Let Them Drink (Filtered) Tap Water!
A reader emails:
This is worth a longer post, but for now take a look at this chart of the U.S. dollar index. It shows what's happened to the relative value of the dollar during the Bush presidency. If you think the cost of living is rising now, wait until you see what happens if that index falls further. Even Kudlow is starting to worry here.
Direct and indirect spending on Iraq is an important part of what's driving the dollar down and the cost of living up. Current thinking in Washington is that a recession or weak stock market must be avoided in order to pay for Iraq. But the monetary stimulus this necessitates is driving up the price of everything, including stocks. It's also created a link between a rising stock market and inflation; the former exacerbates the latter. And by the way, don't overlook the effect U.S. unpopularity has on the marginal willingness of foreigners to hold dollars; those greenbacks are a symbol of something, and these days it ain't good.
Just as the inflationary problems that confronted Carter and Reagan were rooted in Johnson's Vietnam spending fifteen years earlier, the worst effects of our fiscal and monetary distortions won't be felt for years. But remember, by the time this magazine cover hit the newsstands, LBJ was long gone. Will the public understand the connection between Iraq and the rising cost of living before the current actors hand things off to their successors? Probably not. But it's important.
So I went to Costco today and, among other things, bought a gallon of skim milk.Either that, or find Rudy's secret market.
$2.79!
~12-18 months ago it was ~$1.85. Until recently it was ~$2.25.
I wish I could take Ben Bernanke grocery shopping with me.
This is worth a longer post, but for now take a look at this chart of the U.S. dollar index. It shows what's happened to the relative value of the dollar during the Bush presidency. If you think the cost of living is rising now, wait until you see what happens if that index falls further. Even Kudlow is starting to worry here.
Direct and indirect spending on Iraq is an important part of what's driving the dollar down and the cost of living up. Current thinking in Washington is that a recession or weak stock market must be avoided in order to pay for Iraq. But the monetary stimulus this necessitates is driving up the price of everything, including stocks. It's also created a link between a rising stock market and inflation; the former exacerbates the latter. And by the way, don't overlook the effect U.S. unpopularity has on the marginal willingness of foreigners to hold dollars; those greenbacks are a symbol of something, and these days it ain't good.
Just as the inflationary problems that confronted Carter and Reagan were rooted in Johnson's Vietnam spending fifteen years earlier, the worst effects of our fiscal and monetary distortions won't be felt for years. But remember, by the time this magazine cover hit the newsstands, LBJ was long gone. Will the public understand the connection between Iraq and the rising cost of living before the current actors hand things off to their successors? Probably not. But it's important.
posted by The Cunning Realist at Monday, April 16, 2007
26 Comments:
http://www.financialsense.com/editorials/casey/2006/0428.html
http://www.sprott.com/pdf/not_free_not_fair.pdf
And by the way, don't overlook the effect U.S. unpopularity has on the marginal willingness of foreigners to hold dollars...
Or, for the more mundane transactions that most people make, to buy American products. This little side-effect of our "fuck you, world" foreign policy somehow never occured to the Clausewitzen of the GOP.
-- sglover
The Cunning Realist repeats some incorrect conventional wisdom about the root of "the inflationary problems that confronted Carter and Reagan." He blames "Johnson's Vietnam spending fifteen years earlier."
The fact is, the last budget Johnson signed, the one for year 1969, was in surplus. The largest budget deficit during the Johnson years was 1968 when the total deficit was 2.9% of GDP; the 1967 deficit was 1.1% of GDP. If you review the CBO chart Revenues, Outlays, Surpluses, Deficits, and Debt held by the Public, 1962 to 2006 (Percentage of gross domestic product) found on Page 2 of this pdf file you'll see runs of deficits in each of the subsequent decades exceeding that of Johnson's highest deficit. The Reagan, H.W. Bush and Clinton deficits did not cause inflation. So far the W. Bush deficits have not caused inflation.
