Inflation since 1800

Presented without comment, I came across a chart showing inflation in America since 1800 (thanks, Tim Iacono), and I thought it was worth sharing, given all the talk I do about the Fed. The red line shows the cumulative effect of annual inflation, while the blue bars behind it show the actual annual rates. Do with it what you will.

[Tim Iacono]

Concentrated benefits and dispersed costs

I know, that's the most exciting headline you've ever seen on this blog. But it's also one of the most important dynamics in American politics and economics, and it's one that dominates just about everything that comes out of Washington these days. Thanks to Alex Tabarrok of the Marginal Revolution blog, we've got a nice video that explains what it's all about, focusing on why there's corn syrup instead of sugar in our Coke bottles.



Simply put, the people (farmers) who want there to be corn syrup instead of sugar in our Coke have more to gain (or lose) than the rest of us, so they make the most noise, donate the most money, and generally spend the most time and effort making sure that the laws of the land are written in a way that benefits them, even if it's at the expense of the greater good. The rest of us tend not to have enough of a dog in the fight, so we generally won't take the time to fight back, even if we're aware of the issue at hand (which we often are not). The problem is, sooner or later these little things start to add up in a way that matters significantly to us, but only in aggregate.

This video also provides a valuable lesson on the typical behavior of large companies in response to changes in input cost structure. When one input in the product they create increases dramatically in price, these companies are typically very resourceful at finding ways to replace that input at a lower cost (but similar enough quality). That's how we end up with corn syrup in absolutely every food in the grocery store, that's how all of our manufacturing jobs get outsourced to China and Vietnam (no, it's not about "currency manipulation"), and it's also one of the primary factors holding our official "inflation rate" in check.

Inflation rates are only useful statistics if we assume that the goods we're measuring are 100% the same over time, which they rarely are. Coke is different now than it was 30 years ago (and frankly, even five years ago), and so too are cars, houses, clothing, electronics, and more. That's usually a good thing, but not always. "Low inflation" is not a win for us as consumers if it means that the quality of our products is degrading over time—unfortunately, that's exactly what's been happening right under our noses, with a huge assist from government policies.

Concentrated benefits and dispersed costs—it's great when you're the focus of the concentration, not so great when you're the one bearing the costs... and when those small dispersed costs start piling up, it starts to become a pretty big cost, doesn't it?

[Marginal Revolution]

On housing and the low cost of money

I'm often writing about the perils of the Fed's monetary policy, but there are obviously some bright spots to be found out there. I'm sure by now that you've read at least one glowing article this year about the "housing recovery", and for the most part it's legitimate (even if there are some strange dynamics under the surface).

The question, of course, is whether this recovery is sustainable, and what will happen to housing prices if interest rates begin to rise from their freakishly low levels. That's a topic that Tim Iacono took on in a recent blog post, and I thought his findings were absolutely worth sharing (emphasis mine).

I’ve about had it with how giddy a large portion of the U.S. population has become about rising home prices. 

Don’t get me wrong, when first thinking about this, I was about as happy as anyone else to learn that property values are now rising sharply again since, after renting for six years, my wife and I finally bought a house about two years ago. So, we stand to benefit as much as anyone else. 

But, when you look at what’s driving home prices higher and how unnatural and unsustainable those factors are, suddenly the headlines sound more ominous than optimistic...  

Yes, low inventory is a big factor behind the home price surge as the flood of foreclosures has slowed to a trickle while strong investor demand and growing confidence amongst American consumers have surely tipped the scales in favor of higher prices. But, it is today’s freakishly low interest rates – engineered by the Federal Reserve – that have clearly played the biggest role in pushing home prices higher, simply because most people buy a house based on the monthly mortgage payment, not the purchase price. 

And when you see the impact record low rates have on purchase prices, you might be as concerned as I am... 

Based on a constant mortgage payment of $1,100 per month (what seemed to be a good national average based on this story and others like it), today’s 3.31 percent 30-year mortgage rate will finance a house at almost double the price that the 40-year average mortgage rate would!

While there are clearly other factors involved, it is the Federal Reserve’s asset purchase program that is largely responsible for these freakishly low rates (it is one of their stated policy objectives) and, while the central bank has promised to keep rates low for a long time and to continue buying mortgage-backed securities indefinitely, those actions are by no means guaranteed. 

This is a dynamic that I've been well aware of for a long time now, but it's still striking to see it laid out graphically like in Tim's piece. In just the last 12 months, 30-year mortgage rates have come down from 4.2% to 3.4%. Using Tim's $1,100 monthly payment, that means that a buyer who waited a year can now afford to buy a $276,000 home, as opposed to a $250,000 home last year.

That's an increase of 10.4% year-over-year because of the low cost of money, and yet home prices are only reported to have increased by 5 or 6% over the last year, even according to the rosiest estimates. Therefore, in any realistic terms, the price of housing has continued to decline this year, rather than rebound sharply as the headlines would have you believe.

If interest rates are really going to stay this low forever, then you shouldn't have much to worry about, and you can go ahead and buy real estate to your heart's content (just don't read these three posts before you do so). But as Wells Fargo is always reminding me in their constant mailings, "Interest rates rarely stay put for long!"

And if Wells Fargo is indeed correct, well then... Tim's chart tells us that housing's got another pretty significant leg down (like, 30 or 40%) to get back to those historical average rates. And that likely won't be pretty for anybody hoping to sell property at any point in the next few decades. Good luck!

[Iacono Research]

Catastrophe bonds, QE, and you

Following up on my favorite topic (the Fed), and making a connection with this week's biggest news (Hurricane Sandy), we have this piece from last week from Businessweek.

