Monday, November 08, 2010

"No Job? No Problem!! We'll Starve You, Too!!"

Bernanke has gone mad. Barking-at-the-moon, driving-against-traffic mad. And you will pay dearly for fuel and food (if you can pay for it at all) because of his distemprous action.

The problem with fiat currencies is that their value is determined by what the market thinks they're worth. Let me pretend that I'm a nation. My currency is called the 'widget'. The market will value my widgets as a function of the overall health and strength of my economy. If I decide, arbitrarily, to print double the number of widgets, without any growth in the underlying value of my national economy, the markets will take note. Traders in another country will say something like: "Hmm. You had a million widgets in circulation, and we valued each of them at one of our currency, the whatsit. You now have two million in circulation - without any added value to justify them. We, on the other hand, still have only a million whatsits in circulation. That means that the value of your widgets has declined relative to our whatsits. Each widget is now worth only half a whatsit." I may protest, and claim that the value of my currency is unchanged, but the markets won't buy it - literally. If I try to buy something from another country, using my widgets, they'll now demand twice as many widgets as before to buy their product.



The implied tax that has been imposed on the economy thus far since QE1 was put in place is a stunning $250 billion annually due to oil's price increase alone, or nearly four times the so-called "Bush Tax Cuts" for the rich. QE2 will add another $1/gallon (roughly) to gasoline which is another $140 billion, for a total of almost $400 billion each and every year.

And there's proof: corn, oats, soybeans (and petroleum) are up about 10% annualized since QE1. Think QE2 will make that go away?

We're back to Rush's proposition that the aim of the Obama Regime is to destroy the US.


J. Strupp said...

This scenario is simplistic. It assumes an economy without a massive output gap and high unemployment. Your link would be correct if we didn't have 15 million people and loads of capacity sitting around doing nothing.

Second, most commodity prices have rebounded to around pre-crisis baseline growth. This is a good thing as it reflects improved global demand and a weaker dollar. But commodities aren't exploding. Yes, they've increased from their recently depressed levels, but commodities have simply not exploded historically speaking. I can add some charts when I get time.

Finally, The idea that poeple are scared to death of future inflation is precisely the idea. The point is to raise future inflation expectations.

Will QE2 be the solution to all of our problems? Of course not, especially since our government is preparing to offset any recent monetary expansion by contractionary fiscal policy.

Dad29 said...

Yah, it's simplistic.

And your implication that petroleum cannot rise is unsupportable.

For that matter, you say that commodities "are rebounding", which is proof per se that your theory is wrong.

Unemployment has NOT changed in any significant degree, nor has resource-utilization, in the last 12 months.

But commodities are going up?

You say they won't. The record says they do.

neomom said...

I would say that an intentional weakening of the dollar along with inflation for oil, gas, and food is not a solution for tens of millions on fixed incomes (Soc Sec), families that got pay cuts/freezes/furloughs or are on unemployment. Don't believe me? Go to the grocery store and fill up your gas tank.

Makes it a little more difficult to spur that consumer spending that drives the economy, no?

Might be good for pointy-headed-theorists... not so much on the ground - in reality.

J. Strupp said...

Gotta think globally,Dadster. Global demand HAS improved. In Asia in particular.

Dad29 said...

OK great!

So globally, prices are rising.

Meaning, of course, that if US citizens do not pay the higher prices, they don't get to 1) drive; and 2) eat.

So depreciating the US currency will do, what, exactly, other than artificially maintain the "price" of housing and keep the banks from collapsing?

J. Strupp said...

"Meaning, of course, that if US citizens do not pay the higher prices, they don't get to 1) drive; and 2) eat."

1) I assume you consider QE2 to be fully priced into the market at this point. If so, take a look at historical U.S. median gas prices and tell me your worried about exploding gas prices. Again the "fear" at the pump is a myth:

Gas prices do not have the exposure to dollar weakness like crude oil does. The refiners can't pass through increased input costs to the consumer. Why? Gasoline is DEMAND driven more than anything else. And our current median gas prices are nothing out of the ordinary.

2) Commodities like soybeans, corn, wheat, etc. are near their pre-crisis baseline.

J. Strupp said...

"So depreciating the US currency will do, what, exactly, other than artificially maintain the "price" of housing and keep the banks from collapsing?"

A depreciating dollar is the most effective method of adjusting the trade deficit. A weak dollar boosts exports and brings the trade balance more in line which increases GDP and boosts employment.

It's what SHOULD happen in a floating currency system. This, of course, ties in nicely with our other discussion about certain southern European nations' inability to do exactly what we're doing because they're hogtied to the Euro. The only alternative for them is austerity, deflation and mass unemployment (and probably default at some point in time).

Dad29 said...

I assume you consider QE2 to be fully priced into the market at this point.

Nope, not yet. I expect petroleum to continue rising for the next couple of quarters, at least.

