Tuesday, February 1, 2011

Stagflation, anyone? (updated)

It is said that history doesn't repeat itself, but often follows similar patterns.

And if you have followed this blog for any length of time you know my thoughts about inflation are that we are following patterns similar to what we experienced in the 1970s.

Since Quantative Easing began in 2009, I have cautioned that the biggest looming threat is not deflation, but the inevitable inflation that all this liquidity is going to trigger combined with a stagnating economy.

Inflation is already with us.

It has been taking root around the world for the past 6 months, machinations of a deliberate monetary policy to debase the world’s reserve currency.

All that debasement has had one objective... the creation of a little inflation to get America and the west out of the deflationary spiral caused by the failure of those horrid financial instruments known as OTC Derivatives and un-payable government debt.

Around the world, inflation has erupted in global food prices. Most of the world has no savings to get through difficult times and “hedge” inflationary outcomes.

Those outcomes appear quickly and change realities violently. American monetary policy and the global “race to debase” is the reason you are seeing raging crowds on TV from Ireland to Greece and Egypt.

Looking at China and India alone, despite the fact that the yuan and rupee rose 2.4% and 1.3% respectively against the dollar through November of last year, inflation rates in both countries dwarfed the relatively tame readings we are reporting in North America; Chinese consumer prices up 4.4% and India's up 8.6%.

Frequently you hear people say "if inflation is such a problem, why isn't it registering in the consumer price index?"

The answer to this supposed riddle of non-existent inflation: inflation is all in how you measure it.

In North America food, along with energy have been stripped out of our CPI, and the result is a more tame inflation reading.

But those price pressures still exist notwithstanding.

30 years ago when Ronald Reagan entered the White House, it was precisely the spike in food and energy - ignored today - that had Reagan and others so concerned about inflation.

Times change, and governments become slick and manipulative, and now those price pressures have supposedly 'disappeared'.

Calculate inflation today the way it was calculated in the 1970s, 1980s and 1990s and the federal government's measure of inflation would be substantially higher than what we are currently being told.

Once you understand that... then the latest statements from the Governor of the Bank of England that standards of living are about to plunge are not all that surprising.

Mervyn King, Britain’s counterpart to the Bank of Canada's Mark Carney, has delivered a stern, sobering message to his country:

  • "In 2011, real wages are likely to be no higher than they were in 2005... One has to go back to the 1920s to find a time when real wages fell over a period of six years."

    "The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy."

    "The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies."

    "Furthermore, inflation may rise to somewhere between four per cent and five per cent over the next few months."

    "The idea that (we) could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking."

    "Unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal."

    "I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis.”

The Governor of the Central Bank of England has looked his country in the eye and admitted that he is completely powerless to prevent the inevitable decline in living standards that inflation and a stagnating economy are about to ravage upon us.

Meanwhile in Canada, our Central Banker has been sounding alarm bells since last February about high debt and the impact of significant looming interest rate hikes combined with an economy that will not grow fast enough to offset them.

Both Governors can see what's coming.

And as the blog has repeatedly posted, it's all about inflation, a stagnating economy and the looming spectre of rising interest rates.

Meanwhile Reuters reports that more manufacturer's are warning of rising input costs.

Emerson CEO David Farr said inflation ran well ahead of the company's own projections, and the company was spending three times as much on materials as on labor.

"We'll have to significantly increase prices around the world because this is not a momentary blip," Farr told analysts on the company's conference call.

"In my opinion, I think net material inflation could run at higher levels for the next two or three years. That's a plus and a minus in many regards but in reality this is an issue we'll have to deal with. It's not going away."

Earlier this week, Illinois Tool Works, which makes a variety of products for the automotive, residential construction, and industrial marketplace, warned it might not be able to fully recoup all the raw material price increases it is seeing - even though it expects to raise prices this year.

Officially it's known as cost-push inflation. Wages don't rise, jobs don't increase and the economy founders, but manufacturing costs rise anyways pushing up prices.

QE1 and QE2 are the causes. And now there's talk of QE3.

Inflation has only just started.


Email: village_whisperer@live.ca

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