Saturday, November 09, 2013

Why No Inflation?

While middle-class and lower-class, working Americans suffer from low pay (the average real wage has declined steadily) and from joblessness, corporations are making large profits, and the stock market has risen to record levels.  Globalization and the housing crash brought us to this point, but the current dilemma is the direct result of Obama Administration economic policies.

The Federal Reserve is pumping hundreds of billions of dollars into the economy by buying Treasury Bonds ($2 trillion, so far).  Ordinarily this would be causing high and rising inflation here at home, and many of us have taken steps to protect ourselves from a hyperinflation that, so far, has failed to develop.  Inflation is higher than admitted by the government, but not anywhere what we would have expected.  The question is, why not?  An explanation is in this excerpt below from RealClearMarkets:
“While Washington's latest figures show a year-over-year CPI increase of just 1.2%, the private service ShadowStats, which recalculates the data along the lines that the government used to, finds that real consumer inflation is closer to 9%.

My guess is the true number lies somewhere in between, but that it would be much higher were the US not able to export much of its inflation abroad. The process works as follows: the Fed prints money (inflation) and uses it to buy Treasuries and mortgages. The government and banks, in turn, pass much of that money to consumers, who spend it on imported goods. The money then flows to foreign manufacturers of those products, who then sell it to their own central banks, who print their own currencies (inflation) to buy it. This money goes out to pay wages, rents, etc., which the recipients then spend on goods & services. Finally, the foreign central banks use the dollars they buy to purchase US Treasuries and mortgages, starting the cycle again.

It's a complicated relationship, but the end result is that inflation created in the US ultimately bids up consumer prices abroad and Treasury prices at home. In other words, our trading partners have to pay much more for goods & services while Americans get to borrow limitless money for next to nothing. The products our trading partners "sell" us increase the supply of goods available to American consumers while simultaneously decreasing the supply available to everyone else. That is what I mean by "exporting inflation," and the important thing to remember is that its result is to mask inflation at home and transfer wealth from emerging markets to the US.”  RealClearMarkets

This cannot continue indefinitely, but right now we cannot predict when the day of reckoning will come.  Remember how the market tanked when the Fed simply wondered aloud about how and when they should start tapering off the Quantitative Easing?  More on this in future articles.


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