Inflation Is Rampant in Tuition, Healthcare and Property Taxes
by ilene - December 2nd, 2010 4:24 pm
Charles Hugh Smith shows the games played in determining "inflation" levels when not all prices are included in the measurements. It may be worth dispensing with the misleading term all together. When prices for big-ticket items keep rising but the items are not considered in the calculations, we have a clear mismatch between government statistics and household realities. However you define inflation, there is a real problem from real people. And regardless of one’s operative definition of inflation, Inflation Is Rampant in Tuition, Healthcare and Property Taxes. - Ilene
Courtesy of Charles Hugh Smith, Of Two Minds
A number of big-ticket household expenses are skyrocketing: tuition, property taxes and healthcare.
Here is my simple definition of rampant inflation: you’re paying a lot more money for the same item/service but the quality/quantity is the same or lower--and your income is stagnant/declining. We are constantly told that inflation is near-zero, but the basket of goods selected for measurement seems not to include healthcare/ health insurance, college tuition or property taxes.
These costs are skyrocketing, and they are non-trivial expenses, running into the tens of thousands of dollars per year. I have addressed the difference in scale of expenses for the wealthy and the "middle class" before. For instance, $10,000 per year for healthcare insurance is a massive percentage of the after-tax income of a household earning $60,000 a year, while it is a modest percentage roughly equivalent to the sums spent eating out and traveling for a household earning $160,000 a year.
The same scale differences are present in all measures of inflation. Onions might well have declined over the past year, which means that the $30 I spent annually on onions declined to $29--a grand savings of $1.
Even a 10% decline in natural gas costs would only yield a modest $50 reduction in costs for my household. Let’s say another household consumes a lot more natural gas, and their savings would total $200 a year.
Compare these modest reductions due to deflation with the thousands of dollars in increases in big-ticket items like tuition, property taxes and healthcare.
Take property taxes. Nationally, according to the Census Bureau report on state and local tax revenues, total property taxes in the U.S. rose from $225 billion in 1998 to $476 billion in 2009-- an increase of 111% over a time period that saw costs rise 32% (i.e.…
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DiggIS QE2 THE ROAD TO ZIMBABWE-STYLE HYPERINFLATION? NOT LIKELY.
by ilene - December 2nd, 2010 1:19 pm
Ellen Brown asks and answers, IS QE2 THE ROAD TO ZIMBABWE-STYLE HYPERINFLATION? NOT LIKELY. Her views of the Fed’s activities, debt and the risk of hyperinflation are different than many we’ve been presenting here. Further discussion is welcome. – Ilene
Courtesy of Unlike Zimbabwe, the U.S. can easily get the currency it needs without being beholden to anyone. But wouldn’t that dilute the value of the currency? No.
A month ago, the bond vigilantes were screaming that the Fed’s QE2 would be the first step on the road to Zimbabwe-style hundred trillion dollar notes. Zimbabwe (the former Rhodesia) is the poster example of what can go wrong when a government pays its bills by printing money. Zimbabwe’s economy collapsed in 2008, when its currency hyperinflated to the point that it was trading with the U.S. dollar at an exchange rate of 10 trillion to 1. On November 29, Cullen Roche wrote in the Pragmatic Capitalist:
Back in October the economic buzzwords had become “money printing” and “debt monetization”. . . . [T]he Fed was initiating their policy of QE2 and you’d have been hard pressed to find someone in this country (and around the world for that matter) who wasn’t entirely convinced that the USA was about to send the dollar into some sort of death spiral. QE2 was about to set off a round of inflation that would make Zimbabwe look like a cakewalk. And then something odd happened – the dollar rallied as QE2 set sail and hasn’t looked back since.
What really happened in Zimbabwe? And why does QE2 seem to be making the dollar stronger rather than weaker, as the inflationistas predicted?
Anatomy of a Hyperinflation
Professor Michael Hudson has studied hyperinflation extensively. He maintains that “every hyperinflation in history stems from the foreign exchange markets. It stems from governments trying to throw enough of their currency on the market to pay their foreign debts.”
It is in the foreign exchange markets that a national currency becomes vulnerable to manipulation by speculators.