Bonds designed to protect insurers from payouts on natural disasters are headed for the best returns since 2009 as a superstorm expected to develop from Hurricane Sandy threatens to strike the U.S. Northeast. 

Catastrophe bonds, which lose money if they’re triggered, have returned 10.3 percent this year through last week, more than triple the 2.79 percent gains in the corresponding period of 2011, according to the Swiss Re Cat Bond Total Return Index. The measure, which tracks dollar-denominated debt sold by insurers and reinsurers, includes bonds linked to potential storm damage in the U.S. 

Investor demand for the securities has grown with yields on speculative-grade corporate bonds hovering at record lows as the Federal Reserve holds down interest rates to boost the economy. About $1 billion of catastrophe bonds may be exposed to the storm, according to a “loose” estimate by Patti Guatteri of Swiss Re Capital Markets. 

“Some investors are looking for bids on specific bonds that are the most exposed to the Northeast,” Guatteri, director of insurance-linked security trading in New York, said today in a telephone interview.

Yeah, toss this one in the old "unintended consequences of QE" pile. People can't get investment yield from traditional securities, but they feel the need to do something to keep up with inflation, so they start scrambling around looking for yield wherever they can find it.

So it is that we end up with individual investors starting to play around in the catastrophe insurance business, taking on risk that even the large insurance companies don't want. As a result, the price of these things skyrockets (and the yield goes down), even as the exact opposite should be happening with Sandy bearing down on the East Coast.

This is (was) nothing but outright gambling by a bunch of desperate investors who can't see any other way of keeping up with Fed-sponsored inflation. All of this is absolutely fantastic, what could possibly go wrong? Seriously, taking all of your money to Vegas and betting on black would be a better bet than this. The investors who thought this was a good idea deserve whatever they get as a result (i.e., no bailouts), no matter how much they may have thought the Fed "forced them" to do it. Dumb investing is dumb investing.

[Businessweek]

Gas stations vs. department stores

I thought this chart here from the Illusion of Prosperity blog was pretty telling, and I think it says just about everything you need to know about what Fed policy has done for and to our economy over the last decade-plus (obviously the internet has a role to play here as well, but that dynamic alone cannot and does not account for a tripling of the ratio in a dozen years). Regardless of the reasons behind the spike in this chart, it's clear that inflationary monetary policy is powerless to restore lost retail jobs, but certainly ensures that we all spend more and more of our paychecks at the pump and the grocery store.

Pretty awesome, right? Hooray, Bernanke!

And hey, while we're at it, let's share another semi-terrifying chart from the same blogger.

Good times. Sooner or later, nobody will have any home equity at all, and then we'll all be living on Easy Street. Which will be good, because gas will be so expensive that we won't be able to afford to drive to any other streets. I can't wait.

Bernanke's Terror Alert Scale

Since I'm such a frequent critic of Federal Reserve policy, I'm pretty sure there's no way I can let yesterday's "aggressive", "unprecedented", "open-ended" announcement of what amounts to permanent quantitative easing ("QE") go by without comment. Indeed, I won't.

There's about a million different angles from which I could attack this latest policy announcement (it's desperate, it's ill-timed, it's dangerous, it fans the flames of inflation at a time when the economy can ill afford it, it jacks up the Fed's balance sheet leverage to astonishing and terrifying levels, it makes me wonder just how freaking bad things are out there if the Fed feels like this is a "reasonable" step, and it therefore isn't exactly confidence-inspiring), but I'm not even going to bother with any of those approaches. Instead, I'm actually going to celebrate (yes, you heard me), because this means that the end of the era of Fed-manipulated markets is now imminent. The Fed fired its last meaningful bullet yesterday, and now the endgame is at hand. Let me explain what I mean.

In the immediate aftermath of 9/11, the newly-created Department of Homeland Security unveiled its "Homeland Security Advisory System" (better known to most as the "terror alert level" or "terror alert scale"), a color-coded, semi-ambiguous chart indicating just how scared we all should be of a terrorist attack at any given moment. The intent of the program was in large part to impact the psychology of citizens, making them more vigilant and aware of their surroundings when times warranted.
 
Unfortunately, the terror alert scale was an utter failure. Since the level was essentially always set to either "yellow" or "orange", nobody ever really paid any attention to it. It simply became a part of the background noise, consistently ignored because of its ubiquity. People are able to remain vigilant and aware only for short periods of time—when they're asked to do so for years at a time, they simply become complacent. Not surprisingly, the terror alert scale was eventually retired, presumably still set to "orange".

The Fed's latest QE program similarly attempts to impact the psychology of the American citizens—if consumers and investors know that the Fed is committed to always printing money, they'll be more likely to step out on the risk scale and start spending and investing money (while it's still worth something) rather than waiting around until tomorrow. It theoretically creates a certain sense of urgency that the Fed has been laughably unable to instill up until now.

Unfortunately, perma-QE is likely to fail in the same manner that the DHS terror alert scale ultimately failed. Sure, QE-∞ will cause a Pavlovian short-term rally in the markets, just like the terror alert scale caused us all to be super-vigilant at airports for about 3 months. But sooner or later, this perma-QE will just fade into the background like the "orange alert" that we all ritualistically ignored after a while.

The simple fact is, "QE always" is "QE never", just like anything else that was once rare but then became ubiquitous (like, say, a college education). Once a new baseline expectation has been set and adjusted to, this "easing" simply becomes part of the landscape, and it will become increasingly difficult—if not impossible—for the Fed to effect incremental change. In all areas of life, ubiquity brings along with it an ironically increased invisibility—call it the paradox of ubiquity. Ubiquity breeds irrelevance, for Fed policy just like anything else.

