The Federal Reserve has made intentional obfuscation an art form. From Simon Black at sovereignman.com:
More than twenty years ago when I was a young Army intelligence officer fresh out of the academy, my commander summoned me to his office one afternoon because he had a ‘special mission’ for me.
I was beyond excited.
My assumption was that it would be a clandestine assignment to lead one of our unit’s counterintelligence teams in the Middle East. Or perhaps it would be temporary duty as an aide to the commanding general who would be visiting soon.
It was none of the above.
Instead, my commander looked at me and said, “Lieutenant, I need you to plan our unit’s long-term budget for the next ten years, and I want it on my desk this afternoon.”
Aside from the obvious disappointment of being handed such a lame assignment, I was dumbfounded that they would entrust something like budget planning to a 22-year old with zero experience in the matter.
But the task took me all of 15 minutes to complete. I looked at what our unit’s current budget was for that fiscal year… and then I spent a few minutes researching the inflation rate.
According to Yahoo (yes, this was so long ago that people still primarily used Yahoo instead of Google), the projected inflation rate was 2%.
There will be maybe two people who are short everything when the bubble pops, and they’ll be the two richest people on the planet. Michael Burry may be one of them. From Tyler Durden at zerohedge.com:
Earlier this year, none other than Michael ‘Big Short’ Burry confirmed BofA’s greatest fears, as he picked up on the theme of Weimar Germany and specifically its hyperinflation, as the blueprint for what comes next in a lengthy tweetstorm cribbing generously from Parsson’s seminal work, warning that:
“The US government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket.”
“The life of the inflation in its ripening stage was a paradox which had its own unmistakable characteristics. One was the great wealth, at least of those favored by the boom..Many great fortunes sprang up overnight…The cities, had an aimless and wanton youth”
“Prices in Germany were steady, and both business and the stock market were booming. The exchange rate of the mark against the dollar and other currencies actually rose for a time, and the mark was momentarily the strongest currency in the world” on inflation’s eve.
“Side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter. The crime rate soared.”
“Accounts of the time tell of a progressive demoralization which crept over the common people, compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich.”
“Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out.”
Inflation is much worse than the government’s statistics and its not going to be transitory. From the I & I Editorial Board at issuesinsights.com:
Both the out-of-touch Biden administration and our betters at the Federal Reserve Board continue to assert that inflation’s no big thing. They’re right. It’s not, unless you work for a living. Then it’s a very big thing indeed.
We were told by all the best “experts” that inflation is ephemeral, a mere blip. The Fed keeps telling us the recent jump in prices is “transient.” Democrats and many of their media friends continue to insist it’s not an issue. Just keep spending, they say. Stimulus!
But calling the recent burst in inflation “transient” or any other such euphemism to suggest it’s like a brief summer cold is not exactly accurate. In fact, it’s wrong.
The recent surge in inflation isn’t likely to go away anytime soon. Indeed, it’s even worse than the numbers now indicate.
In the most recent Consumer Price Index data, year-over-year inflation hit a tad above 5%. That’s the biggest spurt since 2008. In April, it hit 3.6%, nearly twice the recent average. Meanwhile, core prices (excluding volatile food and energy) are rising at their highest pace since 1992, when then-Fed chief Alan Greenspan was forced to nearly double interest rates to kill what many feared would be a bad bout of inflation.
This is no coincidence. In May, real average hourly earnings fell 2.8%, even as employees worked more hours. Let that sink in: Those earning an hourly wage actually took home less pay for working more.
As inflation rises, real wages — that is, earnings adjusted for inflation — inevitably go down. Just as in the 1970s, low-skilled, less-trained and less-schooled workers can’t keep up. Their wages fall behind. That’s the real danger here.
Chinese imports have long kept a lid on US prices, but that’s fading. From MN Gordon at economicprism.com:
Jerome Powell might be done as a useful Federal Reserve Chairman. Not that Fed Chairs provide a use that’s of any real value. They mainly excel at destroying the wealth of wage earners and savers for the benefit of member banks.
