A Tale of Two Economies
Inflation in the age of Nonsense
Welcome, once again, to the asylum. There are issues that most of the public doesn’t fully understand, even as they feel the effect of them in their daily lives. The government, through their control of the mainstream media and education, capitalizes on this ignorance to mislead and confuse people. There are few places where this is so clearly the case as the economy and the economic indicators that are reported on almost every nightly newscast.
Inflation is one of the most painful and most manipulated figures in the economy. I was told by an otherwise intelligent person (very good at solving highly complex problems with data systems) that they were grateful inflation was down to 4% and it would be nice to see the process falling. After I explained that prices wouldn’t go down so long as the inflation number was positive, their defense was that is not what the news said. Sadly, I believe they are in the majority that don’t understand that current inflation stacks on past inflation, further increasing prices (here).
These issues are compounded by the fact that the government has falsified (under the guise of getting a more accurate picture of inflation) the calculation twice, once in the 90s and once again in the first decade of the 2000s. At the same time, the government stopped publishing the M3 money supply numbers, leaving us only with the M2 numbers. What are M2, M3 or other M numbers (here)?
· M2 money supply: It is perhaps the most commonly accepted measure because it consists of M1 in addition to marketable securities and less liquid deposits.
· M3 money supply: Known as ‘broad money,’ it constitutes M2 and money market funds like mutual funds, repurchase agreements, commercial papers, etc.
All the talking heads will claim that M2 is the best way to monitor the money supply so who cares about M3. The problem is M3 is the real accounting. The M3 was made confidential just as the Federal Reserve (FED) was expanding its balance sheets at the beginning of the last banking crisis. The M3 was hidden at that time because unlike the M2, the M3 that is no longer released to the public would show all the dollars the FED created out of thin air in exchange for bank bonds made up of bad assets (non-performing mortgages, bad personal loans, and the like). By hiding the M3, the FED was attempting to hide the extent of its intervention. Since these bonds were huge and not redeemable on demand (here), this also helped to hide the 14 trillion dollars the FED printed and sent overseas to bail out other countries in the same time period (here and here).
The old way of calculating CPI, before the 80s, was to do a one-to-one what everything for sale cost last year vs what it cost this year. Then, in 80s, the government changed the way it calculated CPI to a basket of around 80,000 items and then compared them one year to the next (the items compared changes frequently and those changes NEVER lead to an increase in inflation). Then, in the 90s, the government was having trouble finding 80,000 items to compare that would give them acceptable inflation rates so they introduced substitution to the calculation. This is where it gets really squirrely. By the original measure of inflation, or even the 90s measure without substitution, if you usually ate ribeye steak once a month and it was $10 a pound and then for whatever reason the cost of the steak jumps to $25 a pound you would say inflation was 150%. After the introduction of substitution, they assumed the public would substitute hamburger chop steak and since it cost $12.50. A pound (never mind it was $5 a pound last month) inflation is only 25%. This method completely removes consideration for standard of living to make sure inflation numbers stay low (I love my source for the inflation calculation changes because it fully makes my point while pretending the changes are a good thing. It is propaganda at its best here).
As you can see, the government inflation numbers are highly flexible by what the government chooses to include in their basket of goods and what they imagine you might substitute out items that are too expensive now for. Essentially, so long as you only buy items included in the basket and you are totally happy swapping out the products you really wanted for the products you can afford, then the government inflation calculation is fine, even though it doesn’t include food or fuel and they keep adding and removing housing from the numbers. You know, these things are just too volatile (here).
What happens if we look at the last few years using antiquated inflation calculations like those used from the time the government started tracking inflation to the 80s or even the basket of goods without substitution (and including food, fuel, and housing) like the 90s? Last month I showed how food (using the approved current calculation) is up nearly 27% (here). Using either the original or the basket method without substitutions cumulatively total real inflation is up over 10% a year resulting in almost double the reported inflation (here). I suppose that the government is correct, folks are substituting out while greatly eroding their standard of living. It is because they have to, not because they are equally happy doing so that is now and has always been a lie bureaucrats tell themselves to help them sleep at night.
If we can go back to the money supply numbers I spoke about above and why they are important, while some short-term inflation can be caused in some items by temporary problems with supply chains, war, or a natural disaster that temporarily reduces the availability or supply of a product, widespread systematic inflation is always a function of the currency losing value and has been through all of human history. Rome suffered inflation as their silver Denarius was debased with base metals (here and here). France’s attempt at paper currency in the 1700 (here) and even twice here in America with the green back and the continental (here and here). The fact is that hyperinflation is the ultimate fate of all fiat currencies or hard currencies debased to the point of fiat. It is important to know exactly how much money the FED is printing.
This becomes increasingly true as current policies and secrecy lead a split economy with two very different branches. You will frequently hear about Wall Street and Main Street on the news or wherever for lack of a better term, I will use the same designations. Main Street is the real economy where people work, things get made, and services are rendered. When value is added in the Main Street economy someone has produced goods, rendered services, or in some other way served another person. For the most part, Main Street works on a totally win-win, double thank you principle. This is the idea that in any voluntary exchange both parties leave believing themselves better off than before the exchange (here). The Wall Street economy requires no production, service, or efficiency to prosper. Right now over 20% of publicly traded companies are zombies, meaning they are not profitable and largely produce only theoretical value (here). The Wall Street economy needs only free, abundant money from the FED to prosper. Seriously, it doesn’t matter if a company is contributing goods or services to the economy or not as long as it can borrow at negative, or near negative, interest to buy back its own stocks, driving the prices higher. It can then sell back a portion of those stocks at the higher price, making shares in itself its biggest product (here).
The brokerages are also always finding ways to defraud the public legally, of course, with things like short sales. These work like this: Dan buys stock in Company A at $20 a share. Bill wants to short company A because he thinks the stock will fall to $10 a share in a fixed amount of time. So, Bill calls the broker and says he wants to short Company A. So, the broker collects $10 from Bill and sells Dan’s share of A and puts it in an account for Bill. If Company A goes down to $10 or less by the time the short contract runs out, then the brokerage buys Dan a new share of company A for $10 and gives Bill $20. If at the time the short expires Company A is $100 Then Bill has to cough up $90 for the brokerage to buy Dan a new share. There is risk here and it has gone bad before where a short went bust and the holder couldn’t pay (here). They also have come up with all manner of other instruments and derivatives allowing them to essentially sell every share multiple times. It is all a big, rigged game of chance (here) and like all games of chance the only guarantee is the house always wins.
This has put the FED in a tight space because they can’t raise interest rates to the point that they really destroy dollars or Wall Street will crash horribly, but if they don’t do something Main Street will totally fail. As a result, they have taken a soft middle ground where they are raising rates ever so slowly and at the same time expanding their balance sheet, in sort of secret, to keep the casino floating (here and here). Unfortunately, Main Street needs real deflation and Wall Street is so deeply indebted (as is the government) that they need continued high inflation to survive. By not taking decisive action to save one, the FED risks losing both. The truth is, over the last 50-80 years, we as a nation have painted ourselves into a corner that there is no easy way out of and it will be much, much worse before it is ever better (here, here, here, and here).
1 Peter 3:15
But sanctify Christ as Lord in your hearts, always being ready to make a defense to everyone who asks you to give an account for the hope that is in you, yet with gentleness and reverence;
God Bles you
-Sam