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Fed Is NOT Debasing the Currency Via High Consumer Price Inflation (CPI)

By Jas Jain   2012 Dec 22, 8:35am   1 link   2,901 views   15 comments   watch (1)   quote      

If you don't read the newspaper, you are uninformed; if you do read the newspaper, you are misinformed. – Mark Twain

A vast majority of Americans have been misinformed about Federal Reserve’s “Money Printing” that would lead to high, or even hyper, inflation. I have been telling anyone who would listen, for the past 14 years, that that is simply not the case and the data (please see the attached graph) clearly bears it out. Consumer Price Inflation is at a 50-year low and going lower in the most recent data. Extreme volatility in the headline CPI, red graph, during 2004-2011 was due to the huge rise in crude oil price, followed by a collapse, as a result of the crisis, and then partial recovery that lead to volatile pricing of gasoline. Inflation over the past 12 years is the same as it was during the 12-year period, 1958-69.

An annual inflation rate of 1-3% (2% plus, or minus, 1%) in consumer prices is not debasing the currency because that is what Fed has been mandated to do and has successfully done to date. Federal Reserve, under Greenspan and Bernanke, has done lot of bad things, but debasing the currency via high inflation in consumer prices is not one of them. People may disagree about what is high inflation rate and what is a low inflation rate; I have picked the dividing line at 3% annual rate over a three-year period. Annual inflation rate over a 12-month period is very volatile and the 3-year period simply smooths out the volatility.

When Greenspan took the helm at the Fed, after Volcker had sleuthed the high inflation beast, the inflation rate was 4% (in 3-5% range) and he brought it down below 3% and Bernanke has brought it to 2%. The annual core inflation rate under Bernanke’s tenure as a Chairman is 1.91% and the headline inflation is 2.21%. I expect inflation rate to go to 1% over the next 2-3 years to be followed by below 0%, regardless of if Bernanke stays or leaves. Why? It is the demand, stupid! Demand has been held up artificially high by the deficit spending by the federal govt and it simply can’t continue for more than a couple of years. The US can’t avoid a recession and the recession would take the inflation rate to zero and below.

Below are excerpts from Doug Noland, who has been writing a weekly report for many years, and my comments interspersed.

Credit Bubble Bulletin: Recalling John Law

By: Doug Noland | Fri, Dec 21, 2012

"There are good reasons to think that the nature of money is not yet rightly understood." John Law, 1720 (with the collapse of the Mississippi Bubble)

"Irredeemable paper money has almost invariably proved a curse to the country employing it." Irving Fisher, 1911

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." John Maynard Keynes, 1920

"Since the time when President Richard Nixon broke the final tenuous link between the dollar and gold in 1971, no major currency, for the first time in history, has any connection to a commodity. Every currency is now a fiat currency..." Milton Friedman, 1991

"We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money." Alan Greenspan, 2000

I included the above quotes back in a March 2000 CBB titled, "John Law and Alan Greenspan - The Great Inflationists." I could not have imagined at the time that his successor would make Mr. Greenspan appear a most responsible central banker…

Thursday, an exasperated Maria Bartiromo pleaded with policymakers to get a deal done so investors could do what they clearly wanted to do, buy stocks. Interviewing a Congressman, Bartiromo pounced: "Are you guys just incompetent or what? If you can't do what the American people pay you to do why don't you step aside and put someone in there that can get a deal done?"

…The reality is that years of unsound "money" and Credit have done their dirty work…

… Federal Reserve money printing is devaluing our currency, weakening our nation's moral fiber, and essentially financing the federal government's takeover of the economy.

Federal Reserve is no more “devaluing our currency” than what the Federal Reserve was doing in 1960s under the celebrated sound money guy, William McChesney Martin, 1951 to 1970.

From my Credit Theory perspective, this was all too predictable. Unsound "money" and Credit invariably fuel Bubbles replete with economic malinvestment, inequitable wealth redistribution and economic wealth destruction…

I agree.

Surely, Washington and the markets will not take this dire predicament seriously so long as the Fed is determined to aggressively expand its debt monetization operations. And the more conspicuous the consequences from years of unsound finance, the more determined the Fed is to print more "money."

… I have faith in our democracy…

Do you mean that people “our democracy” puts in power had nothing to do with the appointment and several reappointments of Greenspan and Bernanke? Doesn’t Congress have the power to approve and supervise the Fed? Who all are responsible for the Fed? Congress and the President, a necessary product of “our democracy.”

At the same time, I have lost all confidence in our central bank.