But as Powell loses a grip on price inflation the business of supplying credit at a fixed rate of return becomes less fruitful. Consumer price inflation, as measured by the consumer price index (CPI), is rising at an annual rate of 4.2 percent. That’s well above interest rate of a 30 year fixed mortgage, which is currently 3.1 percent.
It doesn’t take much imagination to foresee a CPI over 6 percent. At that rate of price inflation, what good to the bank is a home loan that’s only paying 3 percent? This, among other reasons, is why Jay Powell is toast.
Powell, no doubt, has been going along to get along since long before he took over the reins of the Federal Reserve. He’s always done what everyone asked. He’s rapidly expanded the Fed’s balance sheet to fund massive government deficits and backstop the mortgage market.
Of course, he’s not alone. The central planners in the U.S. and abroad manufactured this price inflation through decades of mass money printing, credit market intervention, and currency devaluations. Anyone with half a brain knew the day would come when the glut of money and credit would jack up consumer prices. Quite frankly, what took so long?
This is a complex question to answer. One that’s much to intricate for us to comprehend. Still, today we attempt to unfold one wrinkle of the complexity:
How the delicate trade relationship between the U.S. and China suppressed consumer prices in the U.S. over the last three decades…and how that delicate relationship has reversed to exasperate rising consumer prices going forward.
Inflation is obvious to anybody who buys things. From Mark Hendrickson at mises.org:
To most people, “inflation” signifies widespread rising prices. Economists have long argued, as a matter of technical accuracy, that “inflation” denotes an increasing money supply. Frankly, though, most people don’t care what happens to the supply of money, but they care a lot about the prices they pay, so I’ll focus primarily on the numerous rapidly rising prices Americans are paying today.
Following are several examples of the current inflation:
Copper prices have risen to an all-time high. Steel, too, recently traded at prices 35% above the previous all-time set in 2008. Perhaps most famously, the price of lumber has nearly quadrupled since the beginning of 2020 and has nearly doubled just since January.
Naturally, with raw materials prices soaring, prices of manufactured goods are jumping, too. That is especially noticeable in the housing market, where the median price of existing homes rose to $329,100 in March—a whopping 17.2% increase from a year earlier.
The cost of driving is soaring, too. According to J.D. Power, cited in The Wall Street Journal, the average used car price has risen 16.7% and new car prices have risen 9.6% since January.
Many people who have made a lot of money in cryptocurrencies would vigorously resist the notion that their gains are fueled by the same monetary inflation that’s fueling gains in many other speculative markets. From David Stockman at davidstockmanscontracorner via lewrockwell.com:
Goodness gracious, me! Is this the ultimate case of the pot-calling-the-kettle-black or what?
If there were ever a pure play in the great fraud of fiat, Elon Musk is it. Yet here he is electing to go with crypto instead.
The true battle is between fiat & crypto. On balance, I support the latter.
Actually, there is a seminal picture in these few words and it amounts to this: Crypto currencies are not money, they are the latest boiling hot speculative asset class that, ironically, is just another bastard spawn of the central bank money-printers. They are not an alternative to bad central bank money; they’re are an issue from its own loins.
It’s blatantly evident that neither Bitcoin nor any of the other swarming herd of cryptos are a store of value or a medium of exchange. During the last 48 months, for example, the value of Bitcoin has changed on a monthly basis as follows.
Monthly Value Change:
Gain of 40% or more: 7 months;
Gain of 20% or more: 17 months;
Gain of 10% or more: 21 months;
Loss of 20% or more: 5 months;
loss of 5% or more: 19 months;
Loss of 2% or more: 22 months;
As to a means of exchange for anything less than a $125,000 Tesla (for a time), a good old fiat wire transfer, check or chunk of cash has a lower transaction cost as a percent of purchase price.
Big price increases are always waved off as transitory . . . until they’re not. From Stephen Roach at project-syndicate.org:
The US Federal Reserve is insisting that recent increases in the price of food, construction materials, used cars, personal health products, gasoline, and appliances reflect transitory factors that will quickly fade with post-pandemic normalization. But what if they are a harbinger, not a “noisy” deviation?
