Tag Archives: Paul Volcker

Deflation or Inflation? Yes

Since the beginning of the “Great Recession” that Americans still find themselves in, there have been prognostications of incredible inflation while other “experts” claim that crippling deflation would be the necessary outcome.  Could they both be right?

Perhaps – there are two major forces at play in our economy right now: price inflation and income deflation.

Price inflation

Wheat Prices

Commodities are going through the roof.  Oil is above $90 a barrel, corn is $6.07 per bushel, March wheat got as high as $8.05 a bushel this week soybeans, cotton, sugar .. you name it.

It’s not just food and clothing.  Copper, gold, silver are also much higher recently.  All of these commodities are building blocks for the food we eat, the clothes we wear and consumer items Americans need.

Oil prices hit twice as hard.  Not only is petroleum a raw material for plastics, medicines, food and clothing, but it is also used to fuel the trucks, trains, planes and ships that transport those goods to stores.

Now that the government is pushing to raise the amount of ethanol in gasoline, rising corn prices will also hit Americans in two places.  As a component of E10/E15/E85, it will increase the price at the pump.  As more corn is turned into fuel, the supply-demand curve will steepen and everything that has corn as an input will see raw material prices increase even faster.

Wage/Income Deflation

The American job market has not recovered from the recession and is likely to take several years to do so.  As The Wall Street Journal reports, this recession is already longer than the last wage period where wage deflation took hold.

The only other downturn since the Depression to see similarly large wage cuts was the 1981-82 recession. But the latest downturn is already eclipsing that one. Unemployment has stood above 9% for 20 straight months—longer than the early 1980s stretch—and is likely to remain above that level for most of 2011, putting downward pressure on wages.

With millions more workers seeking jobs than there are available, employers have gained a stronger position in pay negotiations.  The job market is incredibly competitive allowing employers to cherry pick the best talent for the salary dollar.

Another downward wage pressure is that employers do not have to give big salary increases or bonuses to keep talented employees.  A tough job market means fewer employees will be willing to leave and if they do, there is an ample pool of workers ready to take their place – perhaps at a reduced rate.

The Journal post shows evidence that these dynamics are cutting wages for American workers.

Economists had wondered how far this dynamic would go in this recession, and now the numbers are starting to show it: Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.

Prices Higher and Incomes lower – Inflation or Deflation?

Both.  Production costs are going up, but consumer buying power is falling off.

Consumers have to pay home heating costs, put gas in their cars, buy clothes and food.  If all of those things cost more, and consumers are making less money .. there is less consumer potential in the market place.  Welcome back the nemesis from the late 1970’s and early 1980’s: stagflation.

Remember the “misery index” from the 1976 and 1980 Presidential election?  The misery index is computed by adding inflation to unemployment.  If both are high, a stagnant economy and high inflation are present.  Stuff gets more expensive to make, but no one can afford it so the economy stagnates.

Jimmy Carter holds the current record of 21.98, but Obama’s current term is on a run taking the misery index from 7.73 at the beginning of his Presidency to 10.94 in November.  The current numbers are deceptively low for two reasons: the federal reserve inflation rate and bureau of labor’s unemployment numbers aren’t telling the whole story.

Anyone that has been to the grocery store or filled their car up with gas knows that things are much more expensive lately.  Because the government’s inflation measure does not include food and energy, it doesn’t take into account the very things that Americans simply must buy.  The incredibly low inflation rate reported by the fed is a sham and does not truthfully report the increase in living costs that Americans face.

The unemployment numbers are also portraying a false positive.  BLS statistics do not include those that have simply given up looking for work or have run out of benefits.  Unemployment is a measure of first time applications.  After 20+ months, not many first timers left to apply.  As this article from the Associated Press states, 9.4 is not as good a number as the President would have America believe (emphasis mine).

The unemployment rate did come down, to 9.4 percent from 9.8, but that was partly because people gave up looking for work.

..

All told, employers added 1.1 million jobs in 2010, or about 94,000 a month. The nation still has 7.2 million fewer jobs today than it did in December 2007, when the recession began.