The Zimbabwe economic crisis dated back to 2001, when the government defaulted on its loans and the IMF refused to make the usual accommodations, including refinancing and loan forgiveness. Zimbabwe’s credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its
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WHAT EVER HAPPENED TO THAT DOLLAR CRASH?
by ilene - November 29th, 2010 2:55 pm
The Pragmatic Capitalist asks, WHAT EVER HAPPENED TO THAT DOLLAR CRASH? As a reminder, Pragcap does not view QE2 as inflationary. – Ilene
Back in October the economic buzzwords had become “money printing” and “debt monetization”. Of course, at the time, the Fed was initiating their policy of QE2 and you’d have been hard pressed to find someone in this country (and around the world for that matter) who wasn’t entirely convinced that the USA was about to send the dollar into some sort of death spiral. QE2 was about to set off a round of inflation that would make Zimbabwe look like a cakewalk. And then something odd happened – the dollar rallied as QE2 set sail and hasn’t looked back since.
Just days before the dollar rally started I said the market was excessively confident in the Fed’s ability to create inflation and misinterpreting the impacts of QE2:
“If my theories prove correct it is likely that the dollar is well oversold and equities have become overextended on false hopes of a Fed driven economic recovery. This means the market is excessively concerned about inflation and we are likely to move closer towards our economic reality of disinflation with a higher risk of deflation than high inflation. If this is correct it means there is a fairly sizable air pocket beneath risk assets currently. Warren Buffett once said it is better to be greedy when others are fearful and fearful when others are greedy. I am currently fearful.”
Since then we’ve seen a 7%+ move in the trade weighted dollar and the smallest 12 month increase in the history of the CPI report. In other words, inflation remains non-existent. For the minority who understood how QE was actually going to impact the economy this was an obvious inefficiency at work (yes Eugene Fama, you are still wrong and this was real-time evidence of it). QE2 wasn’t inflationary and it never was going to be inflationary because it merely alters the term structure of outstanding government debt and nothing more. It is not
This was just one more opportunity for the fear mongering hyperinflationists to latch onto something. Even as Ben Bernanke himself explained that he was not printing money we continued to see aspiring Presidential candidates, talking heads and even bunny rabbits explain to millions how the Fed was destroying the value of the dollars…
DEEP THOUGHTS FROM DAVID ROSENBERG
by ilene - November 27th, 2010 9:11 pm
Courtesy of The Pragmatic Capitalist
Via WealthTrack:
“On this week’s Consuelo Mack WealthTrack, a Financial Thought Leader who called the credit and housing bubbles way ahead of the pack. Gluskin Sheff’s prescient Chief Economist, David Rosenberg shares his economic and market outlook, plus advice on how to invest in it.”
Bernanke Is Making the Crisis Worse
by ilene - November 23rd, 2010 7:10 pm
Bud Conrad of Casey Research delivers some more harsh criticism to Ben Bernanke regarding QE2, foreign relations and currency devaluation. – Ilene
Courtesy of Casey Research
The Fed is a corrupt and powerful institution, and Chairman Bernanke is making the global crisis worse. His new speech given last week in Europe was terribly misguided and will upset markets as the Chinese and Germans won’t ignore his challenges. Bernanke’s interpretations of the markets have been wrong since before he was appointed to head the Fed, and his actions are doing nothing but aggravating the situation.
In this seminal speech, titled “Rebalancing the Global Recovery,” Bernanke not only defended QE II as the right policy, but also attacked the monetary policy of China, the biggest holder of U.S. debt, an action that must be understood for how misdirected it is.
Here are a few excerpts from the speech:
On our "tepid" recovery
- In sum, on its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years.
Indeed, although I expect that growth will pick up and unemployment will decline somewhat next year, we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.
On China
- The strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.
… For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth [i.e., China and its strategy] cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.
On defending QEII as the right policy
- Following up on this earlier success, the Committee [i.e., the Federal Open Market Committee] announced this month that it would purchase additional Treasury securities. In taking that action, the Committee seeks to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation that would prove damaging to the recovery.
Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver
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THE PATH TO DEFLATION: JAPAN VS THE USA
by ilene - November 22nd, 2010 11:56 pm
The Pragmatic Capitalist looks at THE PATH TO DEFLATION: JAPAN VS THE USA
Here’s a longer perspective of the chart I’ve often referenced in the past showing how similar our current inflation trend is to Japan’s in the 90′s. As the housing double dip takes hold in the coming months, it’s likely that inflation will remain very low and concerns about deflation will reemerge (via the NY Times):
“The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core
inflation rate — excluding food and energy — rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession.
