfortunately, money is a chimera in today’s world and will wind up savaging billions in the years to come.

As you know, I believe we’re well into what I call The Greater Depression. A lot of people believe we’re in a recovery now; I think, from a long-term point of view, that is total nonsense. We’re just in the eye of the hurricane and will soon be moving into the other side of the storm. But it will be far more severe than what we saw in 2008 and 2009 and will last quite a while – perhaps for many years, depending on how stupidly the government acts.

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Will Policy Makers Turn a Global Economic Slowdown Into a Crisis? by Daniel Lacalle

This is a far better description of how the economy actually works than anything you’d get out of economics textbooks. From Daniel Lacalle at mises.org:

The recent macroeconomic data of the leading economies point to a widespread slowdown. What is more concerning is not just a logical moderation in the path of growth, but the acceleration in the weakening of economies that were supposed to be stronger and healthier. It is even more concerning that this aggressive worsening of key leading indicators in China, the EU, and most emerging economies happens at the peak of the largest monetary and fiscal stimulus in decades.

It is easy to blame this widespread weakening on political headlines, trade wars, and — of course —Trump, but it would be disingenuous to believe those are the real factors behind the negative economic surprise.

The pace of global recoveries since 1975 has been slower and weaker, consistently, according to the OECD. Recoveries take longer and happen slower. At the same time, periods of crisis are less aggressive albeit more frequent than prior to 1975.  Another interesting evidence of the crises and recoveries since 1975 is that almost all economies end the recession period with more debt than before.

These factors are all concerning, but the evidence also shows that economic progress has continued regardless and that the main factors of wellbeing have improved dramatically. I had the opportunity of meeting Johan Norberg, author of “Progress” and we discussed all the positive elements we have seen in the past decades. In the same period, from 1975 to 2018, extreme poverty has been reduced to all-time lows. Hunger, poverty, illiteracy,  child mortality… all those terrible problems have been dramatically reduced to the lowest levels in history. That is the positive.

However, recognizing the positive is important, but ignoring the risks is dangerous. Global debt has ballooned to all-time highs, more than three times the world GDP. For those elements of progress to continue improving, we must stop the race of perverse incentives created by the wrong analysis of the origin of crises and the solutions that are often proposed in mainstream economics and politics.  I agree with Johan Norberg that the two main factors that have driven the phenomenal progress we have seen are free markets and openness. The freedom to innovate, experiment, create and share must come with the right incentives.

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