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Archive for the ‘Inflation’ Category

What is Money?

Posted by Steve Markowitz on August 14, 2014

For some years conservative economists have voiced opinions that the easy money policies of the Federal Reserve and the increasing deficit spending by the United States will damage the economy. As the years pass and without clear connection between these policies and their costs or consequences, these calls have begun to sound more like the girl that cried wolf. However, unless one believes in perpetual motion or alchemy, there must be costs to policies that in essence print money.

Forbes Editor-in-Chief Steve Forbes has said of money:

Money is simply a tool that measures value, like a ruler measures length and a clock measures time. Just as changing the number of inches in a foot will not increase the building of houses or anything else, lowering the value of money will not create more wealth. The only way we will ever get a real recovery is through a return to trustworthy, sound money. And the best way to achieve that is with a gold standard: a dollar linked to gold.

While reasonable people can argue as to the merits of again linking the dollar to gold, it is hard to argue with Forbes’ common –sense definition of money being a measuring tool. Fiat currencies, those not tied to a commodity other than the printing press, are a promise that the currency will be worth something of value in the future for trade or commerce. It does not take a PhD in economics to realize that if the total amount of goods, services and demand remain constant while the money supply increases, that the value of money will decrease.

As a simplistic example, in an economy for which the only goods and services offered and that there is demand for is corn. In this example there are 100 bushels of corn produced each year and demand remains constant at 100 bushels annually. Finally, the total currency available to this society is $100. Under this scenario, the price of corn will be $100 divided by 100 bushels or one dollar bushel. If these assumptions remain unchanged, except the aggregate money supply increasing to $150, the price will increase to $1.50 per bushel, $150 divided by 100 bushels. This is an inflation rate of 50% for the year caused by the natural bid up of prices that will occur, the result of excess currency chasing limited supply.

So far the federal deficit and Fed’s easy money policies have not resulted in significant inflation. This is due to extraordinary economic events including: 1) outsourcing that has lowered the cost of labor to the developed world, 2) excessive production capacity due to significant increases, mainly in China, and 3) historically low cost of financing that has offset spending increases by the government and lowered various costs to private industry. However, none of these items are sustainable, which when the tide turns, has the potential to lead to significant inflation with little warning.

Few economists are currently predicting significant inflation in the near-term. However, significant economic changes are rarely predicted in advance by mainstream economists. We need look no further than their track record of not predicting the 2008 economic meltdown or the problems that the subprime mortgage market would cause the economy.

Bubbles and other non-sustainable economic events generally continue much longer than reasonable logic predicts. This reality leads to a hockey stick type trajectory towards the end of bubbles. Therefore, the best economists can do is to predict a low rate of inflation until inflation kicks in. Yikes and hold on!

Posted in economics, Inflation | Tagged: , , , , , | 6 Comments »

Kyle Bass Claims Obama Administration Plans to “Kill the Dollar”

Posted by Steve Markowitz on January 23, 2013

Kyle Bass is claims in the video below that a senior Obama Administration official told him directly that “We are going to kill the dollar.”  Yikes!

There are many pundits who make all sorts of outrageous claims that should be ignored.  Kyle Bass is not one of them.  This is a serious gentleman who foresaw the housing bubble and mortgage crisis before there were any public hints of problems.  His investment arm made a bundle selling those markets short.

If Kyle Bass’s claim is accurate and should the Obama Administration proceed with a plan to “kill the dollar”, significant inflation will follow.  Also, such a policy would drive up interest rates as foreigners will refuse to buy America’s depreciating bonds.  Finally, that policy would start trade wars between countries that also want to export their deficits.  Already, Japan is deflating its Yen that has dropped by more than 10% in recent weeks

Posted in Free Trade, Inflation | Tagged: , , | Leave a Comment »

Food Prices Surging

Posted by Steve Markowitz on August 24, 2012

Weather patterns have always been erratic.  At times they are conducive to crop production and at other times, counterproductive.  This summer’s North America weather and drought has negatively impacted crop growth.

According to the Wall Street Journal, earlier this month the U.S. Department of Agriculture projected the lowest yielding corn crop in 17 years.  They pushed the yield for corn down from 166 to 123 bushels per acre and expect prices to rise to $8.90 a bushel, a 39% jump in one month.  Finally, the USDA projects 13% less corn produced in the US  than the previous year.

The jump in corn prices has negative tentacles throughout the economy.  One problem is that the cost of feed for livestock is increasing.  This will eventually lead to higher meat prices.  Higher food prices in the United States are inevitable.

The draught is not the only reason for increasing food costs.  In one of the worst examples of crony capitalism, the US government mandates that oil companies blend more than 13 billion gallons of ethanol into gasoline per year.  This requirement consumes about 40% of the corn produced in the US.  Using corn for fuel is not only inefficient for agricultural land, but also aggravates food pricing pressures, even more during adverse growing conditions.