Producers have been eating the increasing costs of their raw materials and transportation.  That practice is ending as margins have been squeezed as tightly as possible.  The cost to the consumer is going up, but the consumer now has less money to spend.  Stagflation, again..  oddly enough, under another progressive Democrat President that has been listening to Paul Volcker for economic advice.  Same players, same results.

Remember When They Warned Us That Japan Might Not Always Buy Our Debt

I was young, but I remember the news stories and the dire warnings from family friends, parents and uncles: Japan owns us .. and they may not always want to.  Yeah, that was a long time ago and a major player has changed, but the warning is still relevant.

Before the Japanese asset price bubble burst (sound familiar? – yeah, different article .. I know) in the early 1990’s, Japan was the single largest holder of U.S. Treasuries (our debt).  I can vividly remember being reminded of cheap Japanese goods flooding U.S. markets, the “Buy American” campaign and the fact that if Japan ever stopped buying our T-Bills, we’d be screwed.  Japanese firms were buying up U.S. real estate and there were even conspiracy theories that they would call in the debt if it went bad and take our National Parks or mineral-rich land.  Sounds nothing like today …

We apparently never learned our lesson.  We kept on borrowing and spending as-if we would never have to pay it back.  Japan’s economy collapsed and another manufacturing giant took its place as America’s sugar daddy – China.

Oh, I know, all that noise about the Japanese not wanting to purchase our debt never happened and another benefactor showed up to take their place when the Tokyo couldn’t.  So, “why so serious”?  Things are different now.

From 1970 to 2008, we can call it the BB period (before Barry), the highest debt load as a percentage of GDP was 40.8% (yeah that includes G.W. Bush’s tenure). In 2009 we suddenly spiked to over 60% and it’s scaring some folks – namely those who hold large portions of our debt.

It might have a different slant if 2009 was projected to be an out-lier, but the Obama administration and money-drunk Progressive Congress have gone all out.

  • $56 Billion in new regulations
  • $1 Trillion health care reform
  • $785 Billion Stimulus
  • Billions in foreign aid
  • Pushed Unemployment to a record-high 99 weeks of benefits
  • my stomach is turning flips .. can’t go on with the list – but you get the point

This irresponsible spending of money that America does not have is pushing our debt to “unsustainable” levels.  In 2010 it’s projected to be 67.1% of GDP and take a wild guess for 2011 – down?  nah .. 70.1% of our national gross domestic product will be represented by debt.  The cause of the mess is obvious, but that’s not the point of this post – it is the dire effects that about to hit us all smack in the face.  Just like the young adult parents have to let feel the pain of their poor choices – our benefactors are leaving us to fend for ourselves.

As the Fed released a torrent of printed money at our debt, outside investors are running away from purchasing our debt.  The Fed’s monitization of the debt was supposed to cause higher bond prices and therefor lower yields (interest rates).  That would make credit easier to get and savings less attractive.  All of this to get us to go out and spend money that many don’t have and some are too afraid to spend.  It didn’t work.

Americans aren’t looking for more credit, they’re looking for jobs.  The Chinese and Europeans aren’t looking to have yeilds go down and they have absolutely no interest in seeing a flood of pretend money in international markets.  They seem to have had enough.  Americans aren’t borrowing and now it appears the rest of the world may no longer be lending.

Despite the printing of gobs of cash and buying our own debt with the monopoly cash – yields rose.  The only cause for that is that the Fed may be the only one buying T-bills in any decent volume.  As a side effect, Americans get to watch the dollars buy less.  Hello late 1970’s .. inflation, milk, gas, you name it.. out of reach.  Oddly enough, Paul Volcker was there then too.

Is it too late for American austerity?  Remember when they warned us?

Fed Proposing Carter Era Inflationary Policy to Fix Economy

You’d think Paul Volcker was in the driver’s seat again.  While he’s no longer running the Fed, perhaps his leadership as the President’s chief economic advisor is giving him more of a voice than any of us want.

