Blog Archives

No Matter How Much Money the Fed Prints, We Still Can’t Afford Nice Things

You’d think that with the Federal Reserve printing trillions of dollars since 2008, we’d all be able to afford nice things. But you’d be wrong: after 11 years of Fed money-printing, nice things are even more out of reach for all but the favored few who’ve received the Fed’s bounty of freshly created currency.

The Fed’s trillions were supposed to trickle down into the real economy, but they never did. All those trillions boosted asset prices and the wealth of the $100 million yachts and private jets elite.

Instead costs have soared while wages have stagnated. If this widening gap between wages and costs were accurately presented, there would a political revolt against the Fed and those few who have benefited so immensely from Fed money-printing: the banks, financiers, corporations buying back their own shares, the owners of high-frequency trading computers, etc.

Despite the best efforts of the government’s “suppress all evidence of runaway cost inflation” functionaries, a few facts have slipped through. Let’s start with income from 1980 to the present, as per the Congressional Budget Office (CBO). Note that this is all pre-government-transfer (Social Security, food stamps, etc.) income, both earned (wages) and unearned (investment income).

The top households have done very, very well in the past 20 years of Fed largesse, while the incomes of the bottom 80% have gone nowhere.

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Will MMT Work as Intended, Or Will It Trigger the Collapse of “Money”?

Modern Monetary Theory (MMT) is presented as a means to painlessly fund the large-scale infrastructure / alternative energy spending the nation needs to rebuild and modernize.

While most people support the goal of useful fiscal stimulus (as opposed to paying people to dig holes and fill them), the question remains: Will MMT work as advertised?

Rather than dismiss it out of hand, I’m trying to approach the subject without ideological bias.

What Exactly Is MMT?

The basic idea of MMT (as I understand it) is that the economy is not running at 100% capacity–there is capital, equipment, people and resources which could be put to work to better society, and the chief impediment to making full use of our capacity is a lack of funding for projects that would benefit society.

In other words, the only thing standing in the way of broad-based, socially beneficial spending / progress is a lack of money (funding).

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The Unraveling Quickens

The central thesis of my new book Will You Be Richer or Poorer? is the financial “wealth” we’ve supposedly gained (or at least a few of us have gained) in the past 20 years has masked the unraveling of our intangible capital: the resilience of our economy, our social capital, i.e. our ability to find common ground and solve real-world problems, our sense that the playing field, while not entirely level, is not two-tiered, and our sense of economic security–have all been shredded.

The unraveling of everything that actually matters is quickening. While every “news” outlet cheerleads the stock market (“The Dow soared today as investor optimism rose… blah blah blah”), our “leadership” and our media don’t even attempt to measure what’s unraveling, much less address the underlying causes.

The hope is that if we ignore what’s unraveling, it will magically go away. But that’s not how reality works.

The unraveling is gathering momentum because prices have been pushing higher while wages lag, feeding the rising precariousness and inequality of our economy. The connection between people losing ground and social disorder/disunity has been well established by historians such as Peter Turchin Ages of Discord and David Hackett Fischer The Great Wave: Price Revolutions and the Rhythm of History.

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Welcome to the USSR: the United States of Suppression and Repression

When propaganda is cleverly engineered, people don’t even recognize it as propaganda: welcome to the USSR, the United States of Suppression and Repression. The propaganda in the U.S. has reached such a high state that the majority of people accept it as “pravda” (truth), even as their limbic system’s BS detector is sensing there is a great disturbance in the Force.

Inflation is a good example. The official (i.e. propaganda) inflation rate is increasingly detached from the real-world declines in the purchasing power of the bottom 80%, yet the jabbering talking heads on TV repeat the “low inflation” story with such conviction that the dissonance between the “official narrative” and the real world must be “our fault”–a classic technique of brainwashing.

To give some examples: healthcare is over 18% of the nation’s GDP, yet it makes up only 8.7% of the Consumer price Index. Hundreds of thousands of families have to declare bankruptcy as a result of crushing healthcare bills, but on the CPI components chart, it’s a tiny little sliver just a bit more than recreation (5.7%).

Then there’s education, which includes the $1.4 trillion borrowed by student debt-serfs–which is only part of the tsunami of cash gushing into the coffers of the higher-education cartel. Yet education & communication (which presumably includes the Internet / mobile telephone service cartel’s soaring prices) is another tiny sliver of the CPI, just 6.6%, a bit more than fun-and-games recreation.

As for housing costs, former Soviet apparatchiks must be high-fiving the Federal agencies for their inventive confusion of reality with magical made-up “statistics.” To estimate housing costs, the federal agency in charge of ginning up a low inflation number asks homeowners to guess what their house would rent for, were it being rented–what’s known as equivalent rent.

