Wednesday, May 16, 2007
the spectre of inflation
One way to actually measure how absurd the US core inflation measure is to look at what has happened to the spread between headline CPI and Core CPI. If Core CPI is understating inflation, than the spread should be widening. If it is accurate, the overall ratio between the two should be relatively steady.
What does the data show? The spread has increased substantially since the US adopted an ultra low rate/easy money policy under Greenspan (now affiliated with bond giant PIMCO). Since the easy money policy of the 1990s, and the rate slashing of the 2000s, it is no coincidence that the spread between the headline number and the core has grown dramatically.
If you want to trace this widening spread back to its origins, it coincides with implementation of Boskin Commission changes in CPI. (About as intellectually dishonest analysis of Inflation as has ever been penned -- its goal was to reduce Social Security payments and avoid bankrupting the US Treasury -- not measure inflation accurately). Since then, the spread between the core and headline data have only grown further apart.
This simply reflects the government's BLS inflation data diverging from reality.
Core CPI flatlined over the past 8 years because that is how it was constructed -- to not show inflation.
a great many americans are seeing their social security payments lowered, year after year after year, by the government's refusal to index payments to the actual rate of inflation -- which is something much closer, as milton friedman would have told you, to the rate of the expansion of money supply.
it is notable that the federal reserve facilitated this fraud and quit publishing m3 data just before engaging on a money-printing binge that has caused m3 to reach annualized rates of growth exceeding 12%.
and the fraud goes well beyond that. the treasury further issues inflation-indexed securities that are declining in real value because the coupon they yield is not enough to overcome the fraudulent difference between the fictional indexing rate and the actual rate of inflation. the misinformation (along with price-insensitive foreign central bank and petrodollar recycling flows) distorts the cost of borrowing for the government -- which is, of course, what was intended in the first place.
what is too often left unsaid is that this amounts to the world's largest economy engaging in a desperate mississippi scheme in order to escape the fiscal recklessness that is an endemic feature of democracies as special interests discover that largesse can be directed to them from the public treasury, to (perhaps) paraphrase alexander tytler. the avenue of destruction opened when the government in 1933 confiscated specie, and was paved when nixon closed the gold window in 1971, forcing the end of bretton-woods and moving the west to an open fiat currency regime. the understanding that replaced the specie-backed system -- a floating-exchange rate system -- has since the late 1990s become hopelessly compromised in a series of informal intergovernmental agreements known colloquially as bretton-woods 2, whereas the united states has secured asian central banks in a "balance of terror" to recycle current account surpluses into american debt instruments, preserving a series of currency pegs.
all of these moves served primarily to remove the restrictions on public and private borrowing that a responsible currency management compels. it has fed a great many delusions of american economic superiority, even as economic growth hs become more and more dependent on mere debt. the listless economic recovery of 2002-2007 is evidence that, like an addict, more and greater injections of liquidity are required to generate a response.
this system is ending. it will not endure an aggressively inflationary policy from the united states (which is currently fueling huge liquidity-driven asset booms in many asian nations) as such would likely leave asian governments holding massive forex losses and potentially compromising their currencies and banking systems.
the result of its eventual breakdown is likely to be a massive inflationary spiral -- already the imbalances are so massive as to make it all but unavoidable. and that will be an event to remember.