Printing Money Causes the Wrong Kind of Inflation

The Great Correction…still in business…

The latest news suggests that we’ve been right all along. Housing starts are down a surprising 12% – with house prices still soft or falling in most areas.

Jobs? Forget it. Joblessness continues to be a major headache…with no significant relief in sight.

And both consumer and producer prices are flatter than expected. In fact, the core CPI reading is at a record low. For all the talk of ‘inflation’ – there isn’t any. Ben Bernanke is right, at least about ‘core’ inflation. Prices for people who neither eat, nor travel, nor heat their houses are flat.

Yes, dear reader. We’re in a great correction. We just don’t know what it intends to correct. Not yet.

‘US inflation moves close to zero,’ says the BBC.

And here’s Bloomberg, with the details:

The cost of living in the US probably rose for a fourth month in October, led by higher gasoline and food prices that aren’t filtering through to other goods and services, economists said before reports today.

The consumer-price index increased 0.3 percent after a 0.1 percent gain the prior month, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. Excluding food and fuel, so-called core costs may have increased 0.7 percent from October 2009, matching a record low. Another report may show housing starts last month fell to the lowest level since July.

We were watching the descent of consumer prices this past spring. It looked like the CPI would approach zero by the end of the summer…and then head into negative territory.

But then, with all the excitement around QE, we kind of lost track. The feds were printing money intentionally, right out-in-the-open and without even a ‘sorry’ or an ‘excuse me.’

Everyone knew it was ‘inflationary.’ And it was – to the extent that it inflated the monetary base. But it didn’t inflate consumer prices. Why not?

‘It’s the economy, stupid.’

When an economy is de-leveraging you get a phenomenon that John Maynard Keynes described as ‘pushing on a string.’ You can push money into the system. But the other end of the string…where you find consumer prices…doesn’t move.

And now, it looks like Keynes was right. The Fed is pushing in $600 billion. Consumer price increases are still going down.

So we might be tempted to think that the feds can push on the string all they want; they’ll never get consumer prices to rise.

But it’s not that simple. It may be true that you can’t increase consumer prices simply by putting money into the banking system. But the Fed is now going one step further. It’s funding the US budget deficit – practically the whole thing. That frees all the money that would have gone into US Treasuries to go elsewhere. Where? Darned if we know.

But just look at cotton prices. And gold. And farmland in Iowa and Indiana. Farmland yields (not crop yields…financial yields, from renting out the land) are at an extreme low. Prices have been bid up – thanks to record low interest rates and record high agricultural output prices.

And look at prices of Indian stocks. They’re selling near record levels too.

All over the world, prices are going up – especially in emerging markets, where economies are growing fast.

But in America, consumer prices – when you take out food and energy – are going nowhere.

Just what you’d expect in this strange correction.

And more thoughts…

As you know, the White House put together a bi-partisan commission to figure out how to get the deficit down. The group made what sounded like sensible proposals. Cut this…trim that. But even if the proposals were accepted in their entirety – which they won’t be – only about a third of the deficit would be eliminated.

In a nutshell – which is where these things belong – the feds spend about one out of every four GDP dollars in the US. They collect, however, only about one in every five or six dollars worth of GDP. That is a pretty big gap – nearly 10% of total GDP.

If you’re going to cut that kind of a deficit you’re going to need more than a bi-partisan commission. You’re going to need a catastrophe.

Heck, we could cut the budget in half an hour. We’d just get rid of everything that was not part of the original plan – that is, everything that was not necessary for the defense of the country or the maintenance of law and order. We’d have a huge surplus overnight…and lynch mob by daybreak.

Deficits are a big problem. They’re not going away. We’re not going to ‘grow our way out’ of them. Left unchecked, the country will go broke. So you can expect a lot of pantywaist proposals and pussyfooting around on the subject in the years ahead. And then the country will go broke.

The big item is health care. It seems to grow uncontrollably. Americans don’t want to give it up.

We went to the doctor today. We paid $220, in cash. That was the end of it.

‘Come back next year,’ she said.

Seems controllable enough to us. If we don’t have $220 we won’t go back.

But Americans seem to like going to doctors and hospitals…especially if someone else pays for it.

*** Here’s an example of what’s ahead. Bloomberg reports:

Nov. 17 (Bloomberg) – Alice Rivlin, a member of President Barack Obama’s deficit-reduction commission, is trying to stir a debate over imposing a national sales tax to reduce the deficit as part of a plan that includes steep Medicare cuts and a one-year payroll-tax holiday to spark economic growth.

Rivlin, as part of a separate 19-member group sponsored by the Bipartisan Policy Center in Washington, offered a plan for a 6.5 percent sales tax. Her recommendation comes as the president’s panel prepares a Dec. 1 report on options for Congress to trim the national debt.

On Social Security, instead of raising the retirement age, as would the Bowles-Simpson plan, the Rivlin group proposes a gradual increase in the amount of wages subject to payroll taxes, currently $106,800, over the next 38 years to cover 90 percent of all wages. It would also trim the annual cost-of- living adjustments and reduce the growth in benefits for the top 25 percent of beneficiaries.

Targeting domestic discretionary spending cuts alone would require eliminating almost everything from law enforcement and border security to education and food and drug inspection, according to the policy center.
The nation also can’t grow its way out of the deficit, the group’s report says. Just to stabilize the debt at 60 percent of gross domestic product, the economy would have to grow at a sustained rate of more than 6 percent a year for at least the next 10 years, it says. The economy hasn’t grown by more than 4.4 percent in any decade since World War II.

Finally, the problem also can’t be solved simply by boosting taxes on wealthy Americans, the report says. Reducing deficits to manageable levels by the end of the decade would require raising rates on the top two income brackets to 86 percent and 91 percent, the report says.


Bill Bonner,
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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$220 for a doctor’s visit? Good grief, I hope that wasn’t your standard “I have a cold and need a doctor’s certificate” appointment. Why does it cost so much?

Time to order over the internet and self medicate?

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