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Notes to myself, possibly of interest to others.
-- Bill Northlich

Thursday, January 13, 2011

The Case for Planned Inflation. (vs. fiat currency hyperinflation one hears so much about)

The global financial crisis and recession left behind unpayable private and public debt and an unreformed political system. It will bite in 2011...the Greenspan Credit Bubble...the broken global monetary system...a finite global oil supply...

Housing prices are sinking again, even after billions in government subsidies were spent to prop them up. Fifteen months after the official end of the recession, the median duration of unemployment -- a measure of how long the majority of the jobless have been out of work -- remains at nearly twice the level it was at 15 months after the 1983 recession.

GDP growth under a 3% annual rate, while better than zero, is simply too slow to close the output gap created by the Housing Bust Recession before a new recession arrives to widen it yet again...

every trick that generated the 4%-plus annual GDP growth that the US needs to reach output gap and escape velocity is out of the question, save the unmentionable: an inflationary boom ala 1975 to 1980 that generated an average 5.6% annual real growth -- much to my surprise when I researched it -- while wiping out a generation's debt...

The most worrisome, but least unexpected, development is fast-rising cost-push inflation...inflation that began as fast-rising oil prices in late 2009 worked its way into commodity prices in early 2010 and started to make headlines as out-of-control food costs in China and India by the end of the year...inflation in excess of 5% is already showing up in the official US producer price indexes...

If interest rates rise, albeit more slowly than inflation, figure higher money costs into prices as well, and wage inflation, too, as competition for trained labor within growing industries -- especially energy- and technology-related businesses -- drives up wage rates...

The costs of the Fed’s pro-inflation policies are largely born by the middle class. High food and gasoline prices, often dismissed by statisticians as too volatile to include in the CPI, are included in the producer price indexes, and the trend is clearly up.

Food may only represent 16% of personal consumption expenditures (PCE) for US consumers as a whole, but 4.1% food price inflation, with 7.5% intermediate food price inflation in the pipeline, is a big deal for a family making $50,000 a year. That’s down 4% from $52,000 10 years ago.

If it feels to you like you’re making less money now than 10 years ago, that’s because you probably are. Regardless of income group, the year 2000 was the high-water mark for incomes in America. According to the 2010 US Census data, the income ride has been downhill ever since.

The Fed will be able to ignore inflation as long as it remains a wage-earner’s and not a bondholder’s issue. As long as the bond market buys the weak demand-pull inflation story and bond yields do not rise too quickly, the Fed can turn the other cheek. Besides, the US can continue to export its inflation problem to China, Brazil, and elsewhere, and what are they going to do about it? They can’t fight capital inflow bonanza-induced inflation produced by raising interest rates. That just makes the problem worse. So they poke away at the margins, imposing halfhearted capital controls, and complain. Or maybe 2011 is the year they do more?
---Eric Janszen, iTulip.com, via Minyanville

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