To date, previous QE programs have been effective because they have been sudden, strong, and powerful—like a quick shot of cold air on a hot summer day. But once we've turned the AC on full blast and left it there for months at a time, does anybody even notice it anymore? Or do they only notice when it's taken away? I'd argue the latter, which means that the days of the Fed influencing the market with incremental policy proposals are largely in the past.

So as I said to lead off this rant, the Fed has now fired its last meaningful bullet (some intrepid journalists in fact called it a bazooka), and it sure as hell better work and work quickly. Because if it doesn't, they're going to have to do something far beyond drastic to ever have any impact on the economy (or markets) again, now that they've made permanent QE the baseline.

At some point in the not-too-distant future, the market will experience another correction, and the economy will tilt into another recession. The question is, what will the Fed do then, and will it have any impact whatsoever? The Bernanke Terror Alert Scale is now definitively set to "red"—to have any future effect, Bernanke will have to invent a new color, and I for one don't think that's possible.

So congratulations, Chairman. You've seemingly pulled off the impossible and printed yourself into irrelevance. Enjoy these next few weeks or months of Fed-fueled market rallies while you can—I'm betting this may be the last time you'll ever see them.

On droughts and inflation

Hey, have you noticed? It's been really hot this summer. Like, absurdly hot. And dry. And this could be a really, really big problem for our economy.

The nation is experiencing its worst drought in over half a century. Grain crops, particularly corn, are being devastated as only 31% of the domestic corn crop in is good shape versus 40% just one week ago. The same is true for soybeans as only 34% is in good shape versus 40% last week.

As a result both commodities have hit record highs on the world futures market. For the first time in history corn exceeded $8.00 per bushel to $8.05 (one year ago--$5.50) and soybeans are at a high of $17.12 per bushel ($10.90 a year ago). It is projected by some commodities experts that these price may go up yet another 20-30%. The inflationary impact of these vital grains will be felt very soon in the nation's grocery stores as virtually all meat and many processed foods are dependent on these commodities. This on top of an economy that is already languishing in recession levels.

Right. Food inflation is bad, especially for those of us on already-strained budgets when unemployment remains stubbornly high. Things have gotten so bad that ranchers can no longer afford to keep/feed their cattle herds, so they're selling them off at auction at bargain-basement prices. So the corn and grain shortage in turn causes a meat shortage, meaning that the spillover effects on food prices are likely to be far-reaching. (Check below for a graphical representation of this year's drought versus previous years).

Chart from NY Times via Barry Ritholtz; CLICK to enlarge

But in my opinion, the more concerning issue here is what this might mean in terms of future Fed policy, which we haven't taken much time to discuss here in recent months. Now seems like a good time to change that.

Over the last few years, our economy has become increasingly dependent upon loose Fed policy to keep itself going (and to allow the federal government to finance its ever-growing debt). Recently, the economy has begun to show significant signs of slowing growth, and as a result people everywhere are calling for a third round of "quantitative easing"—a policy that I absolutely hate—to help out the economy.

That's great and all, but can the Fed really afford to engage in inflationary monetary policy at a time when American consumers are already getting squeezed at the supermarket? Yes, the Fed claims to largely ignore food and energy prices when considering their policies (because those prices are "noisy"), but there's no way they can ignore the impact that the ongoing drought is likely to have on national price levels. This drought will likely give the Fed even less room in which to operate, making a declaration of QE3 that much more difficult to sell to an increasingly-skeptical American public.

If nothing else, this drought should serve as a very loud reminder to everyone in the world that the Fed and other central banks are not the only determinant of price levels in the global economy. Maybe Ben Bernanke's consistent attempts to play God angered Mother Nature, and she decided to show him who's boss after all—like Icarus before him, the Chairman flew a little too close to the sun, and all of us got burned.

For all of us, if we're looking to the Fed (or the federal government) to be our savior, we should know that there are limits to the bank's power—this drought threatens to make those limits pathetically obvious to all of us, and in the long run that may be a very good thing. But it may be a very bad thing over the next several months, for those of us who like to eat.

[American Thinker]

Quote of the Week

I never intended for Quote of the Week to become the Crimson Cavalier's version of Sports Illustrated's "This Week's Sign That The Apocalypse Is Upon Us", but increasingly it seems like that's what it's becoming. So be it. I don't make the news, I just re-package it and add snarky commentary.

This week, we've once again got co-champions, since it seems like everyone in the world these days is in a race to say (or do) the dumbest possible thing. My money is still on Jose Canseco in this race, but the field is strong. First up, the European Central Bank, as reported by Mish Shedlock (pardon the weird grammar, blame Google Translate for the clumsy translation).

This week's QUOTE OF THE WEEK #1

"The personal representative of the [European] central bank is now demanding that the employees pensions would be protected against inflation. It requires that an insurance against their own failure."
                       - Frankfurter Allgemeine, via Mish Shedlock

This is truly special. The ECB, like the Fed, is supposedly charged with upholding the stability of the region's primary currency (the Euro). They know, however, that their policies (like the recent LTRO) are incredibly destabilizing in the long-run, and they therefore want to ensure that they are protected from the damage caused by their own policies. This is akin to a doctor demanding that his salary increase every time he is sued for malpractice--it would be laughable in that case, and it should be laughable here as well.

You know what else is laughable? California politics. I give you Jerry Brown:

This week's QUOTE OF THE WEEK #2

"Brown also defended calling his proposal a 'millionaires tax' on his initiative campaign website, even though the income threshold would be $250,000.