In his turn at the Fed, it was Volcker that pushed for the massive and crippling inflation that many of us remember having lived through.  Many in the Fed are considering giving that strategy another shot.

The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed’s informal target.

The rationale is that getting inflation up even temporarily would push “real” interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.[1]

Didn’t we learn anything from the move in the 80’s to end the inflationary mess?  Do they really think that consumers and businesses are holding on to their money because %1.36 interest on a CD is an amazing way to grow money?  From what planet do these ridiculous, Keynesian, demand-side retards come from?  The Fed is trying to fix a problem over which it has little power.  Consumers aren’t spending because they are worried about the jobs situation and business are holding on to extra cash because the regulatory and tax situation are still in-limbo.  Tack on Obamacare, looming EPA craziness, and an anti-business administration in Washington D.C. and you have the perfect recipe to paralyze an economy.

Don’t forget that the interest rates that the Fed controls would also push up lending rates on the second mortgages, lines of credit and credit cards that small businesses and consumers use to fund a portion of their spending.  If more money goes to paying the interest, less will go to actual spending.

The loonies in the Fed need to sit tight and we the people will help in November.  Getting a pro-business Congress that secures the Bush era tax cuts for the near future, slaps some limits on Obama’s czarist regulatory agencies, and puts real stimulative legislation in-play are the real solutions to our current economic situation.  Paying $5.00 for a loaf of bread will simply move the spending from non-essentials like T.V.s and travel to well ..bread.


[1] Wall Street Journal -“Fed Officials Mull Inflation as a Fix”http://online.wsj.com/article/SB10001424052748704689804575536391713801732.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

Is Obama Pursuing a Weak Dollar Policy?

Paul Volcker - Obama's Chief Economic Advisor

Paul Volcker - Obama's Chief Economic Advisor

Within a few days of Obama entering the White House, Tim Geithner stated that a strong dollar is in the best interest of our economy.  The actions taken to date and some historical analysis of Obama’s chief economic advisor, Paul Volcker, would point at a policy of continued weakening of the U.S. currency.  If the dollar continues it’s slide just an additional 5% it will be at be at an all-time low.

Today, the Wall Street Journal published an article stating that, “Pacific Rim government leaders will tell U.S. President Barack Obama about global concerns over the falling dollar and burgeoning U.S. debt at a summit this week..”.  Their concerns are well founded and can be grouped together with those of the Chinese, European Union, Brazil and Canada.

One indicator of the Administration’s desire for an even-weaker dollar is it’s push to have China stop managing it’s currency and allow it to float.  If that happens, the only possibility is a stronger yuan, and therefor a weaker dollar.  Furthermore, on October 31st of this year, Obama said that the U.S. economy should be based even more on exports.  In order for that to occur, our currency needs to greatly weaken against those of countries we have a large trade imbalance with.. like China.

A weak dollar isn’t all bad news as long as the decline is controlled, slow, and has a desired end-point.  When the dollar weakens, international exports from America become less-expensive for others to buy.  This increases foreign demand for American products.  This only works when the American products don’t require components from other countries as those items are imports and will cost much more under a weakened U.S. currency.

One implication of a weak dollar is inflation.  As the dollar weakens, so does it’s purchasing power.  Imports become more expensive which will relieve downward-pressure on domestic products allowing those items to increase in price as well.  The dollar is also how all trades in oil are transacted.  As the dollar weakens, crude gets more expensive.  Considering that petroleum is an input into so much of our economy (fuel for trains, trucks, planes, ingredient in plastics, rubber, etc), it hits Americans both directly in the gas tank and indirectly in stores, restaurants and vacation spots.

Carter era gas lines

Carter era gas lines

The last sustained depreciation of the dollar was during 1977 and 1978.  There are some striking resemblances to that bleak period in U.S. economic history to today.  We have a liberal Administration, we have hostages in Iran (I’m fairly certain that is not linked to the weak dollar), and Paul Volcker is back.  During the late 70’s Volcker was the Federal Reserve chairman and directly orchestrated the dollar’s collapse – on purpose.  Gas, groceries, imports and just about everything else got insanely expensive as double-digit inflation hit the pocketbooks of U.S. citizens.