Wait a minute–don’t we have actual sales data for houses, and actual rent data? Yes we do, but those are verboten because they reflect skyrocketing inflation in housing costs, which is not allowed. So we use some fake guessing-game numbers, and the corporate media dutifully delivers the “pravda” that inflation is 1.6% annually–basically signal noise, while in the real world (as measured by the Chapwood Index) is running between 9% and 13% annually. How the Chapwood Index is calculated)

As the dissonance between the real world experienced by the citizenry and what they’re told is “pravda” by the media reaches extremes, the media is forced to double-down on the propaganda, shouting down, marginalizing, discrediting, demonetizing and suppressing dissenters via character assassination, following the old Soviet script to a tee.

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No, Autos Are Not “Cheaper Now”

Longtime readers know I’ve long turned a skeptical gaze at official calculations of inflation, offering real-world analyses such as The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016) and Burrito Index Update: Burrito Cost Triples, Official Inflation Up 43% from 2001 (May 31, 2018).

Official claims that grossly understate real-world inflation is a core feature ofdebt-serfdom and neofeudalism: we’re working harder and longer and getting less for our earnings every year, but this reality is obfuscated by official pronouncements that inflation is 2%–barely above zero.

Meanwhile, quality and quantity are in permanent decline. New BBQ grills rust out in a few years, if not months, appliance paint is so thin a sponge and a bit of cleanser removes the micron-thick coating, and on and on in endless examples of the landfill economy, as new products are soon dumped in the landfill due to near-zero quality control and/or planned obsolescence.

Free-lance writer Bill Rice, Jr. recently analyzed shrinkflation, the inexorable reduction in quantity: What Does Your Toilet Paper Have to Do With Inflation?Manufacturers have been engaging in “shrinkflation,” leaving consumers paying more for less, but stealthily.

In the guest post below, Bill looks at new car prices, and finds that official inflation for “new vehicles” from November 1983 to November 2013 measured only 43.8 percent… while actual car inflation (based on archived price records in Morris County, NJ) is 4.85 times higher than official CPI “new vehicle” inflation.

Prices for new cars sky-rocketed over 30 years (or did they?) 
A lesson in ‘hedonic adjustments’ 

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‘Workarounds’ Galore: How Real Americans Deal with ‘Real’ Inflation

Today I’m publishing a guest post by writer Bill Rice, Jr., on “real inflation,”which as everyone knows far exceeds the “official” inflation rate of 2%. Bill and I corresponded earlier this year when he was researching and writing his recent article What Does Your Toilet Paper Have to Do With Inflation? Manufacturers have been engaging in “shrinkflation,” leaving consumers paying more for less, but stealthily. (The American Conservative magazine)

Bill’s extensive list of links (50 Dots…) follows his essay. Thank you, Bill, for sharing your insightful research with Of Two Minds readers. 

‘Workarounds’ galore: How real Americans deal with ‘real’ inflation By Bill Rice, Jr.

While working on a story on inflation and shrinkflation, I quickly zeroed in on the concept of “workarounds” as an alternative, perhaps superior, way to gauge the true state of our economy. I define workarounds as the changes individuals or families (or businesses) must make in their daily living to adapt to a world of rising prices. If nothing else, these examples, taken in the aggregate, challenge the conventional wisdom that inflation is “low” or “contained,” or that the economy is just fine, thank you.

As decades have passed, the list of workarounds families have utilized to deal with rising prices has rapidly grown.

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The Crisis of 2025

While many fear a war between the nuclear powers or the breakdown of civil order, I tend to think the Crisis of 2023-26 is more likely to be financial in nature.

War and civil breakdown are certainly common enough in history, global/nuclear war has been avoided in recent history, largely because wars are typically launched by those who reckon they can win the war. Launching a nuclear strike against a nation with the ability to launch a counterstrike (from submarines, for example, and missiles that survived the first strike) guarantees the destruction of whatever concentrations of population and assets the attacker may have.

The breakdown of civil order has not occurred in developed-world nations for quite some time, as central states can marshal military forces to restore order and issue / borrow money to buy the compliance of the restive populace.

Financial crises, in contrast, remain a constant feature of the modern era, and developed-world nations are perhaps even more vulnerable to financial disorder than developing nations.

As I’ve often noted, systems tend to follow an S-Curve of rapid expansion followed by slower growth during maturity and culminating in stagnation, decline or collapse.

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The Fantasy of “Balanced Returns” Funding Retirement

The fantasy that a “balanced portfolio” yielding “balanced returns” will fund a stable retirement for decades to come is widely accepted as a sure thing:inflation will stay near-zero essentially forever, assets such as stocks and bonds will continue yielding hefty income and capital gains, and all the individual or fund needs to do is maintain a “balanced portfolio” of various asset classes that yield “balanced returns,” i.e. some safe “value” lower-yield returns and some higher risk “growth” returns.

