Inflation

All posts tagged Inflation

To shed more light (well actually cast more gloom) on last week’s inflation post here’s an excerpt of an email from Chuck Butler, President of Everbank:

The Fed has turned its back on inflation folks… And here’s some items that you won’t see in the CPI data…
1. Grade-A Large Eggs – Dec. 06 $1.54 a dozen… Dec. 07 $2.10, and current $2.73 a dozen… That’s up 36% in a year!
2. White Bread – Dec. 06 $1.13 a loaf… Dec. 07 $1.28 a loaf, and current $1.62 a loaf… That’s up 12.6% in a year!
3. Whole Milk – Dec. 06 $3 a gallon… Dec. 07 $3.87 a gallon, and current $3.93 a gallon … That’s up 29% in a year!
4. Fresh Whole Chicken- Dec. 06 $1.06 per pound… Dec. 07 $1.17 per pound, and current $1.19 per pound… That’s up 10.3% in a year!

These are the things I talk about all the time, in that an individual can feel the inflation eating away at this wallet… This is just some simple food items… I’m not even talking about things like: Tuition… Insurance… Medical… Movie tickets… And so on…

Your Federal Reserve has turned their backs on inflation eating your wallet folks… Isn’t that SAD?

And here’s some info on inflation in New York City. This data is from late last year.

[Inflation stats for New York City 2007]
Regardless of what the government tells you, inflation is running way more than 4% a year. Not only are they in denial about inflation, they also keep increasing the Money Supply (they’re printing more dollars which is making each dollar in circulation worth less) under the pretext of providing liquidity to prevent a depression-like scenario. I’m under the impression that the US government is bankrupt and doesn’t have any intention of meeting its nearly $60 Trillion worth of future debt obligations. If they can stave off insolvency through liquidity, that’ll be some real magic!

Today’s post is an excerpt from a letter by Martin Hutchinson. He’s done a great job of explaining why interest are so low and why inflation will probably run 10% pretty soon.

Back in the early 1990s, the Fed and its chairman – Alan Greenspan – had a problem. And it was a big one. The central bank tried to maintain a low rate of money supply growth, as Fed predecessor Paul Volcker had pioneered, but this was causing problems. Even though inflation appeared under control, economic growth remained stuck in low gear – even long after the nadir of the 1990 recession. President George H.W. Bush was seriously annoyed, as he had right to be: After all, that slow economic growth probably cost him the 1992 election.

Accordingly, Greenspan in 1993 abandoned monetary targeting, asserting that for some unspecified reason [but one that was doubtless highly technological] money supply aggregates had become inaccurate, so it was better to target inflation directly. However, inflation showed signs of turning up, so in 1994, the Fed was forced to tighten again, slowing growth once more. No fun at all.

The solution was to move the goalposts. The Bureau of Labor Statistics, which measures inflation, suddenly found a great interest in “hedonic pricing” – essentially an assessment of the pleasure people gain from the goods and services they consume.

The idea behind this is quite simple – essentially that the satisfaction derived from a particular good does not remain the same if the quality increases through better technology. Shouldn’t that quality increase be counted as the equivalent of a price decrease?

The most exciting application of this premise was a concept called “Moore’s Law” in the high-tech sector, where microprocessor power was doubling every two years or so. If you pretended that this doubling in chip speeds also doubled “hedonic” output, you could also pretend that the price had been halved. If you then rebased all weightings on the 1st of January of each New Year, you could then take the effect of these repeated “halvings” in tech-sector hedonic prices. If each halving took the tech sector from 5% to 2.5% of the economy, then after 10 years you would have halved prices over fully 50% of the economy.

Doing this is completely spurious – for one thing, it ignores the negative hedonic effects to consumers of such nuisances as customer call centers and automated telephone systems – but it has allowed the BLS to report inflation at about 0.8% to 1% less than it otherwise would have been in every year since 1995.

Conversely, since inflation is lower, using that artificially lower number to get a “real” economic growth figure will produce a growth figure that is artificially higher. And that’s why we had the so-called “boom” of the late 1990s, and the apparent boom since 2000 – even though neither really seemed to make consumers any richer.

Needless to say, politicians love this stuff! It enables them to trumpet the new, higher growth rates and the new, lower inflation rates every time they run for re-election. It also makes improvements in the U.S. economy look much better than its European Union and Asia counterparts, which haven’t adopted “hedonic” pricing.

