Gulf Coast Commentary: Early Warnings of Price Inflation

Tuesday, May 7, 2013

Early Warnings of Price Inflation

The mountains of US government deficit spending, now paid for by trillions of dollars of money creation by the Federal Reserve will eventually create price inflation, either in hard assets, financial assets and/or in general prices (CPI). Huge increases in central bank balance sheets, in the US, Japan and China and eventually Europe will eventually ignite inflation of some sort. It's unlikely that this money expansion can be reversed in a timely way, so due to fractional reserve lending system, it is likely that too much money will chase too few goods (and securities) at some point. The Federal Reserve still hasn't learned it's lesson that it creates bubbles that pop leading to economic distress!! Idiots! There's nothing worse than intelligent idiots!

The early warning signs are already found in price inflation in assets that the wealthiest people invest in. This is because the hyper-money creation from the Federal Reserve goes directly into the hands of the top 0.1% at the banks. These bankers use a majority of that free money "flood" to buy a similar flood of government bonds issued and pocket a net 0.5 to 1.3% return on the TRILLIONS of dollars being created. This is an unspoken agreement between the corrupt crony capitalists and the corrupt ruling elites. This "process" is effectively financing the entire federal deficit, so lawmakers have no incentive whatsoever to even begin to trim out-of-control spending and debt. All of this bond buying is reducing interest rates on all government bonds and at all durations. As an aside, I don't think that anyone knows what the natural interest rate is at the moment. If we don't know the true level of market interest rates, then we have no way to correctly evaluate equity prices, financial asset prices or even the proper exchange rates. But I digress.

Two Causes of Inflation

Type #1 Pure Monetary Inflation: 'Banksters' and the investment banking arms of the big banks primarily buy govt bonds but also put newly created money into other investment markets such as the stock market, real estate, land, collectibles, gold, wine, art and high yield bonds. So first expect asset inflation in these asset categories that are favored by the most connected and wealthy. It is now a fact that all of these categories are inflating at rapid rates, with housing being the latest to rise (after a huge crash of couse) . The Fed is basically complicit in either creating new bubbles or re-igniting old ones. But once the banks begin to lend to individuals and businesses, this will begin the monetary multiplier process which will put more money into circulation and all prices will rise--not just assets..

Type #2 Government Spending Push Inflation: Other categories where significant inflation is occurring are in areas where the government is directly spending or where the govt is encouraging spending by making loan guarantees. This spending is creating excess demand: in healthcare (via medicaid, medicare, VA spending), in college tuition, and in housing and land (anything with a mortgage). All of these areas are seeing hefty inflation now. Healthcare is getting additional "organic" demand due to the aging and increasingly obese population.

Eventually speculation and inflation in asset and other markets will affect the CPI inflation, but it's much later, if ever. For example, in the 2000s, the CPI inflation gauge never did reflect the bubbles in the mortgage and securities markets before the bottom dropped out of these markets--which crashed the general economy.

But there were early warning signs. Once again, there are early warning signs already here and now primarily in asset and commodity markets. Already there signs of unsustainable bubbles in farm land and college tuition. Student loan default rates have recently soared--reminiscent of the housing bust.

Examples of Gov't Pure Monetary Inflation (Type #1)

Gold Prices vs. Commodities

Gold has quintupled in price in a decade in the expectation for future inflation

Reuters Commodities Research Bureau (CRB) Index

Commodities, including gold have had a big surge since the credit crisis of 2008 but are backing off during the last 1 1/2 years due to cooling of the global economy and a reduction of demand for commodities.

Farm Land: up to 20% Inflation

Farm Land Prices Vs S&P
Farm Land Is Smoking Hot! Rising World Food Prices Must Have Something to Do With It.
From http://farmprogress.com/story-invest-stock-market-iowa-farmland-14-96321

Food Prices: 7% Average Inflation Since Yr 2000

Food prices have doubled from the year 2000. This reflects the "pumping up" of the Chinese economy and other developing countries by their governments. You can see that the biggest surge in prices occured in the year 2007 and then again in the year 2010. Only government spending and money creation can explain these prices spikes.

World Food Prices
from the UN Food and Agriculture Organization of the UN

Oil and Gasoline Prices 7% Inflation Since 2000

Oil prices have rocketed higher with the easy money regime from our Federal Reserve since 2001 and with more demand from pumped-up economies in China and other developing countries. The US Crude Oil chart looks very similar to the one for food price inflation.

Gasoline Prices have doubled since 2004 which implies about 7% inflation rate over that period. Prices have tripled since 1999 indicating about 10% inflation per annum.

The Stock Market

The Stock Market continues it's climb to new all-time highs. Every day there is a steady bid from companies that borrow at 1 or 2% in the bond market and buy back their own stock in the market. It works in 2 ways, additional balance sheet debt leverages or "amplifies" earnings per share but also reduces the number of shares outstanding. That's how you pump up your share price! It's being done in record amounts: about $1 trillion per year.

Examples of Government "Spending Push" Inflation (Type #2)

Housing Market Inflation (now 9.3% for latest 12 months)

An article about the Case Shiller Housing index in USA Today, has trumpeted that housing prices increased 9.3% for the last 12 months. The bubble is back!! Thanks Federal Reserve!

To put this in perspective, the increase is a small one relative to the parabolic rise in the 2000s and recent decline. But 9.3% inflataion for one year is real and present!

During the 2000s, the minions of highly compensated mega-brains and PhDs at the Federal Reserve system couldn't see the danger building that is so very obvious in hindsight. Now we're enjoying a renewal of an old bubble. Thank you Federal Reserve!

Housing Price Index since 1976 to 2013
The 9.3% Headline Housing Inflation is the small blip up at the far right

College Tuition Inflation (about 10% per annum since Year 2000)

I've mentioned that the government "easy money" loan guarantees has spawned a flood of easy money into the colleges of all types with fairly rampant inflation of about 10% per annum. See Government Causing College Tuition Inflation.