'Anybody who makes $250,000 becomes a millionaire very quickly if you save it. You just need four years,' Brown said. 'It is a millionaires tax. It taxes millionaires, right? And it’s for schools. And it protects public safety.'"
                  - Don Thompson, Associated Press (via Falkenblog)

Wow, buddy. Now, I'm not going to sit here and ask you all to feel pity for anyone who earns $250k a year, but the sheer innumeracy of Brown's argument is simply maddening. First of all, we're talking about $250k in pre-tax income here, not post-tax, so you're already taking Brown's "four years" and bumping it up to at least 7 or 8. Second of all... WHO THE HELL SAVES 100% OF THEIR INCOME???

Let's see, the U.S. personal savings rate is sitting at 3.7% right now, and Bernanke and friends are doing their best to drive that down even lower. If we assume that the hypothetical $250k wage-earner is taxed at a combined 40% between Fed and state, that leaves him with $150k in take-home money. Even if we assume that the savings rate among the richest Americans is higher than that for the average American (a fair assumption), and we place this hypothetical $250k wage-earner's savings rate at an ambitious 15%, that leaves him with an annual savings of $22,500. That's a nice chunk of change, but we've just taken our "four years" and bumped it up to "44 years". Sorta a big difference, don't you think?

But... of course... if our friend just invests his money on the CalPERS plan, he can assume a robust 7.5% annual return on his money, which means... oh, screw it all, whatever, we're all millionaires now. Thanks, Jerry.

Soylent pink

Now that I've got a daughter at home, stuff like this makes me even angrier than it used to...

When McDonald’s and other fast-food chains announced last month that the infamous “pink slime” was no longer being used in their burgers, some thought the ammonium hydroxide-treated beef cuts had disappeared from our food supply once and for all. 

But a new report in the Daily tablet newspaper suggests the slime will appear in school lunches this spring — 7 million pounds of it. 

The USDA, schools and school districts plan to buy the treated beef from Beef Products Inc. (BPI) for the national school-lunch program in coming months. USDA said in a statement that all of its ground beef purchases “meet the highest standard for food safety.” The department also said it had strengthened ground beef safety standards in recent years. 

Last April, celebrity chef Jamie Oliver reported that 70 percent of America’s ground beef is made with BPI’s ammonia-treated product. 

BPI recently said that figure still holds. In a statement, the company called ammonium hydroxide a “natural compound ... widely used in the processing of numerous foods.” 

Gerald Zirnstein, a former microbiologist at the Food Safety Inspection Service who coined the term “pink slime,” told the Daily that the continued purchase of ammonium hydroxide-treated beef cuts for school lunches doesn’t make any sense. 

“I have a 2-year-old son,” he told the Daily. “And you better believe I don’t want him eating pink slime when he starts going to school.” 

Zirnstein came up with the “pink slime” phrase when he toured a Beef Products Inc. production facility in 2002 during an investigation into salmonella contamination in packaged ground beef. After the animal byproduct is mixed with ammonia, it has a pink appearance. Zirnstein e-mailed his colleagues after the visit to say he did not “consider the stuff to be ground beef,” according to the Daily.

The fact that something that was once relegated to pet food is now considered perfectly acceptable for our children to eat at school is somewhat nauseating. I certainly don't want to force my children to eat something that has been rejected even by McDonalds, Burger King, and Taco Bell--frankly, the prospect of home-schooling has never seemed more appealing.

Of course, I'd argue that this kind of thing is yet another inevitable unintended consequence of the Fed's long-standing inflationary monetary policy. Nobody ever would have considered re-purposing this stuff for human consumption unless food inflation had gotten to a point that other alternatives were no longer affordable. That's also why you're now finding high-fructose corn syrup all over the place, since it's more cost-effective than sugar and the average consumer simply can't afford the real stuff anymore.

These kinds of trade-downs are everywhere lately, but of course they don't show up in "official" inflation statistics. A hamburger is considered a hamburger by the Fed, regardless of its content--the Fed makes no distinction between pure ground beef and something that is 30% "pink slime". I've ranted about this before and could do so all day long, but it's frankly pretty terrifying, and yet it's completely avoidable. We need to stop with the monetary hijinks and the nasty unintended consequences that they've created. Now.

[Washington Post]

Quote of the Week

For this week's Quote of the Week, I was tempted to pull something from a terrific guest post on Barry Ritholtz's Big Picture blog on the myth of "liquidity" in capital markets, especially as it pertains to high-frequency trading. It's a must-read if you have any interest in financial markets (these days, it's frankly irresponsible not to), and I suggest you take a minute to peruse it--it's short.

But I'm going to turn my attention elsewhere, namely Washington, where the drumbeat of election season is getting louder by the day (which generally means truth is in short supply). You may have noticed that oil and gas prices are on the rise lately (I wonder why?), which of course is threatening to become a pretty big campaign issue. Enter Nancy Pelosi, that brilliant financial mind, with your Quote of the Week.

This week's QUOTE OF THE WEEK

"Wall Street profiteering, not oil shortages, is the cause of the price spike... Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws."
                          - House Minority Leader Nancy Pelosi

Sigh... here we are again, blaming those faceless "speculators" for ruining the economy. You see, the problem with this whole line of reasoning is that we only vilify so-called "speculators" (they're usually hedge funds, but since the biggest funds are trading with primarily pension fund money, it's really your pension fund doing the speculating... but that's a discussion for another day) when they cause markets to move in ways that we find inconvenient.

Nobody's blaming "speculators" for doubling the price of the S&P 500 in two years, because we generally like that outcome. But when those same investors (I refuse to actually call them "speculators", because it's just so intellectually dishonest) put their money into commodities like oil, corn, sugar, and wheat, it's suddenly a huge economic problem that requires swift action.