As the accompanying chart indicates, the core inflation figures are charting a path roughly similar to one shown in
Japan 15 years earlier. That has been true despite a much stronger reaction by the American central bank, which was determined not to make the same mistakes the Japanese made.Deflation is feared for several reasons. If consumers come to expect it, as happened in Japan, there is a strong incentive to delay purchases while waiting for a lower price. That can restrain economic activity and increase unemployment. In addition, deflation places downward pressure on asset prices, worsening the situation of those who are indebted.”
Source: NY Times
RISKS TO THE OUTLOOK
by ilene - November 22nd, 2010 4:49 pm
The Pragmatic Capitalist discusses RISKS TO THE OUTLOOK. In addtition to listing David Rosenberg’s concerns, Pragcap adds one of his own — a double dip in housing. – Ilene
Courtesy of The Pragmatic Capitalist
David Rosenberg provided a nice list of risk in this morning’s client letter. The one major risk that Rosenberg and the market is largely overlooking at this juncture is the housing double dip. This has the potential to be THE most important story of 2011. As I’ve previously explained, declining asset values are highly destructive during a balance sheet recession. If the housing double dip surprises to the downside the problems that we’ve swept under the rug will quickly reemerge and this time there won’t be any political will for government intervention.
I still believe we are mired in a balance sheet recession that will result in below trend growth, deflationary risks and leaves us extremely vulnerable to exogenous risks that could exacerbate the current malaise. Rosenberg’s excellent list follows:
1. China is getting more active in its policy tightening moves as inflation pressures intensify. It’s not just food but wages too. Headline inflation, at 4.4%, is at a 25-month high. The People’s Bank of China (PBOC) just hiked banking sector reserve ratios by 50 basis points to 18.5% — the second such increase in the past two weeks and the fifth for the year. This could well keep commodity prices under wraps over the near-term.
2. European debt concerns will not be fully alleviated just because a rescue plan has been cobbled together for Ireland as it deals with its banking crisis. The focus will now likely shift to other basket cases such as Portugal and Spain. Greece has a two-year lifeline before it defaults. This saga is going to continue for some time yet.
3. Massive tightening in U.S. fiscal policy coming via spending cuts and tax hikes. This is the part of the macro forecast that is not given enough attention. See States Raise Payroll Taxes to Repay Loans on page A5 of the weekend WSJ.
4. Gasoline prices are about six cents shy of re-testing the $3-a-gallon threshold for the first time since mid October 2008. On a national average basis, prices at the pump are up 26 cents from a year ago — effectively draining about $25 billion out of household cash flow. Tack on the coming
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Robert Prechter Explains The Fed, Part I
by ilene - November 19th, 2010 3:19 pm
Robert Prechter, Elliott Wave theory expert, examines the Federal Reserve. – Ilene
Via Elliott Wave International, Robert Prechter Explains The Fed, Part I
The ongoing financial crisis has made the central bank’s decisions — interest rates, quantitative easing (QE2), monetary stimulus, etc. — a permanent fixture on six-o’clock news.
Yet many of us don’t truly understand the role of the Federal Reserve.
For answers, let’s turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter. Today we begin a 3-part series that we believe will help you understand the Fed as well as he does. (Excerpted from Prechter’s Conquer the Crash and the free Club EWI report, "Understanding the Federal Reserve System.") Here is Part I.
Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert PrechterAn argument for deflation is not to be offered lightly because, given the nature of today’s money, certain aspects of money and credit creation cannot be forecast, only surmised. Before we can discuss these issues, we have to understand how money and credit come into being. This is a difficult chapter, but if you can assimilate what it says, you will have knowledge of the banking system that not one person in 10,000 has.
The Origin of Intangible Money
Originally, money was a tangible good freely chosen by society. For millennia, gold or silver provided this function, although sometimes other tangible goods (such as copper, brass and seashells) did. Originally, credit was the right to access that tangible money, whether by an ownership certificate or by borrowing.
Today, almost all money is intangible. It is not, nor does it even represent, a physical good. How it got that way is a long, complicated, disturbing story, which would take a full book to relate properly. It began about 300 years ago, when an English financier conceived the idea of a national central bank. Governments have often outlawed free-market determinations of what constitutes money and imposed their own versions upon society by law, but earlier schemes usually involved coinage. Under central banking, a government forces its citizens to accept its debt as the only form of legal tender. The Federal Reserve System assumed this monopoly role in the United States in 1913.