The refiners can't pass through increased input costs to the consumer.

Wrong. They DO pass costs on. If one uses diesel as a proxy, you'll note that the Ceridian index of real-time diesel usage is barely crawling upward in the US. But pricing is not "barely" crawling up.

Gasoline retailers I know do NOT notice an increase in demand (albeit that's anecdote, not data.)

So where's the incfrease which justifies a 10% pop in price last 90 days?

Dad29 said...

As to exporting: no big with PRChina, which ties reminbi to the USD. Europe may get whacked, and Japan.

We'll see whether increasing the prices of food and fuel (see WSJ for 'food increase' article) is what US population wants, eh?

Dad29 said...

Commodities like soybeans, corn, wheat, etc. are near their pre-crisis baseline

From 2002 through 2007 soybeans traded in a range between 500 and 625.

The bubble hit in 2008--prices up to ~1375.

Range 2010 averaged 1000, now spiking towards 1250.

Kinda depends on what you call "baseline," eh? A one-year bubble, or a 5-year history.

J. Strupp said...

I believe you were talking about gasoline in your orginal post which hasn't seen a big move up in recent months. And diesel competes directly w/heating oil for refining capacity in this country. We're talking about October and November no? Might have something to do with things.

"So where's the increase which justifies a 10% pop in price last 90 days?"

If you're loking for sound justification as to why commodities (oil especially) move up or down in the short run, you'll be looking for a very long time. Maybe oil futures have risen slightly due to strong economic data over the last month. Maybe, oil has risen temporarily based on worries of QE2. Maybe people are using oil as a hedge like they're using gold. Commodities are highly speculative and highly volatile which is why we usually don't use them for core CPI data. Remember 2007? If you look at commodity prices back then, you were led to believe that the U.S. was experiencing VERY high inflation. But most of that price spike was highly speculative as we found out a year later.

As for the PRC, that's true of course. But to keep the reminbi stabile vs. the dollar the PRC would need to continue Treasury purchases and risk even more inflation than they already have. They will continue to do this of course, but that's where good diplomacy comes in which is a whole other issue.

J. Strupp said...

Final point. You can break out food and beverage from the CPI on the St. Louis Fed. website (awesome tool BTW). Anyway, the "food and beverage" portion of CPI best reflects grocery inflation/deflation. Thre following chart is the year to year rate of change in grocery prices. As I siad before, the idea that grocery prices are exploding is simply false:[1][id]=CPIFABNS&s[1][transformation]=ch1

J. Strupp said...

Might as well beat a dead horse. Here's historical CPI for food and beverage. Notice the flat line at the end of the 60 year chart:[1][id]=CPIFABNS&s[1][transformation]=ch1

Dad29 said...

I believe you were talking about gasoline in your orginal post which hasn't seen a big move up in recent months.

I was talking about gasoline, which DID pop in the last two weeks, from 2.75 to 2.89/gal.

(I used the Ceridian final-customer diesel-purchase graph as a proxy for fuel consumption, not for price.)

Yes the StL graphs are interesting; what they tell us is that food-inflation dropped just after the crash. But we also know that food prices FOLLOW input prices (oats, corn, soybeans...) and my post suggests that inflation WILL take place in the future, right?

(One wonders if the StL food/bev graph includes restaurant-purchased meals/beverages, by the way.)

J. Strupp said...

Fair enough. That's something we can both watch. Whether or not higher commodity price, for whatever reason, translate into significant food inflation at the supermarket and/or restaurants. My guess is that the full impact of higher commodity prices won't cause a significant hike in retail prices for 2 reasons:

1. The actual proportion of cost of a commodity within a given food item can be relatively small (marketing, packaging etc. takes up a huge part of total cost in many retail food items).

2. Weak demand domestically should keep many retailers from passing the full cost of commodity price increases on to the end user. Usually, this is the case, but not when, say, General Mills is having a very difficult time increasing the top line and isn't interested in giving up marketshare by pricing themselves out of the market. Likewise, discount retailers will continue to squeeze margins to get people through the door. They've already shown the willingness to squeeze margins if they have to.

As I say, we shall see moving forward. Just keep in mind, I'm of the same opinion that prices will increase moderately, moving forward as demand shifts upward slightly and the economy marginally improves from the abyss of 2009. But the price increases should be moderate, considering the continued slow improvement in the economy. I just don't think that 600 billion in asset purchases by the Fed. has the type of fire power you assume it does.

Dad29 said...

And a minor, anecdotal-not-statistical note:

A major local food retailer is having margin problems thus cutting back on work-hours.

MOre to follow if it becomes available.

neomom said...

Mr. Strupp -

Not to burst any of your theories and graphs and stuff... but....

Have you actually ever been in a grocery store?

Because if you had, you would have noticed a combination of packages getting smaller and prices going up.

I don't need a St Louis graph when my checkbook is spelling it out rather clearly.