The problem is, it's Fed policies that caused all of this--pension funds need to consistently meet overly rosy annual return assumptions in order to remain solvent, and when you drive interest rates low enough, they therefore need to pile into any and every other asset class in order to attempt to meet those assumptions. Sometimes they pile into equities, which our economic central planners love. Other times, they pile into commodities, which those same planners vilify. BUT THEY'RE THE SAME PEOPLE.

When you choose to inflate the money supply as a way to "stimulate the economy" (read: bail out reckless fiscal policy), you will inflate all asset prices. Ultimately, you can't pick and choose which assets appreciate and which don't, and it becomes a bit of a zero-sum game economically speaking. This is why I've spent so many words here railing against Fed policy, but government hacks like Pelosi still don't get it and choose instead to fall back on stale campaign rhetoric. This is gonna be a long and frustrating year for me, isn't it?

[The Hill]

Paul Ryan gets it?

I've had my disagreements with Paul Ryan's decisions in the past (namely, voting for TARP and voting for Medicare Part D), but today he issued some incredibly sensible analysis in his questioning of Fed Chairman Ben Bernanke.



The highlight, as I see it: "The Federal Reserve, whose primary goal is to manage our money, is involving itself in fiscal policy--is sort of bailing out fiscal policy, because the branch of government in charge of fiscal policy, this branch, is not doing its job. I mean, a budget hasn't passed Congress in two years."

That is correct. I vehemently disagree with Bernanke and his inflationary policies, as I've made clear here on several occasions. But as I pointed out in my post earlier this week, Bernanke is merely raising taxes (effectively, at least) where Congress has refused to do so. His constant purchases of U.S. debt have kept the federal government solvent where it otherwise would not be (by artificially depressing borrowing costs), and it is therefore disingenuous at best to see elected officials hurling barbs at Bernanke without also acknowledging their own shortcomings.

With his analysis today, Rep. Ryan showed that he at least seems to understand the dynamics at play--Bernanke may be the devil, but he's a devil of Congress' own creation. One cannot exist without the other.


(h/t The Mess That Greenspan Made)

Quote of the Week

This week's Quote comes courtesy of Karl Denninger, who has inspired more than a couple of my rants here in the past. It stems from the Congressional Budget Office's projections released yesterday, which are absolutely chock full of ugly numbers and statistics (ignore them at your own peril). Let's get right to it:

This week's QUOTE OF THE WEEK

"Government spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion, or 7.3 percent of the country's total economic output, congressional researchers said on Tuesday.


In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit."
                                           - David Morgan, Reuters

Look at that first paragraph: that's 7.3 percent OF THE COUNTRY'S TOTAL ECONOMIC OUTPUT! Not of tax revenues, not of total government spending, of the ENTIRE ECONOMIC OUTPUT. In case you were wondering, total federal tax receipts in 2011 were approximately $2.3 trillion, on total economic output (GDP) of $14.6 trillion--about 15.8% of total economic output. That means that our expected expenditure on health care programs would be a full HALF of everything that we currently bring in from tax revenues.

That is, in a word, untenable. There's absolutely no way to make these programs solvent, and we need to stop pretending that there is. We can't grow our way out of this problem, we can't inflate our way out of this problem (hi, Ben), and we certainly can't default our way out of it (although that's where we're heading).

Oh yeah, and just repealing Obamacare doesn't do anything to help matters either, in case any of you Republican-lovers were wondering.

This country is bumping up against fundamental problems with respect to how it cares for its elderly, and it's clear that we've made promises that we mathematically cannot keep. A millionaire tax or a wealth tax or an inflation tax or whatever other tax can't compensate for the fact that there's just simply not enough money to go around. We need to admit that we've made promises that we can't keep, and begin the ugly and unpleasant process of reneging on those promises. The longer we wait, the worse the problem will get--procrastination is an expensive vice that we simply cannot afford.

[Reuters]
(h/t Karl Denninger)

The inflation tax

With all the idle campaign rhetoric surrounding millionaire taxes and wealth taxes (read that wealth tax article, by the way, it's a good one), you might have missed the massive tax increase that was passed last week without any fanfare at all. Oh, you did miss it? Don't worry, I've got your back.

The Federal Reserve took the historic step on Wednesday of setting an inflation target, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world's other major central banks.

The U.S. central bank, in its first ever "longer-run goals and policy strategy" statement, said an inflation rate of 2 percent best aligned with its congressionally mandated goals of price stability and full employment.

First of all, generally speaking, anything that can be considered "a victory for Chairman Ben Bernanke" should also be recognized as a loss for working Americans. Furthermore, the article's nonchalant assertion that inflation targeting is okay because it "brings the Fed in line with many of the world's other major central banks" is offensive, in a "if all your friends jumped off the Brooklyn Bridge, would you do it too?" kind of way. We've all seen the mess that Europe has created for itself, and so far we've comforted ourselves by nodding in agreement that "things are different here". Nope. Not anymore. Ben Bernanke just dealt the final death blow to "American exceptionalism".

But all that aside, what comparatively few people recognize is that inflation--especially inflation as an explicitly defined policy goal--is effectively a tax levied without Congressional approval. By decreasing the purchasing power of the dollars that people earn, we're essentially confiscating a larger chunk of their earnings--that's no different from doing so more directly via taxation, and the same parties benefit from the policy in the end.

Sure, 2% a year may not sound like much to us, but it's a hell of a lot over the course of a working lifetime--with compounding, 2% annually over a 45-year time horizon amounts to a 144% increase in prices. A loaf of bread that costs 3 bucks today, then, would be expected to cost $7.32 in 2057, when today's college graduates (not to mention those who didn't go to college, screw them, right?) would be looking to retire. That's a pretty big failure with regards to the "price stability" half of the Fed's famous dual mandate.

