5 Reasons The Fed's New Policy Won't Create Inflationand
Inflation - Running Out Of RoadThe first contends that however much money the US Federal Reserve prints it will not succeed in creating a substantial rise in the consumer price index. The second asserts that far from there being no price inflation, an honest consumer price index would show inflation running at an annual rate of 10%.
So how to resolve the contradiction? First, it is necessary to be clear as to what inflation is. As Milton Friedman put it shortly:
Inflation is a monetary phenomenon -- always.This of course was not an original insight. Adam Smith wrote at length of the process whereby monetary inflation was achieved by re-minting gold and silver coinage in increased quantities through the addition of base metal.
But the supply of money is not unrelated to prices. As Samuel Johnson observed in 1775, during a visit to the Western Isles of Scotland, eggs were a half-pence a dozen not because eggs were abundant but because pence were scarce.
But the effect of monetary inflation on prices is not necessarily uniform. Thus, inflation does not necessarily affect the consumer price index directly or even at all. In Western economies today, money is chiefly created by banks, central or private, that create money out of thin air by making loans.
These loans are, in the case of the commercial banks, made primarily to facilitate the purchase of big-ticket items, particularly houses and cars, to support speculative stock investments, or to allow corporate stock buy-backs.
Such lending has little effect on the consumer price index, since it does nothing to increase consumption of items, the price of which determine the level of the price index.
Rather, mortgage debt and car loans will tend to suppress the consumer price index by forcing borrowers to divert an increased share of income to interest and capital repayments.
What such loans do affect is the price of houses, cars and stocks that are bid up by the loan-based spending. Thus, if we want to gauge the effect of monetary inflation on prices, we need to look at home prices and stock prices as well as the prices of bread or milk.
When we take that broader view, we see that the US and many other countries are in the midst of a rapid money-printing-induced price inflation, which greatly enriches the already rich, i.e., the owners of stocks and real estate, while making the poor, relatively speaking, much poorer.
As for gold, the price reflects fear of the consequences of monetary inflation--which is to say fear of the loss of purchasing power of the unit of currency--among those with money but no desire to invest it in stocks or real estate.
As for gold, the price reflects fear of the consequences of monetary inflation--which is to say fear of the loss of purchasing power of the unit of currency--among those with money but no desire to invest it in stocks or real estate.
The issue is that in the United States, for several decades, the prices of housing, education, and medicine have steadily increased, that of food has increased somewhat, but stuff like toys, electronics, and furniture there has been no notable price increase.
ReplyDeleteThe government and media took advantage of a situation where prices were increasing, but not on all goods and services, by just including in the inflation indices the items where the prices were not increasing. I really don't think anyone should pay attention to these indices.
However, there has been various theories as to why there have been big price increases in some areas of the economy and not the others, and yours is brilliant. I've not seen it elsewhere and it makes sense. If something is normally purchased with debt, such as a house or school tuition, and the debt is made easily and cheaply available, not only will the price go up, but money will be sucked out of the rest of the economy to pay interest on the debt, causing deflation elsewhere.
Though my wife and everyone I know personally thinks I'm nuts for thinking this, to me the obvious approach for someone who has to live in this world is to never buy a house, since that is the most inflationary sector of the economy. While rents are up too, its not as bad since rent is not paid with debt. Education and health insurance are tough to avoid, since you need teh degree just to enter the job market, and you need catastrophic health insurance, but the advice there would be to avoid anything that looks like gold plating.
Yes, I really wonder about how things will turn out for those young families purchasing a house with a mortgage that costs up to half of family income to service.
DeleteFertility rates in North America and Europe are in every country below replacement and far below in some countries, including Germany and Italy. So who will today's buyers sell to? There seem to be only two possibilities: (a) nobody, and (b) African immigrants, i.e., people from the only part of the world with high fertility rates.
Now I have nothing against Africans. The one's I've known I liked. But why should people from a continent three times the size of Canada -- or thirty times the habitable portion of Canada -- replace the existing, people of Canada. Better, surely to have lower house prices, which would make it financially feasible for Canadian families to raise more children, thereby to achieve a stable national population.
But destroying your own people to achieve maximum profit was never a problem for the elite, I suppose.
I recently learned the FED now owns 40% of all residential mortgages.
ReplyDeleteThe bankers are getting ready to own and control virtually everything. Anything they own proving inconvenient or difficult to control, they plan to shut down.
"The bankers are getting ready to own and control virtually everything." Yes, the covid-justified shut down of most of the small business sector has already done so much for the Walton Family and Bezos.
DeleteMy theory is the economy is and has been a command and control economy. Yet until now the command and control has not been total.
DeleteThe situation where a society is command and control, increasingly so, but not finally totalitarian is one of extreme danger for the people in charge (in our case, the plutocrats).
Unless they in effect have total control, their grip grows increasingly fragile and susceptible to upset from whatever remains outside their control. Something relatively minor can flare up and destroy all they've worked to achieve.
At this point in history, though, the plutocrats know all about this. They've been through this before and studied carefully where it went wrong for them. They're prepared for every contingency they know may happen because it has happened previously to other, unsuccessful or nearly successful plutocrats.
