Inflation Is Part Of The Plan

Martin Hutchinson writes: Forget about lost decades. Forecasts that we'll be turning Japanese couldn't be further from the truth.

It's simple, really. Deflation is not in the interest of anybody in power, so it's very unlikely to happen.

The U.S. Federal Reserve's policy move to target inflation last week just re-emphasizes this point.

For savers and those living on fixed incomes, deflation would be a very good thing indeed.

Their income would gradually increase in real terms, and their savings would become steadily more valuable. Holders of Treasury bonds would also gain mightily from deflation.

The People's Bank of China can't vote in the U.S. (yet!), Ron Paul is not president, and there is not an organized and powerful savers' political movement. After all, this is not Germany or Japan!

Meanwhile, in the real world, the U.S. government is spending far more than it takes in, and its debt is rising to dangerous levels. This has been happening on a bipartisan basis since at least 2001.

The Tea Party may have elected a Congress committed to reducing spending, but none of the battles of 2011 actually reduced spending - they just slowed the rate of growth somewhat.

Since much of the debt is borrowed long-term at low interest rates, the best way to reduce its burden on future generations is to encourage inflation.

Savers may lose out on the deal, but to those in Washington, the idea of inflating our way out of debt is irresistible.

Of course, sometimes we can depend on an independent central bank to resist this temptation. But at present, Fed Chairman Ben Bernanke is committed to near-zero interest rates in his fight against deflation.

Now you don't have to be a conspiracy theorist to realize that, if the power structure is committed to at least moderate inflation, inflation is what you are going to get.

One of the more reliable signs of future inflation, at least in the medium term, is monetary growth.

In the last year, the St. Louis Fed's Money of Zero Maturity, the nearest counterpart to the old broad-money M3, has risen by 9.5%, while the slightly narrower M2 has risen by 9.8%.

As for the monetary base, which monetary theory tells us is supposed to be the most accurate inflation indicator of them all, that's up 29.9%. What's more, there is no sign of M2 and M3 slowing down.

If you don't believe me, you can discover these facts by clicking here and seeing for yourself from the St Louis Fed's weekly data.

This 9% to 10% increase in the money supply is compared to a current rise in nominal gross domestic product (GDP) of about 5%. (That's including some acceleration in 2011's fourth quarter over earlier in the year.)

Since monetary "velocity" tends to increase continually with modern payment systems, that is far more money growth than you need to currently run the economy.

So the real puzzle is not whether we will get inflation, but why we don't have it now.

After all, interest rates have been near zero for more than three years now, and the money supply was rising faster than the economy for many years before that.

The main factor suppressing inflation since the middle 1990s has been the Internet and modern telecoms. These have made it much easier to source products in low-wage countries.

So today we buy our clothes from China, whereas 20 years ago many of these same items were made in the U.S. The result has been about a 20% decline in apparel prices since their peak in 1993.

With this effect on consumer goods, and Moore's Law making technology-based goods cheaper and better all the time, even the rise in oil prices from about $10 per barrel in 1998 to about $100 today has been easily absorbed.

So the extra money that is sloshing around the world has pushed up commodity and energy prices, but has had much less of an effect on consumer prices.

However, there are signs that the price-suppressing effect of emerging markets manufacturing is coming to an end.

Chinese wages are rising rapidly, the currency has risen against the dollar, and China's balance of trade surplus has almost disappeared.

In fact, consumer price inflation worldwide began trending up in 2011. Now that commodity prices are rising again - as you would expect with expansionary money policy worldwide -2012 inflation pressures are beginning to build.

And now even Ben Bernanke finally weighed in last week as he tipped the scales even more decisively towards inflation.

By promising to keep interest rates at zero until the end of 2014, Bernanke has insured that interest rates almost certainly will remain below the inflation rate for the next three years.

That alone will cause inflation to rise, so we can expect the upward pressure on prices to continue.

So forget about deflation, since it will be vigorously resisted by the Obama Administration, Congress, and the Bernanke-led Fed. Inflation will keep heading higher from here.

In fact, by Election Day in November, inflation could be at troubling levels.

2 posted on 01/31/2012 5:19:06 PM PST by citizen (It's time to decide, folks. Who do you want as president? 4 More of the fascist Zero or Romney?)

Apparently, inflation only exists if it is reported. We’ve had massive inflation in food, for example; little of it shows up in the CPI.

So if they don’t report inflation, it does not exist. Just like the death of millions of soldiers in WWI.

Yup.

If they don't report that the banks are insolvent you don't know it and it doesn't matter, eh? (The government just prints and sends them more money...everything is okay.)

Good article but the author is apparently being duped by the fudged government inflation stats.

The real inflation rate:

http://www.shadowstats.com/alternate_data/inflation-charts

Dear NumbNuts at the Market Oracle, either you are very young or very naive and stupid. Inflation has been the Game Plan since August 15, 1971 when President Nixon Closed the Gold Window, thereby allowing the Commercial Banks through the Non-Federal Non-Reserve System to PRINT MONEY WILLY NILLY without ANY CONSTRAINTS whatsoever. I have carried 2 Silver Dollars in my pocket since that time that received for 2 paper Federal Reserve Notes, today it takes 35 Paper Federal Reserve Notes to purchase 1 Real Dollar in Legal Tender.

We've been totally conned into thinking of everything in terms of its price in dollars, and it's going to be the end of us.

What is important is not the price of goods and services expressed in dollars, but expressed in hard commodities. For example, if you look at the value of the stock market in dollars it seems to be, after a fashion, maintaining its value.

However, Google the term "Dow in gold dollars" (aka "DIG$"), and your eyes will be opened! .. In fact, here it is - this shows how the value of the DOW has changed in terms of something of constant value:

I just refi’d @ 3.75 for 30 yrs with no points.

I plan to repay with Baraqqi/Bernanke minibucks.

That chart really shows how lame an investment the stock market has been since 2000. (12 years now)

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