Of course, this cost inflation isn't as big of a deal for those of us with investable assets who have a realistic method of hedging against cost increases. But it's definitely a huge problem for the poorest Americans, who live paycheck to paycheck and for whom a 2% shift one way or the other can make or break a budget. And if you think those workers' wages are likely to increase in order to keep pace with inflation, you're insane--they'll be lucky to increase at 1% a year, even if their productivity increases measurably.

Inflation, effectively, is the ultimate regressive tax. We fund our deficits and debt by printing money, and the effects of that money printing disproportionately impact the poor. I've discussed this dynamic at length before, but it's vital to remember that the way we calculate our "inflation rate"--as a one-size-fits-all statistic that includes prices of electronics, food, gas, housing, insurance, clothing, and more, and assumes that all consumers have the same relative breakdown between those expense categories--in incredibly flawed in practice.

This chart (an old favorite) shows that the poorest 20% of Americans spend nearly 60% of their income on food and energy, while the richest 20% spend only about 10%. This disparity matters significantly, as it means that different people will be experiencing different "effective" inflation rates, regardless of what the Fed's catch-all measurement declares. Without getting too deep into the mathematical weeds, it should be clear that an environment in which electronics and housing prices are decreasing and food and energy prices are skyrocketing (which is our current reality) will devastate a poor American, be roughly neutral to an "average" American, and matter little to a rich American.

It's not at all unreasonable to assert that a poor person's effective inflation rate could be closer to 3% or 4% (or higher--in developing nations, a disparity of 3% between rich and poor is not uncommon), as opposed to the summary "2%" statistic that the Fed is targeting. Too bad, then, that the poor person has no investable assets with which to hedge against those price increases.

In every way, inflation is a regressive tax that devastates the poor and working class to the benefit of the richest. Not only do the poor have no way to protect themselves against inflation, they also have the distinction of having a higher-than-average "effective" inflation rate. Sucks, huh?

If you want to know why income and wealth inequality is at such lofty levels in the United States, don't blame "capitalism" or our education system or any of a million social dynamics that politicians try to hide behind. Inflation--persistent, intentional inflation--is what keeps the lower class down, and somebody needs to tell them that. This crap has to stop some time. 

[Reuters] 

Not this crap again

Another week, another market meltdown... somebody really doesn't seem to want me to have any free time for the blog these days. But I won't give up that easily--not when an old cause of mine has somehow found a way to creep back into the news.

You'll remember from last year my ongoing tirade about currency and trade wars, and how engaging China in a game of "currency manipulator" chicken was destined to end poorly. I even wrote a letter to my Senators about it, and thought that maybe the issue would fade into the background.

No such luck. With the economy seemingly primed for another leg down, and politicians once again frantically scampering about to shift blame away from themselves, here comes the scapegoating.

After years of trying, Congress is taking another stab at retaliating against what many see as Chinese manipulation of its currency to make its exports to the United States cheaper and U.S. goods more expensive in China.

The Senate is expected to take up legislation Monday that would impose higher U.S. duties on Chinese products to offset the perceived advantage that critics say China gets by undervaluing its currency...

Beijing denies that its exchange rate is responsible for the huge trade deficit that the United States has with China, and it's not clear that U.S. lawmakers have the political will to follow through.

The Senate bill has bipartisan support and is expected to clear a procedural hurdle Monday evening. But intense lobbying against it by American-based multinational corporations and their trade associations could spell trouble for the legislation.

In addition, the Obama administration, like the Bush administration before it, doesn't like the bill, saying quiet diplomacy is a better way to influence Chinese policy and warning that overt penalties could lead to a destructive trade fight.

Sigh. As a reminder, my vicious opposition to this kind of legislation has everything to do with the fact that the loss of manufacturing jobs to China is now and has always been a two-way street. The "undervaluation" of the Yuan and the cheap labor rates that U.S. corporations have enjoyed are among the only factors that have prevented rampant inflation in the U.S. over the last two decades.

The only certain consequence of protectionist legislation like this is that prices of consumer goods will increase overnight. This will ironically do the most harm to those whom it professes to support--the unemployed and the working poor. Inflation in consumer prices is something that we simply can't afford to absorb right now, and protectionist policies like this will have the same effect of the Smoot-Hawley Act, which sent us spiraling deeper into the Great Depression.

Don't believe me? Consider this chart. Higher prices--of oil, food, consumer products, or anything else--are devastating for our economy, especially for those who have been hurt most by the recent economic downturn. For more of my thoughts on the insidious effects of inflation, read this, this, this, this, and this. Or you can just read Mish Shedlock's take on the re-emergence of this zombie bill.

The scapegoating and misdirection plays (don't look here, look over there!) that our politicians insist on utilizing are a huge part of why we're in this mess to begin with, and going back to that same ridiculous playbook isn't going to help. True leadership is not performed by standing on a platform and saying "it's all China's fault"--it's performed by standing up, looking in the mirror, and saying "we're all to blame". And if we don't start realizing it now, we're never going to solve a thing in this country. It's not China--it's you (and me).

Cut this crap out, Washington. Now.

[Yahoo Finance]  
(h/t Mish Shedlock)

College grade inflation

I recently came across an interesting chart regarding grade inflation at our nation's universities--it looked, perhaps not surprisingly, strikingly familiar...

What's perhaps most notable is that grade inflation has been significantly more prevalent at private schools as opposed to public schools.