Why is that? In 1970 Milton Friedman said "[i]nflation is always a monetary phenomenon." What caused monetary policy get so out of kilter in the '70s? To gain an advantage in the 1972 presidential election, Richard Nixon politicized Fed policy. Until Carter appointee Paul Volcker put Humpty Dumpty back together again - at Carter's political expense - the nation suffered recurring bouts of inflation.
Here's what we learn from the Nixon tapes...
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“Just kick ‘em in the rump a little.” One cannot imagine Ben Bernanke, in his tan socks, resorting to such measures in today’s Federal Reserve meetings. But a bit of rump-kicking is exactly what Richard Nixon told the supposedly independent Fed chairman, Arthur Burns, to do in December 1971, according to recently released recordings from the Nixon tapes...
In December 1971, Nixon was less than a year from re-election. Unemployment had risen to 6% from less than 4% a couple of years earlier. Nixon blamed just such a soft patch (rather than the famous sweaty patch on his chin during the TV debates) for his defeat to JFK in 1960, and he wanted the Fed to do everything it could to avoid a repeat. “I don’t want to go out of town fast,” he says. Sad to say, Burns, it appears from these recordings, did rather a lot to oblige...
Unemployment fell in the election year as Nixon had wanted, but inflation was uncorked. In the year after Nixon's landslide victory, consumer prices rose by almost 10%. The Fed engineered a post-election recession in November 1973, but inflation was not brought under full control again until Paul Volcker took charge.
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http://www.federalreserve.gov/releases/h6/discm3.htm
http://en.wikipedia.org/wiki/London_Gold_Fixing
TCR,
Thanks for an informative economic post. Even though economics is not my strong point, and I didn't take any business classes in college (I doubled majored mathematics with music performance), your clear concise writing style makes the concepts easy to understand.
Keep up the great work with your blog! I am look forward to every new post!
Musically yours,
Spider
"So far the W. Bush deficits have not caused inflation."
What? You mean the price of regular gas is still $1.65/gal? Where have I been all this time? [/snark]
Last month I saw the price of cocoa go up 50%. I agree that the prices of milk (at Costco) and butter have similar trends over the period cited.
Even more ominous: the liquidity at the heart of the real estate bubble economy has tightened considerably in the past quarter as a result of the subprime mortgage crisis. So now we've got inflation trending upward and a slowing/contracting economy.
Stagflation rears its ugly head. Another Nixon redux.
If the 'leadership' is intent on righting the wrongs of Vietnam they better get off their asses and get on it. Pronto.
Having pestered TCR in the comments for ages, I now applaud. Thanks for the deeper economic analysis, which I have been missing of late.
I think TCR has hit the crux of the matter again: the Bush so-called Administration believes, just keep that stock market roarin', grow our way out of it, and nobody will ever, ever have to pay the trillion-dollar cost of the Iraq war. The stock market only goes up, never down, remember? The cost of the Iraq war will just be swept under the rug. Nobody important will have to pay it, anyway... "nobody _we_ know; doesn't the Middle Class make $200,000.00 per year anyway? Hey Laura, do we know anyone who buys their own milk?"
Maybe that explains Bush and Cheney's early speeches, when they told the nation (in so many words) that this war would not require personal sacrifices from Americans, the way other past wars have. But the inflationary pressures generated by their financial technique are, of course, an involuntary sacrifice, as opposed to a voluntary one. (Many economists regard inflation as just another form of taxation: the government taking away your purchasing power as opposed to your actual cash.)
Turns out what Bush meant when he stood in the rubble and told us to keep shopping and fly to America's great tourist destinations... was, "Take a quick break now, my little proles, because you're going to get it in the shorts for many years to come."
"So far the W. Bush deficits have not caused inflation."
What? You mean the price of regular gas is still $1.65/gal? Where have I been all this time? [/snark]
Are wages rising? Does fiscal policy affect OPEC pricing?
1) As far as I can see, real prices are rising at much faster rates than real wages. There is plenty of research to back up the erosion of purchasing power over the last 7 years.
2) Does fiscal policy affect OPEC pricing? Yes, albeit indirectly. In the Bush White House, war is the driver of both fiscal and foreign policy.