We’ve seen a too-weak dollar before and it wasn’t pretty.  Now we have some of the same people, trying the same thing, again.

Economy Nearing Carter-Era Catastrophe – Volcker Present Again

Jobless RecoveryInterpreting the latest unemployment report could make one’s head spin, but there is valuable information in it other than the tragic 10.2% unemployment rate and the fact that the economy has shed an additional 190,000 jobs in the last month.  Yahoo news points at a separate survey that shows 558,000 more people were unemployed in October than September.  This discrepancy is due to the fact that once someone gives up looking for a job or runs out of benefits, they are not longer technically “unemployed”.

Paul Volcker, the President’s chief economic adviser, and others are pointing to the idea that perhaps this is a jobless recovery.  To be a jobless recovery – first, one would expect a recovery.  If the economy were recovering, credit wouldn’t be shrinking, banks would be mending, and consumers would be spending.  In direct contradiction to a jobless recovery:

5 banks failed this week, 121 for this year alone:

United Commercial Bank, San Francisco, CA
Gateway Bank of St. Louis, St. Louis, MO
Prosperan Bank, Oakdale, MN
Home Federal Savings Bank, Detroit, MI
United Security Bank, Sparta, GA

Consumer spending dropped by the largest amount in nine months:
Consumer Spending Falls In September, Biggest Drop In Nine Months

Consumer confidence drops in October:
Consumer Confidence Survey

Real incomes flat and spending drops relative to inflation:

Income Flat, Spending Falls as Consumers Stay Wary

The sources vary, but are consistent.  We are not experiencing a jobless recovery, we are heading into a jobless stagnation.  This is exactly where we were during the Carter years, we are following the same actions under some of the same people, and are expecting a different result.

Many credit Volcker’s fed for ending inflation during the Reagan era by invoking a recession to reign-in out-of-control inflation.  The problem being, we don’t have any inflation.  With real-incomes dropping, consumption dissipating and credit drying-up, there is not way for producers to raise prices and expect anyone to buy much of anything.  So is the recent push of massive government spending an attempt to re-ignite inflation so that Bernanke and Volcker can work together to end it and save us all?

Carter era gas lines

Carter era gas lines

During the early 80’s, Volcker created a recession on purpose by tightening monetary policy.  His Keynesian theory then was that it was more important to reign-in inflation than save jobs.  This measure was actually needed only because of  failed Keynesian thought that continuing inflation was good for the economy.  Using monetarist policies, he corrected what Keynesian thought had brought about.

The problem now is that we don’t have job growth and we don’t have inflation.  The massive amounts of cash being poured into the economy by the Fed are not inducing price increases, it’s just watering down the money supply.  Money is being dumped into the stock market at alarming rates, mainly because there’s nowhere else for it to go.  Buying bonds is self-defeating considering the Treasury rates, investing in business at this time is suicidal.. Bernanke is using failed tactics probably at the behest of Obama’s chief adviser on the economy.  Monetary deflation with no corresponding economic inflation.

This looks like an orchestrated attempt to cause inflation so that we can do the same things that we did before.  Dump trillions into the economy and eventually producers will raise prices… well..  what if they don’t?   What if we just end up with a dept to income ratios (debt-to-GDP) rate of 70%+ (we’re at 66% by the way)?  We could easily end up spending everything that comes into this country to just service debt.  The Japanese have lost a decade of growth to thinking like this.

It’s time to cut spending, quit dumping money into the economy, let the pain correct the bubble that exists and move forward.  The Fed created the near hyper-inflationary mess that cost Carter his Presidency, made a mess during Bush’s stay, and is trying to put us in a place where they have any clue of what to do.  I am fairly certain that they don’t know how to get us to that place or a healthy economy.

While Obama is busy blaming bush, he has kept on the one person probably the most-responsible for the mess we have – Bernanke.  The President has also brought Carter’s Volcker back into the mix and Barack is egging them both on.  One can hope this is more due to nativity than purpose.