What Is a Dollar?
Originally, a dollar was defined as a certain
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DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH
by ilene - November 18th, 2010 3:34 pm
DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH
Courtesy of The Pragmatic Capitalist
The following paper by Paul Krugman is an excellent analysis of the current situation in the United States. Professor Krugman accepts Richard Koo’s “balance sheet recession” and draws similar conclusions to Koo – primarily that government must maintain large deficits in order to offset the lack of spending by the private sector. The key component missing in both Krugman and Koo’s argument is the idea that a nation that is sovereign in its own currency cannot default on its “debt”. Nonetheless, the conclusions we all come to are similar – a temporary deficit is not only necessary, but an economic benefit during a balance sheet recession:
“In this paper we have sought to formalize the notion of a deleveraging crisis, in which there is an abrupt downward revision of views about how much debt it is safe for individual agents to have, and in which this revision of views forces highly indebted agents to reduce their spending sharply. Such a sudden shift to deleveraging can, if it is large enough, create major problems of macroeconomic management. For if a slump is to be avoided, someone must spend more to compensate for the fact that debtors are spending less; yet even a zero nominal interest rate may not be low enough to induce the needed spending.
Formalizing this concept integrates several important strands in economic thought. Fisher’s famous idea of debt deflation emerges naturally, while the deleveraging shock can be seen as our version of the increasingly popular notion of a “Minsky moment.” And the process of recovery, which depends on debtors paying down their liabilities, corresponds quite closely to Koo’s notion of a protracted “balance sheet recession.”
One thing that is especially clear from the analysis is the likelihood that policy discussion in the aftermath of a deleveraging shock will be even more confused than usual, at least viewed through the lens of the model. Why? Because the shock pushes us into a world of topsy-turvy, in which saving is a vice, increased productivity can reduce output, and flexible wages increase unemployment. However, expansionary fiscal policy should be effective, in part because the macroeconomic effects of a deleveraging shock are inherently temporary, so the fiscal response need be only temporary as well. And the model suggests that a temporary rise in government spending not only won’t
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BEN BERNANKE EXPLAINS THAT QE IS NOT INFLATIONARY, JUST AN ASSET SWAP
by ilene - November 7th, 2010 2:34 pm
Pragcap’s view of QE3 differs from a number of other financial writers we post here in the Favorites. If you’re puzzled after reading this article, I suggest reading Pragcap’s comment section, particularly comments by Kid Dynamite. – Ilene
BEN BERNANKE EXPLAINS THAT QE IS NOT INFLATIONARY, JUST AN ASSET SWAP
Courtesy of The Pragmatic Capitalist
Ben Bernanke was at Jacksonville University this past Friday discussing the Federal Reserve with college students. It’s actually a very good discussion. He goes through the banking crisis step by step and provides a very clear explanation of the Fed’s role during the crisis. He confirms most of what I have been repeating for weeks now.
Most importantly, however, he explains what the Fed is doing going forward. He makes several critical points:
- He explains that the Fed “is not printing money”. They are merely swapping treasuries for deposits (sound familiar?). As he mentioned in his op-ed the other day there is no reason to believe this operation is inflationary. It alters the duration of debt outstanding and nothing more. QE IS NOT INFLATIONARY.
- He says the price increases in commodities (caused entirely by speculators and not fundamental changes) are not a concern because the slack in the economy will make it difficult to pass these costs along to consumers (sound familiar?). Unfortunately, I think the Chairman is overlooking the fact that corporations will be less likely to hire as they see their margins squeezed. This is a significant issue the Chairman appears to be glaring over. It should not surprise any of us that he is viewing this environment as an academic and not as a business owner. Just one more piece of evidence showing he is unqualified for this position.
- The Chairman proves that he absolutely does not understand how the US monetary system functions when he says that the US is analogous to Japan in that we have high government debts. He claims that Japan funds their debt internally. He clearly has no idea that the bond markets fund nothing in the USA. He goes on to explain that the US budget deficit creates risks for the country despite previously explaining that high inflation is not a problem. Clearly, the Chairman believes the government balance sheet is no different than a household balance sheet. No wonder
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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