When war is used as the instrument of foreign policy in a resource strategic theater like the Middle East, it triggers uncertainty in the energy markets and therefore higher commodity prices; this translates into higher prices for oil. A 'domino effect' that benefits shareholders in big oil at the expense of everyone else. And yes, it's inflationary.
Tax cuts, not war, are the primary factor in the Bush deficits.
The standard explanation for fiscal policy creating inflation is that deficits over heat the economy creating a labor friendly job market which causes wages to rise faster than productivity. That's not happening.
Agreed, on all points.
What's different in this cycle is the added spending power isn't the product of a 'labor friendly job market' but rather a highly leveraged home equity market that people have been using like an ATM. The fact that these gains are taxed at a lower rate makes the game all the more attractive.
Mr. Hedley Bowes,
You would agree that: "a highly leveraged home equity market" is more the result of monetary than fiscal policy* would you not?
*Except to the extent that it is Chinese fiscal policy that is driving this.
Um, hate to burst your bubble, but the "inflation" in the price of certain foods (chicken, eggs, milk, beef, flour) is a result of increased ethanol production. They're having tortilla protests in Mexico over the rising price of corn (which chickens and cows eat, and the chief replacement for which is wheat).
http://www.foreignpolicy.com/story/cms.php?story_id=3756
Anon,
You're right that Friedman was over stating the case when he said inflation is "always" a monetary phenomenon. Globalisation has changed the game since 1970 when he made that claim.
@Mike(top)
The point is the economic effects won't be seen for another 5-10 years. It's just like if you never save a dime in your life and wonder why you're piss poor at 80.
The inflation of the 70's was overwhelmingly a monetary phenomenon, not a fiscal one. From the day the dollar was allowed to float it floated down all through the decade.
This may seem trivial. But I like to buy a Hershey's chocolate bar sometimes when I fill up with gas. A month ago, it was 80 cents. Today, it was 89 cents. A 11% increase. Not bad enough I had to paid over three dollars a gallon of gas. That's why I'm amazed when the so-called pro's say the inflation not bad.
Inflation is still a monetary phenomenon. Why do you think those thieves quit publishing M3. The true effects of our inflation has been masked by globalization and effective central bank coordination. The imbalances have been managed well so far but I believe the Asians are a whole lot smarter than we give them credit for. All they need to do to protect themselves from a declining dollar is increase domestic consumption. Why exactly is America needed to buy Asian exports when they are the most populous people on the planet? What is the Chinese middle class up to now...is it 300 million? Someone is going to feel a good deal of pain in the near future. I don't see any possible alternative than the American middle class. Asia isn't going to need us much longer. They'll do the spending themselves. All you rocket scientist-like economists have to do is look what happened to the British Empire...you know...the country that started the industrial revolution...and then pissed it all away playing a combination of global policeman and Napoleon. This is how the decline of all empires begins...the effects will really be seen by us commoners when grandma and grandpa move in because Medicare implodes.
As Nixon said...We are all Keynesians now.
John Maynard Keynes "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."
"Gold still represents the ultimate form of payment in the world."
-- Alan Greenspan, testimony before the US House Banking Committee, 1999
Don't be dumb...buy gold while its still cheap.
Lee Iacocca new book says it all, "Where Have All the Leaders Gone?".
Me thinks we are the patsy and they are robbing us blind. The Executioner of Excellence
Wolfowitz must know something we don't, when he dictated his girl friend's 8% annual raise.
Last, I'm surprised milk hasn't risen a lot more and sooner. You know how hard it is to be a dairy farmer and the costs involved! Anyone that grocery shops knows the cost of food is much higher, 10 to 20% higher. Go get yourself a new roof, furnace or water heater, which I had the unpleasant experience of doing, and the annualized increase - product and installation, over the past 6 years is 11%.
Just wondering, do we owe Ross Perot an apologize yet?
http://www.financialsense.com/editorials/casey/2005/1214.html
http://www.financialsense.com/fsu/editorials/oroborean/2007/0422.html
http://www.silverstockreport.com/2007/avoid_the_scams.html
http://www.financialsense.com/fsu/editorials/petch/2007/0424.html
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