However, they don't know the “unknown unknowns” as Donald Rumsfeld wonderfully termed their situation.
“Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”-- "Defense.gov News Transcript: DoD News Briefing – Secretary Rumsfeld and Gen. Myers, United States Department of Defense (defense.gov)"
I certainly agree this is true. However, it is no more or no less true for the plutocrats than for the rest of humanity, and the plutocrats are in a wonderful position relative to the rest of us to roll the dice and see what happens. So far rolling the dice has been a splendid success. The level of mind control and willingness to blind obedience has never been so perfected. The frogs are boiling quite nicely right now and soon will be cooked all dead if they don’t find a way to resist.
The way they could resist, in my opinion, would be to be decent, caring, generous, with each other, and for once come together in the love they’ve for so long been willing to proclaim. But come on, they’re debased and debauched—that probably also according to plutocratic plan, but it still required their consent, ultimately.
When I was an undergraduate in England, back in the early 60`s, the coveted prize, academically, was a degree with first class honors, which meant, as one of my mentors explained, that `you can think.``
DeleteAt that time, in England, university degrees were classified based on exams well suited to assessing a student`s ability to think. These so-called finals, consisted in a series of usually three-hour exams during which one might be expected to write perhaps one- to five-thousand word answers to, perhaps, just three questions, which might relate to any aspect of the past three years study (math and physics students, I suppose, were requited to derive, contrive or otherwise resolve questions by largely mathematical rather than verbal means).
Such exams were well suited to determining whether a student had a comprehensive grasp of the principles of a discipline and the ability to deploy those principles in a thoughtful way.
Today, it seems, that approach has gone by the board: multiple choice tests, and cumulative grades based on mid-term and end-of-session tests require little in the way of thoughtful integration and development of ideas. Other social developments, the decline in serious journalism, the rise of garbage social media, non-stop television drivel, legally unrestrained Internet porn, all have created conditions for the destruction of the capacity of the mass of mankind to think intelligently for themselves. Hence, the pathetic widespread submission to Covid authorities of dubious integrity; the reduction of US electioneering to childish name-calling; the general acceptance of sleeze as manifest by the rise of Boris Johnson, or Canada`s continued indulgence of Canada`s most blatantly corrupt Prime Minister, Justin Trudeau.
And with the Covid scare, the brainwashing is being ruthlessly applied to children. Brilliant.
Will the bastards screw up? I have no idea, but I am encouraged by the insolent arrogance of the likes of Meghain and Harry, Musk and Soros. Perhaps those trained in disorder and violence by BLM will yet turn on their masters.
The big changes to the CPI were made in the 90's, under the legendary Greenspan's auspices. Almost immediately people paying attention noticed the CPI no longer reflected their real world experiences of what prices were doing.
ReplyDeleteThe unemployment figures are similarly suspect. The Trump administration has these last weeks trumpeting sharp declines in the unemployment rate. But, if you pay attention to other numbers tracking the job situation, such as new job creation, or the way what's affecting huge numbers of people, such as their transfer from furloughed status to laid off, you know the employment situation must be dire.
Larry Kudlow of the Trump administration invented the idea of a V-shaped recovery; Trump himself has been speaking of a "super" V-shaped recovery. Some of the stock indices have crested over their historical highs-- the DOW has nearly done so.
You'd have to believe what you're told by "authorities" over the authority of your own immediate experience to think this stuff is worth something. Either that or be an obedient sheep and willingly herded into the chute leading, not only to a shearing, but a slaughter.
They care so much about our health? Har har har. They don't want us hogging up their planet and now they're in a position to do something about it.
"But why should people from a continent three times the size of Canada -- or thirty times the habitable portion of Canada -- replace the existing, people of Canada."
ReplyDeleteThere's only a reason from the point of view of the plutocrats. The Africans, the Central Americans, the South Americans, the Asians, would be perfectly happy to stay at home and make something of it, something good-- better than what North America achieved-- if there wasn't tremendous force preventing them from doing so.
Come into our economy and give it a boost? Why? We have plenty here who have all it takes to give our economy a bounty of a boost.
For our part there's no way we wouldn't send our bounty outwards. No way.
We want to hear what Africans and Central or South Americans have to say-- especially musically.
Agree
DeleteAre you aware of these changes to the way the CPI is calculated?
ReplyDeletehttp://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.554.1713&rep=rep1&type=pdf
The Economic Policy Institute is said to have a left-leaning bias, so keep that in mind. For my part, though, this helps offset the policy biases of the FED, which are anything but left-leaning.
I do believe the FED has had the ultimate power and public policy authority of government for a long time now, and if you look at how the FED commandeered the CPI's calculation, you get a good glimpse of how this works in actual practice.
The FED has, as Alan Greenspan famously said, "Power of cash, not of purchasing power." They can control money supply, but not what the money they are printing is able to purchase in actuality. (Inflation or deflation.) At this point in time, I believe the FED has realized THEY MUST HAVE power over purchasing power. They have to command and control purchasing power every bit as much as they've had the power to drop cash from helicopters worldwide for more than a decade.