Yesterday I commented that central bankers are loath to pull back on their support for the financial system before it's clear the economy has staged a stronger recovery.
More importantly, the US Federal Reserve has a long and painful history of ignoring asset price inflation.
The current stock market boom is clearly another asset bubble. None of the market fundamentals support the astonishing gains the market has made since March 9, 2009. Stimulus money has fueled this mini-boom.
Yet the Fed is not taking any action. Through it all we are told the Fed will remove the stimulus before the funds find their way into general circulation and fuel inflation. "Trust us", we are told.
Look at this chart (click on image to enlarge):
The official rate of Consumer Price Index shows that inflation currently stands at -2.01%. Officially, inflation is non-existant and in negative territory.
No need to remove the stimulus... right?
Not so fast.
As faithful readers will recall, I posted this piece in July which outlined how the method for calculating inflation was changed by the government in the 1990s.
How would the chart above look if we calculated inflation using the same formula in place from 1872 to 1990? Would we still be looking at a negative (-2.01) rate?
Shadowstats.com has produced this graph which makes that comparision (click on image to enlarge):
Calculated using the same method as the that used in the late 1970s reveals that inflation is, in fact, proceeding at 5.44%.
Inflation is here. And the US Federal Reserve is ignoring it.
So how can you have faith they will withdraw the stimulus before it triggers a similar period of 22% plus mortgage rates?
The short answer... you can't.
Inflation is already here and the US Federal Reserve has failed to act.
Now we have a giant bomb on the verge of igniting. How long before it triggers a huge run-up in rates?
Tick, tick, tick.
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