But the game may finally be up. Even hedonic consumer price inflation is running at 4.1% in the last 12 months, so with interest rates at 3.5% for the benchmark Federal Funds Rate and about 3.6% for 10-year Treasuries, interest rates are now significantly below the inflation rate.

That means savers are getting an even worse deal than they usually get.

It also means inflation is almost bound to accelerate. By definition, if borrowing costs are less than zero, people will find ways to borrow and will waste the money they have borrowed. Unless the BLS finds some new trick to avoid reporting inflation, it is likely to rise rapidly towards 10% or so in the months ahead.


Whats the best way to hedge against this?

Hutchinson suggests the following:

1. Avoid TIPS (Treasury Inflation Proofed Securities).
2. Consider investing in Rydex Inverse Government Long Bond Strategy C Fund (RYJCX) is a fund designed to move inversely to Treasury bonds.
3. Buy gold.
4. Jump on Japan by buying the ETF JSC, which consists of smaller companies with little or no exposure to the global markets.

India’s Tata Motors just unveiled its 100,000 rupee car today. According to today’s exchange rate, that works out to $2,551 which makes it the world’s cheapest car. Its a small car, with a 624 cc engine and seats 4 adults comfortably. (If you’ve ever sat in a rickshaw, you’d have a slightly lower standard of comfort).

[Tata Motor's Nano: The World's Cheapest Car.]

This is good news of hundreds of millions of Indians who currently drive scooters and motorbikes and can now afford a car. The Nano costs about twice as much as a mid-range bike does. So you can expect it to wildly popular, especially in India and South East Asia.

Even though its very fuel efficient, at 76 miles/gallon in the petrol version (diesel version is expected to give you 92 miles/gallon) compared to the 195 miles/gallon you’d get from a scooter (& more from some bikes), its a rather large step down. This means that India’s consumption of oil is set to increase.

According to Peter Schiff‘s Global Investor Newsletter:

In 1900, we Americans were using one barrel of oil per person annually. By 1970, we were using 27 barrels per capita. At the end of World War II, Japan was using 1 barrel per person. By 1970, they were using 17. Today, China uses 1.3 barrels per person annually and India uses .7. The increased demand this similarity infers is staggering.

The standard of living for millions of Asians has been increasing dramatically over the past few years. The per capita consumption of oil is going to rise significantly as these people buy more cars and goods. If you believe that we’re at peak oil production already, this means that there is going to be a severe shortage of oil over the next years, which should lead to higher prices. Higher oil prices led to higher inflation.

According to Bloomberg, option traders are speculating that oil will hit $200/barrel in a year. While I think this is a long-shot, oil prices are likely to keep heading higher.

Oil is currently trading around $100/barrel. Why oil at the pump costs the same as when oil was $60/barrel is a bit of a mystery. Maybe the upcoming election has something to do with it? I really don’t have a clue. But so long as my Canadian Income Funds keep producing, I’m happy!

Click here for deals on a used bmw or used japanese cars.

Check out this excellent, excellent video where Ron Paul rips Bernanke a new one. He explains why lowering the interest rates is screwing the US citizens. Low rates leads to a weak dollar which causes inflation (since we import nearly everything from foreign countries).


By lowering the rates, the Feds are enabling inflation. Which they probably want because it makes it is much easier to pay back all the money the government has borrowed from foreigners. The government currently needs around $2 Billion per day to sustain itself. Paying back foreign countries with dollars that are worthless is quite an enticing option.However, it doesn’t come without any cost. Putting more dollars in circulation devalues the current value of each existing dollar. If the Fed increases the money supply by 10% per year, the value of each dollar of your savings is decreased by a corresponding 10% too. Since you’re not getting 10% interest in the bank, your savings are being eroded every year. This is what Ron Paul was concerned about. The savings of elderly people are being eroded while simultaneously, everything is getting more expensive.

As the cost of everything goes up, eventually the cost of real assets will catch up. Real assets include commodities like gold, wheat, corn, lumber, oil and especially investments like real estate. So the low interest rates has the effect of propping up real estate prices and engendering the so-called soft landing in the real estate market. However, since its mostly wealthy people who own multiple properties that are leveraged with mortgages, as the value of the dollar drops and the value of real estate increases, they get to pay down their mortgage with cheaper dollars while simultaneously enjoying the appreciation in their properties.

This is basically a redistribution of wealth from the poor and middle classes to the wealthy. So you should either vote for Ron Paul or invest in gold (pretty easy to do), foreign currencies (slightly more difficult) or cash-flowing properties (pretty difficult right now). The worst thing to do is nothing or whine about how unfair life is.