At first blush, the response is "so what"? Who cares if a bunch of Ivy League assholes (not me, of course, I earned my cum laude degree...) are getting higher grades than they used to? The problem is, college GPA is often a primary factor in both corporate hiring and graduate school admissions (many companies refuse to consider applicants whose GPA is below 3.0, regardless of the school they attended), indicating that private school students are, all else equal, more likely to be accepted to graduate school or hired into high-paying jobs.

This isn't necessarily a problem, if we concede that the students at the private schools are actually earning those grades. It's certainly plausible that private schools, with their typically more selective criteria, are in fact getting better students--it's no less plausible that over time, these top students have become better at responding to (and providing) what their professors reward, and that the curricula and grading standards have simply been slow to adjust. In that vein, schools like Harvard and Yale have been quick to point out that their mean SAT scores have increased over time, as their acceptance rates have continually plummeted.

But there is, of course, a possible darker explanation to this picture. It's difficult (if not impossible) for private schools to justify their ever-increasing tuition costs on a "return-on-investment" basis if their students aren't being accepted to graduate schools and hired by banks and consulting firms at a higher rate than their public school counterparts. They therefore have a vested interest in assuring that their students are best positioned for acceptance at the next stage, and a higher GPA is certainly part of that picture. Grade inflation, then, is simply good business for private schools--at least until the graduate schools and corporations change their methods, which they probably won't.

This is not to say that private schools in general are failing to deliver a solid education--though I'd argue that some most certainly are. But there is certainly a benefit to the institution of providing high grades to its students regardless of their performance, and when there is an incentive, there is typically a response.

That's the story that the above chart is really showing, and it's a tough story to swallow. In essence, private school students (well, their parents anyway) are buying their way to higher college GPAs, and therefore buying their way into better post-graduate opportunities. That's certainly not a story Harvard would like to tell about itself, but that doesn't necessarily make it any less true.

[FlowingData]

Another fun infographic

This infographic, from Lapham's Quarterly, takes a look at how far one dollar will go in terms of caloric content from different food types. It's amusing and interesting, but given our recent recession (and the Fed's response to it), it's taken on special meaning for a number of Americans. (Note: I was a little confused by the graphic at first. Look at the numbers inside the pictures--and not the text below them--to see how many calories of each item a dollar will buy.)

It's hardly surprising that Coke and McDonald's food give you the greatest caloric bang for your buck, and that's bad news for our nation's health. Milk, eggs, and potatoes aren't far behind, though, so in theory it shouldn't be too hard for people to put together an at least mildly healthy diet, even on a budget (especially when you throw in other relatively cheap items, like black beans and rice). But in reality, processed foods and fast foods are an increasingly large portion of American people's diets, and this graphic helps show why.

[Lapham's Quarterly]

This is new

I've ranted here plenty about inflation, and by now I'm pretty much numb to the concept of the ever-depreciating dollar. But I've never seen this before (menu insert courtesy of Farmington Country Club):

Those are some pretty scary increases over a 90-day period, and they can't be explained away simply by referring to "unrest in the Middle East".

Yes, bad weather has played a role, as the insert makes clear, and the "manmade disasters" they refer to are I assume the continued after-effects of the Gulf oil spill, which has particularly impacted seafood prices. But a doubling in the price of iceberg lettuce? WTF? Yeah, I'm gonna throw that one in the "unstable politics" category of explanation.

I'm no math major, but an increase from $8 to $9.25 is 16%, in 3 months. Using compounding, that's an annual inflation rate of over 80%. Um... transitory?

The iPad will solve all your food and energy needs

I've been consistently outspoken here about my opposition to inflationary Fed policy, largely in hopes that more people would start to take notice and rise up against the overt manipulation of our economy and financial markets. Clearly I don't think that my rantings here have had a broad impact, but it does seem that a wider set of Americans are starting to recognize that inflation (and the policies that create it) benefits a select few at the expense of the majority. From Reuters (emphasis mine):

New York Fed President William Dudley told business leaders in Queens, New York, that the economic outlook has improved in the past six months.

But he said, the Fed is still "very far away" from achieving its dual mandate of high employment and price stability...

Dudley faced persistent questions from the audience on food inflation. The president of the Federal Reserve Bank of New York said people forget that even as the price of food is rising, other prices are falling. He mentioned the price of the iPad 2, prompting guffaws from the audience.

In his speech, Dudley said some of the commodity price rises are likely to be temporary and unlikely to feed through into a sustained rise in inflation.

"While rising commodity prices may be giving some of you a bad headache, they are not likely to lead to a sustained rise in inflation to levels inconsistent with our dual mandate," Dudley said.

Hey, Dudley--you can't eat an iPad, dude. I mean, you could, but... you probably shouldn't.

Yes, you're right, deflation exists and is well-ingrained in many industries and markets, high-tech being one of the most obvious. That's because of innovation, which is something that seems to be in short supply in our country in many other industries. But that doesn't mean that inflation doesn't exist in very damaging ways in other arenas--most notably food and energy, which is incidentally where most Americans spend the majority of their paychecks.

I've mentioned here before how the Fed's focus on "core" inflation is terribly misguided, and this Reuters piece seems to show that many other people are waking up to that reality. We don't buy iPads every day, and that's especially true when we can't afford to eat the way we used to. If non-discretionary costs are rising, we no longer have any money left over to buy the discretionary goods (iPads, etc.), which not only makes that deflationary data irrelevant but in fact drives their prices down, further fueling the myth that inflation is "not widespread".