This fantasy is based on the belief that yields will exceed real inflation for decades to come. That is, if inflation is 2%, and the average yield of a “balanced portfolio” is 6%, then the inflation-adjusted return is 4% annually–not great, but enough to secure retirement income.

What few dare ask is: what happens if inflation is 7% and yields drop to 2%?Then the retirement fund loses 5% of its purchasing power every year. In a decade, the fund’s value will decline by roughly half.

Oops. Analysts such as John Hussman have been pointing out that historically, eras of outsized returns such as the past decade are followed by eras of low or even negative returns. So assuming a “balanced portfolio” of corporate and sovereign bonds, growth stocks, index funds, etc. will yield 6% to 7% like clockwork is essentially betting that this time is different: high growth will never pause or reverse.

But let’s say things really unravel, and inflation is 8% and yields are negative 2% for a few years. Retirement funds will lose 10% of their purchasing power every year. In a few years, the fund will lose half its value.

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We’ll Pay All Those Future Obligations by Impoverishing Everyone

I’ve been focusing on inflation, which is more properly understood as the loss of purchasing power of a currency, which when taken to extremes destroys the currency and the wealth/income of everyone forced to use that currency.

The funny thing about the loss of a currency’s purchasing power is that it wipes out every holder of that currency, rich and not-so-rich alike. There are a few basics we need to cover first to understand how soaring future obligations–pensions, healthcare, entitlements, interest on debt, etc.–lead to a feedback loop which will hasten the loss of purchasing power of our currency, the US dollar.

1. As I have explained many times, the only possible output of the way we create and distribute “money” (credit and currency) is soaring wealth/income inequality, as all the new money flows to the wealthy, who use the “cheap” money from central and private banks to lend at high rates of interest to debt-serfs, buy back corporate shares or buy up income-producing assets.

The net result is whatever actual “growth” has occurred (removing the illusory growth that accounts for much of the GDP “growth” this decade) has flowed almost exclusively to the top of the wealth-power pyramid (see chart below).

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Here’s Why Rip-Roaring Inflation Is Inevitable

One of the enduring mysteries of the past decade is why inflation has remained tame while the central bank and government have pumped trillions of dollars of newly created money into the economy. Millions of words have been written about this, and so some shortcuts will have to be taken to make sense of it in one essay.

Let’s start with the basics.

1. Adding newly created money but not generating new goods and services of the same value reduces the purchasing power of existing money. To keep it simple: say the economy of a country is $20 trillion. (Hey, the US GDP is $20 trillion…) Say its money supply is $10 trillion.

So banks and/or the government create $2 trillion in new money but the value of goods and services only expands by $1 trillion. the “extra” $1 trillion of newly created money (either “printed” or borrowed into existence) reduces the value of all existing money.

In effect, the new money robs purchasing power from all existing money.Those holding existing money have lost purchasing power while the recipients of the new money receive purchasing power they didn’t have prior to receiving the new money.

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The 21st Century Misery Index: Labor’s Share of the Economy and Real-World Inflation

In the late 1970s and early 1980s, an era of stagflation, the Misery Index was the unemployment rate plus inflation, both of which were running hot.

Now those numbers are at 50-year lows: both the unemployment rate and inflation are about as low as they can go, reaching levels not seen since the mid-1960s. (See chart below)

By these measures, the U.S. economy’s Misery Index has never been lower and hence prosperity has never been higher or more widespread.

But this simply isn’t true: the top 5% are indeed doing better than ever but the bottom 80% are losing ground and the middle 15% are only appearing to do well because asset bubbles have temporarily created illusory wealth.

I propose a 21st century Misery Index: Labor’s Share of the Economy and Real-World Inflation. Headlines about labor shortages and rising wages are popping up, suggesting the long-awaited boost in labor’s share of the economy’s growth is finally starting.

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Real Gains No Gimmicks: Now Is The Time For Gold & Silver To Shine

Time to see if gold & silver can shine.

It’s hard to get a better set-up than we have right now.

The events calendar is light this week, and it actually favors gold & silver.

Why?

Inflation data.

Or better said, stagflation data.

We get the Producer Price Index on Wednesday and the Consumer Price Index on Thursday.

The PPI measures what producers pay for the items they use to produce their goods. It will be interesting to see how the trade wars are now affecting producer costs.

For example, just how much has the cost of steel and aluminum gone up in price?

Furthermore, what will the producers do in the face of rising costs?

Let’s talk about a soda pop for a second.

If the cans are more expensive…

CLICK HERE TO READ THE REST OF ‘REAL GAINS NO GIMMICKS’ ON SILVER DOCTORS
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