Mandating Ethanol usage is but one of the government’s intervention in the farming industry.  In another example of the perverse results of such intervention, farmers’ incomes will likely rise this year because of the draught.  The government offers farmers subsidized crop insurance that pays farmers for the amount of crop loss due to draughts, but at the then going price.  Since the price of corn rises during draughts, most affected framers’ incomes will increase this year.

As bad as the above problems are, they pale in comparison to the worldwide problems.  Even a relatively small increase in the cost of food products can be devastating to hungry people in third world countries.  Such increased result in people starving.  But do not expect the interventionists to take responsibility for this debacle.

Posted in Government Ineptness, Inflation | Tagged: , , , , | 1 Comment »

Wheat Prices Affecting Middle East Politics

Posted by Steve Markowitz on May 20, 2011

Key issues were glaringly missing from President Obama’s Middle East speech this week.  While the world correctly focuses on Obama’s proclamation that Israel should accept its 1967 borders even before the negotiations get started, the effect of high food prices in the Middle East, a more significant issue to the average Arab in the street, was ignored by the President.

The Wall Street Journal reported that wheat prices jumped a whopping 17% for the week and 91% for the year.  While this affects many countries, it is especially problematic for Middle Eastern countries due to their huge dependence on imported wheat.

Wheat is the largest food staple in various Arab countries.  In fact, Tunisians consume more wheat per person than any other country in the world, 478 pounds each per year, about three times the consumption of the average American.  It is not coincidental that the ongoing prot4ests in the Arab world started in Tunisia.  Hungry people are unhappy people.

Increasing wheat prices are in part due to weather issues in some producing countries.  However, prices for all foods and commodities have risen due
to policy decisions of the West and the United States in particular.  The decision of central banks and the Federal Reserve to print money to address the economic downturn has led to significant price increases for commodities including food.  In addition, American energy policy that subsidizes ethanol has resulted in farmers planting corn in lieu of wheat.  This too places upward pressure on wheat prices.

Progressives like Barack Obama believe that governmental intervention is the answer to any issue facing a country or the world.  Not only do they often make the wrong decisions, but they rarely consider the unintended consequences of these decisions.  Such is the case with the food inflation America is exporting world.

Posted in Inflation, Middle East | Tagged: , , , , , , | Leave a Comment »

Pressure on Interest Rates Grows

Posted by Steve Markowitz on April 17, 2011

The Wall Street Journal reported on Friday the following:

Ireland – Moody’s cut Ireland’s bond ratings to Baa, nearly “junk” status.  This will add pressure on Ireland’s debt making in more expensive for Ireland to sell bonds.

United States – The consumer-price index rose a seasonally adjusted 0.5% in March with gasoline increasing 5.6% and groceries increased by 1.1% for the month.  These figures indicate that inflation is rising in the U.S., something everyone seems to get outside of the Obama Administration and Federal Reserve.

China – Its consumer price index increased in March 5.4% from 2010.  That shows inflation is accelerating in China.  The Chinese government has aggressively been increasing interest rates in an attempt to halt the inflation.

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These data points from three countries in very different parts of the world indicate that interest rates in the United States, including those for U.S. Treasury bonds, will be increasing in the foreseeable future.  While this will slow the U.S. economy, the larger problem with the increasing rates is their affect on the U.S. debt.  The increased rates will raise the cost for the U.S. to pay for the huge debt already incurred, which will then leave less funds available for the government to pay for programs and its everyday bills.  Should the politicians in Washington not get control of our spending and soon, the bond market will inject that discipline in a much more painful manner via higher interest rates.

Posted in Inflation, Interest Rates | Tagged: , , , , , , | 2 Comments »

Inflations Figures, Anther Government Hoax

Posted by Steve Markowitz on April 15, 2011

The Wall Street Journal in today’s daily News Alert reported that America’s core inflation rate is under control, rising only 0.1% for March.  The core inflation rate is the government’s published figure that excludes energy and food prices that the government considers volatile.  With food and energy prices included, the inflation rate actually increased a significant 0.5% for the month.

Any first year business student knows that energy and food costs are an important part of consumers’ budgets and would questions statistics that exclude these items from consideration.  But that’s not the case with our government.  And the Left wants to trust these same knuckleheads with running American’s health insurance?

Posted in Government Ineptness, Inflation | Tagged: , , , , | Leave a Comment »

Positive Retail Sales Figure Aided by Inflation

Posted by Steve Markowitz on April 13, 2011

The CNNMoney headline this morning reads:

Retail sales rise 0.4% in March, aided by strength in home furnishing and gasoline sales, the government says.”

Let’s see; gasoline sales are up mainly due to its rapid price rise.  And that’s viewed as a positive indicator by our broken government.  The knuckleheads that put to this data out must have skipped Econ 101 or they would understand that when consumers put out an extra $50 per month for gasoline they spend $50 less in other places.

 

Posted in Government Ineptness, Inflation | Tagged: , , | 2 Comments »