But have not lost confidence in the political system that is 100% responsible for the existence, selection and supervision of the central bank?

Their flawed doctrine is my biggest worry, as they operate unchecked and outside the democratic process…

How can you be so sure that Bernanke was not chosen for his “flawed doctrine?”

And, regrettably, the Bernanke Federal Reserve is in the process of only making the problem worse. Markets cheer.

“Markets cheer” precisely because Bernanke’s instructions are to do all that he can do for the markets. You seem to be in the dark as to what Bernanke’s real job is, other than to keep inflation low. I have had no doubts from day one and Bernanke has done precisely what he is supposed to do in “our democracy,” that is to serve the powerful and the wealthy. Are you in the dark about “our democracy” having been hijacked by the wealthy? Heck, it is inherent in a democracy.



Comments 1-15 of 15     Last »

1   ttsmyf     2012 Dec 22, 8:59am  ↑ like   ↓ dislike   quote    

For 'demonstration' purposes, would you please comment on this.

2   Jas Jain     2012 Dec 22, 12:44pm  ↑ like (2)   ↓ dislike   quote    

I am sorry to report that the biggest "industry," by which I mean the most profitable business, in America is breeding dopes, i . e., brainwashing people from birth onwards to serve the interests of a tiny min ority, e.g., 0.01% . Financial markets are a mechanism to that end. I am fully aware of the fact that this view is not very popular.

3   mell   63/63 = 100% civil   2012 Dec 22, 3:21pm  ↑ like   ↓ dislike   quote    

The CPI calculated by the BLS is kept low on purpose and there have been various controversies around it involving other economists:

So you are more looking north of the 3% mark. Second mistake is assuming 3% as a cutoff, even 2% is brutal. If you take all your working years (say 45-50) and compound those 2% over time the avg. salary would need to rise much faster than it ever did. So CPI is quite high and breaking peoples necks regularly. Try again.

4   gsr   14/14 = 100% civil   2012 Dec 22, 3:52pm  ↑ like   ↓ dislike   quote    

So bond price inflation, real estate inflation, commodity price inflation are not inflation?

5   mell   63/63 = 100% civil   2012 Dec 22, 3:54pm  ↑ like (1)   ↓ dislike   quote    

gsr says

So bond price inflation, real estate inflation, commodity price inflation are not inflation?

Not if you can offset all that with deflation in tech gadgets and gimmicks ;)

6   David Losh     2013 Jan 21, 11:02am  ↑ like   ↓ dislike   quote    

gsr says

So bond price inflation, real estate inflation, commodity price inflation are not inflation?

No that is a false sense of inflation brought about by the historically low interest rates.

7   Hysteresis     2013 Jan 21, 11:14am  ↑ like (2)   ↓ dislike   quote    

CPI is useless and heavily manipulated by government.

you should be asking what is your "personal inflation"?
that is how much more are you paying for things you use in your daily life?
that is the only inflation that matters.

my personal inflation has gone crazy the last decade. phone bill doubled. electrical bill almost doubled. gas prices about doubled. basic foods almost doubled. many of the basic items i buy regularly has gone up a lot in price.

fuck CPI. fuck the government's bullshit numbers.

i find the big mac index is a more realistic measure of my personal inflation than the bullshit CPI

The Big Mac And Your Financial Health: Rising Burger Prices Show A Worrying Trend

8   ChrisKolmar     2013 Jan 21, 11:28am  ↑ like (1)   ↓ dislike   quote    

And I could show you a graph of the amount of computing power $1 buys you over the past 25 years and argue for hyper deflation.

CPI (attempts to) take into account the entire consumer basket, which is better than focusing in on solely Big Macs and gas bills.

9   HEY YOU   580/580 = 100% civil   2013 Jan 21, 12:20pm  ↑ like (1)   ↓ dislike   quote    

"Fed Is NOT Debasing the Currency..."
Well let's print forever.

10   TwoScoopsMcGee   1176/1176 = 100% civil   2013 Jan 25, 12:44am  ↑ like (1)   ↓ dislike   quote    

Never mind Big Macs and Computers. That's not where the majority of income for median America goes.

It goes to Health Care, Rent/Housing, Grocery Store Food, and Education.

I would much rather make $100 extra a month than pay $600 instead of $1200 for a new computer, since I only buy a new computer every 2-3 years, whereas I pay rent, my wife's student loans, groceries, etc. every month.