NEW HAVEN – Memories can be tricky. I have long been haunted by the inflation of the 1970s. Fifty years ago, when I had just started my career as a professional economist at the Federal Reserve, I was witness to the birth of the Great Inflation as a Fed insider. That left me with the recurring nightmares of a financial post-traumatic stress disorder. The bad dreams are back.
They center on the Fed’s legendary chairman at the time, Arthur F. Burns, who brought a unique perspective to the US central bank as an expert on the business cycle. In 1946, he co-authored the definitive treatise on the seemingly rhythmic ups and downs of the US economy back to the mid-nineteenth century. Working for him was intimidating, especially for someone in my position. I had been tasked with formal weekly briefings on the very subjects Burns knew best. He used that knowledge to poke holes in staff presentations. I found quickly that you couldn’t tell him anything. Yet Burns, who ruled the Fed with an iron fist, lacked an analytical framework to assess the interplay between the real economy and inflation, and how that relationship was connected to monetary policy. As a data junkie, he was prone to segment the problems he faced as a policymaker, especially the emergence of what would soon become the Great Inflation. Like business cycles, he believed price trends were heavily influenced by idiosyncratic, or exogenous, factors – “noise” that had nothing to do with monetary policy.
So-called supply bottlenecks are an effect of monetary inflation, not a cause. From Daniel Lacalle at dlacalle.com:
“The constant refinancing of debt from companies of doubtful viability also leads to the perpetuation of overcapacity because a key process for economic progress, such as creative destruction, is eliminated or limited”.
One of the arguments most used by central banks regarding the increase in inflation is that it is because of bottlenecks and that the recovery in demand has created tensions in the supply chain. However, the evidence shows us that most commodities have risen in tandem in an environment of a wide level of spare capacity and even overcapacity.
If we analyse the utilization ratio of industrial and manufacturing productive capacity, we see that countries such as Russia (61%) or India (66%) are at a clear level of structural overcapacity and a utilization of productive capacity that remains still several points lower than that of February 2020. In China it is 77%, still far from the 78% pre-pandemic level. In fact, if we analyse the main G20 countries and the largest industrial and commodity suppliers in the world, we see that none of them have levels of utilization of productive capacity higher than 85%. There is ample available capacity all over the world.
Inflation is not a transport chain problem either. The excess capacity in the shipping and transport sector is more than documented and in 2020 new capacity was added in both freights and air transport. Ships delivered in 2020 added 1.2 million twenty-foot equivalent units (TEUs) of capacity, with 569,000 TEUs of capacity on ultra large container vessels (ULCV), ships with capacity for more than 18,000 TEUs, according to Drewry, a shipping consulting firm. International Air Transport Association (IATA) chief economist Brian Pearce also warned that the problem of capacity was increasing in calendar year 2020.
Below we look at the dark corner in which the Fed has placed themselves and investors: A one-way path toward tanking markets or crippling inflation.
Alas: Pick your poison.
For us, the antidote is as good as gold.
More Inflation Signs
Stocks continue to gyrate nervously as the Fed continues to behave like a cornered animal trying to downplay inflation risks while paradoxically supporting a mega “everything bubble” with pro-inflationary tools.
April’s “official” CPI inflation number climbed by 4.2%, the fastest climb since 2008 and 2X the Fed’s mandate.
The Fed is claiming that’s because because COVID’s 2020 deflationary trends made such relative inflationary increases “expected,” “temporary,” and soon to be “contained.”
We’ve heard those words before…
Meanwhile, US producer prices surged by 6.2% for the same month, the highest move since 2010, as core inflation, which excludes energy and food, saw its highest move since 1981.
As for energy and food, we’ve already made it painfully clear that prices on everything from ethanol to canola and corn, or from milk, chicken wings and lean pork to beef and coffee are skyrocketing by high double digits.
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