In short, ignoring food and energy costs in calculating inflation isn't just misleading--it misses the whole point. The prices of discretionary goods are derived entirely by how much money people have left over once they've covered their basic necessities--drive up the prices of the necessities, and the other goods will fall in price. So to look at one without the other is IRRELEVANT. Got it? Okay, cool. That should be a simple concept for a former chief economist at Goldman Sachs, but apparently it's not.

Though, of course, with 14% of Americans already on food stamps, maybe food prices don't matter all that much anyway. All they're really doing is costing our Federal government money, and they've got plenty of that to go around... right?

[Reuters]
(h/t Naked Capitalism)

The uneven economic recovery

I've certainly written here before about my belief that the policies which have been enacted--both by Congress and by the Fed--in response to our economic crisis have disproportionately benefited the interests of the rich and the corporate, at the expense of the poor (and the retired on fixed incomes).

Earlier this week, I came across an interesting item (and graphic) from the New York Times which gave a further indication of the impact of these policies.

Americans are becoming more optimistic about the prospects for the economy, but are still concerned about their own financial situation.

For the first time in six years, at least half of Americans questioned for the Thomson Reuters/University of Michigan consumer sentiment index said they believed that business conditions had improved over the previous year, according to the preliminary results from the February survey...

Before the recent downturn, only once — in early 1980, during a sharp recession accompanied by high inflation — has a majority said their families were worse off financially than they had been a year earlier. But a majority felt that way for all but one of 18 consecutive months beginning in mid-2008, as the financial crisis took hold.

Even now, 37 percent say they are worse off, compared with just 28 percent who think they are doing better.

In the past, there were only a few times when an absolute majority of people thought they would not be able to keep up with inflation over the next year, and before the financial crisis, all of those times came when inflation was high. But now, 53 percent feel that way, while a record-low 8 percent think their income will rise faster than prices.

The reason for that seems to be largely based on worries about income rather than prices. Although expected inflation rates have been rising, a majority still expect prices to rise by 4 percent or less.

Regardless of what Ben Bernanke says about inflation, it's clear that the impact on the typical American family has been devastating. Despite the steady improvement in summary economic statistics, the gains simply have not been equally shared. That's why you see charts like these, and persistent pessimism in polls like these even when people see the general situation improving.

Economic "recoveries" that are built on inflationary policies will always leave the majority of Americans behind, while disproportionately benefiting a very small subset of the richest of the rich. One of the only reasons that we are not seeing widespread riots in America (like we saw in Egypt, where inequality and inflation were primary driving factors behind the rebellion) is that so many Americans are in fact delusional--they don't realize how unequal we really are, as this post expertly points out.

Sooner or later, as already happened in 2008, the majority of Americans will realize that they have been scammed by Bernanke, et al. GDP statistics may be improving, but the reality--that more and more Americans seem to be waking up to--is that most Americans are getting effectively poorer, not richer. And those who really are getting richer certainly aren't sharing.

[New York Times]

Putting a price on safety, Part 2 (inflation gets personal)

Back in December, I wrote about the safety dynamic at airports, and how the tension between security and efficiency meant that we were effectively placing a price on our own safety. In the post, I made mention of the necessity for many businesses to place a number on the value of a human life. For a refresher:

Many attempts have been made to quantify the value of human life--a task which, unseemly as it may be, is necessary in fields from insurance to air travel and beyond--with estimates ranging anywhere from $1.54 million to $5 to 8 million. To run a profitable business (including an airline), it is absolutely essential to understand what value potential employees and customers will place on their own lives, as well as the lives of others. If you value human lives too little, you will find yourselves outcast as corporate pariahs, and end up in the poorhouse. But at the other extreme, if you value safety significantly more highly than do your customers, you are almost certain to lose customers as well--such is the predicament that our airlines now face.

That dynamic has managed to work its way back into the conversation, as an article from yesterday's New York Times attests.

To protests from business and praise from unions, environmentalists and consumer groups, one agency after another has ratcheted up the price of life, justifying tougher — and more costly — standards.

The Environmental Protection Agency set the value of a life at $9.1 million last year in proposing tighter restrictions on air pollution. The agency used numbers as low as $6.8 million during the George W. Bush administration.

The Food and Drug Administration declared that life was worth $7.9 million last year, up from $5 million in 2008, in proposing warning labels on cigarette packages featuring images of cancer victims.

The Transportation Department has used values of around $6 million to justify recent decisions to impose regulations that the Bush administration had rejected as too expensive, like requiring stronger roofs on cars.

And the numbers may keep climbing. In December, the E.P.A. said it might set the value of preventing cancer deaths 50 percent higher than other deaths, because cancer kills slowly. A report last year financed by the Department of Homeland Security suggested that the value of preventing deaths from terrorism might be 100 percent higher than other deaths.

First of all, well played, Homeland Security. Your attempts at self-justification know no bounds--terror deaths are twice as "valuable" as other deaths? Sure, guys. Whatever makes you feel alright about your bloated budget.

But setting all of the bizarre, chest-pounding, bureaucratic "our cause is more important than your cause" competitiveness in Washington aside for a bit, the economist in me looks at this situation and wonders. With the persistent population growth that our country and the world continues to experience, shouldn't the value of a human life be declining if anything, given the increased supply? That is, of course, unless demand for human beings is growing, which... doesn't really seem to be the case.

Yeah, I know, we're talking about human beings here, so it probably seems crass to apply supply-and-demand curve logic to the human condition. But economists are crass by nature--it's the "dismal science" for a reason--and that character flaw doesn't mean that their insights can't be valuable.

Ultimately, I take this as more of a sign that inflation via a debased dollar is very real, and applies not only to corn, gold, cotton, oats, sugar and oil, but to human lives as well. So, yeah. Inflation just got personal. Good work, Bernanke.

[New York Times]