I can delay a computer purchase, but I can't put off the mortgage payment or paying the landlord. I can skip the big mac and have a burger at home, but I can't delay an ER visit for my coughing child.

When it comes to the "Iron Costs" of living, the essentials, there has been a great deal of inflation, and it's no accident that these costs are partially or wholly discounted by the CPI, while consumer goods are overweighted.

11   Dan8267   2511/2543 = 98% civil   2013 Jan 25, 1:03am  ↑ like (1)   ↓ dislike   quote    

Jas Jain says

Fed Is NOT Debasing the Currency Via High Consumer Price Inflation (CPI)

Correct, the Fed is debasing the currency by increasing M3, the money supply. The CPI is an arbitrary and ever-changing meaningless metric intended to make government look good.

Jas Jain says

An annual inflation rate of 1-3%

Long-term inflation is about an annual 3.5% to 4.5%. When checking, savings, and money market account yield 0% interest, this means a 4% tax on all your savings each year. And all that tax revenue goes to bankers, not to providing government services or helping the poor. Taxing savings also forces people to pay for large purchases like cars, college, and houses with debt rather than savings, and this has many evil effects.

Furthermore, inflation causes real wages and real social security benefits to drop about 4% a year. How often do you get a raise a work? You'd have to get a 4% raise every year just to earn the same real money before taxes every year. Taking taxation into consideration, you need to get a 5% to 5.5% raise each year just to maintain the same after tax income.

Inflation is a tax on savers, wage earners, and the retired who rely on social security, pensions, and retirement plans. And this tax does not benefit society. All tax revenue goes to greedy ass financial parasites so they can buy a service to transport their yachts to Bermuda so they don't have to go through the horror of sailing their yachts from NYC to Bermuda. So enjoy paying that inflation tax.

12   lostand confused   209/209 = 100% civil   2013 Jan 25, 1:12am  ↑ like   ↓ dislike   quote    

Home prices, rental prices, cost of education, cost of health insuarance etc. etc all shoot up -but hey inflation is at lifetime lows.

13   epitaph   34/34 = 100% civil   2013 Jan 25, 1:13am  ↑ like   ↓ dislike   quote    

CPI is a sham.

Say a modest television costs $350 if you were to buy one today. Well an economist working for the government looks at that television and says, "Because it is a flat screen LCD electricity saver and not one of the old CRT ones you are getting more for your money." Which is somewhat true, but I cannot go to Best Buy and pick up a brand new CRT TV, and thus this measurement is way out of whack.

They say your dollars are going further because you get added features, but they are standard features this day and age. This kind of measurement manipulation is called hedonics. Google CPI hedonics if I didn't explain this well enough.

14   Thedaytoday     2013 Jan 25, 2:38am  ↑ like (1)   ↓ dislike (1)   quote    

The Federal Reserve's Explicit Goal: Devalue The Dollar 33%

The Federal Reserve Open Market Committee (FOMC) has made it official: After its latest two day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years. The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.

An increase in the price level of 2% in any one year is barely noticeable. Under a gold standard, such an increase was uncommon, but not unknown. The difference is that when the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. A dollar 20 years hence was still worth a dollar.

But, an increase of 2% a year over a period of 20 years will lead to a 50% increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.

The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.

Why target an annual 2 percent decline in the dollar’s value instead of price stability? Here is the Fed’s answer:

“The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.”

In other words, a gradual destruction of the dollar’s value is the best the FOMC can do.

Here’s why:

First, the Fed believes that manipulation of interest rates and the value of the dollar can reduce unemployment rates.

15   bob2356   494/498 = 99% civil   2013 Jan 25, 2:50am  ↑ like   ↓ dislike   quote    

Jas Jain says

but debasing the currency via high inflation in consumer prices is not one of them.

There is more than one way to skin a cat, there is more than one way to debase currency. The 2000's aren't the 1970's. It's a global economy with global wages and global prices. The sharp wage price spiral of the insular and isolated economy of the 1970's isn't really possible any more. Hyperinflation through sheer stupidity is always possible, but hyperinflation is a political event not a monetary one.

The assumption of the original post is the excess money is going to purchase consumer goods so should be driving up the prices. Why should anyone assume that? Where is the money from the Fed's printing press money going? Consumers? I think not. It's going to the FIRE sector. Dotcom bubble, housing bubble, now the government bond bubble, stock market prices (why the hell is the dow at 14,000 or even close), the list goes on. There are plenty of places where the increasing money supply is going. Consumer's pockets just isn't one of them. Crony capitalism is alive and doing quite well thank you.

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