Janet Yellen Is Wrong About Inflation…

Janet Yellen has dismissed rising inflation figures. They were "noisy," she said.

She didn’t like the sound of them. Valid numbers are harmonious. Invalid ones are cacophonous.

But after so many years of listening to such loud noise coming from her own colleagues, poor Ms. Yellen may be tone deaf. At least, that is one explanation for her nonchalance toward the threat of inflation.

As we pointed out yesterday, the Titanic-like US markets glide over the smoothest seas in nearly a decade. The squalls and swells seem to have disappeared.

The VIX, which measures the market’s expectation of 30-day volatility, shows little fear. Portfolio protection is as cheap as it’s been in the last quarter century.

The S&P 500 has not moved as much as 1% on any trading day in the last 45. Investors no longer lock their doors or even put on their seat belts.

Financial Grotesquerie

All the while, the US Federal Reserve pushes down interest rates. With so much cheap money available, people find ways to put it to use. Speculations… lifestyle enhancements… silly and worthless projects.

One of the main uses of corporate debt has been stock buybacks. Even startups are buying their own stock as soon as the post-IPO lock-up period is over.

Our jaw drops at the thought of it. A startup that can’t think of anything better to do with cash than buy its own shares?

But if you aren’t staggered by that, here’s another example of the financial grotesquerie that has become so common: Central banks are speculating on stocks, too.

The whole hullaballoo is so remarkably cockeyed, it deserves further commentary.

The banking cartel – with special permission from government – offers free money to choice borrowers. Corporations borrow this free money and use it to buy their own shares and cancel them (making outstanding shares more valuable).

And to prop up the market even more, central banks – searching for the yield they’ve denied savers (and themselves) on their bond portfolios – buy stocks.

Who can be opposed to it?

More Inflation = Less Growth

With so much cash pushing them forward… and the soft cushion of central bank guarantees trailing behind them… is it any wonder stocks move higher and higher?

Still, there are always a few things that could wreck this program. China could collapse in a crisis. War could breakout in the Middle East or in Eastern Europe. Central banks might lose control of interest rates – at the long end of the curve. Bonds could dive.

But the most obvious risk is money itself. Money that comes "out of thin air" might someday go back from whence it came. The US dollar could fall against foreign currencies. Or it could fall against the goods and services it is called up to buy. Either way, it could send the sleek touring car into a ditch.

That is why the measure of inflation is so important. If consumer prices are rising faster than the authorities say, it means two important things:

First, real GDP is not growing. Real GDP growth is adjusted for inflation. More inflation, less real growth.

Second, the real cost of borrowing is much lower than we think. If inflation is higher, the real interest rate is lower.

So what’s the story?

The Federal Reserve says 2% is the right number for consumer price inflation. MIT’s (more accurate) Billion Prices Project puts the annual rate of consumer price rise at 3.91%.

And since 2000, Washington says consumer prices are up 39%. Trouble is we can’t find any significant price that is up so little.

Crude oil is up 314%. A dozen eggs rose 106%. College tuition is up 68%. The typical house has risen 50%.

Is this noise too?


Bill Bonner
for Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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