Printing money causes the wrong kind of inflation
The Great Correction鈥till in business鈥�
The latest news suggests that we鈥檝e been right all along. Housing starts are down a surprising 12% 鈥� with house prices still soft or falling in most areas.
Jobs? Forget it. Joblessness continues to be a major headache鈥ith no significant relief in sight.
And both consumer and producer prices are flatter than expected. In fact, the core CPI reading is at a record low. For all the talk of 鈥渋nflation鈥� 鈥� there isn鈥檛 any. Ben Bernanke is right, at least about 鈥渃ore鈥� inflation. Prices for people who neither eat, nor travel, nor heat their houses are flat.
Yes, dear reader. We鈥檙e in a great correction. We just don鈥檛 know what it intends to correct. Not yet.
鈥�US inflation moves close to zero,鈥� says the BBC.
And here鈥檚 Bloomberg, with the details:
The cost of living in the US probably rose for a fourth month in October, led by higher gasoline and food prices that aren鈥檛 filtering through to other goods and services, economists said before reports today.
The consumer-price index increased 0.3 percent after a 0.1 percent gain the prior month, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. Excluding food and fuel, so-called core costs may have increased 0.7 percent from October 2009, matching a record low. Another report may show housing starts last month fell to the lowest level since July.
We were watching the descent of consumer prices this past spring. It looked like the CPI would approach zero by the end of the summer鈥nd then head into negative territory.
But then, with all the excitement around , we kind of lost track. The feds were printing money intentionally, right out-in-the-open and without even a 鈥渟orry鈥� or an 鈥渆xcuse me.鈥�
Everyone knew it was 鈥渋nflationary.鈥� And it was 鈥� to the extent that it inflated the monetary base. But it didn鈥檛 inflate consumer prices. Why not?
鈥淚t鈥檚 the economy, stupid.鈥�
When an economy is de-leveraging you get a phenomenon that John Maynard Keynes described as 鈥減ushing on a string.鈥� You can push money into the system. But the other end of the string鈥here you find consumer prices鈥oesn鈥檛 move.
And now, it looks like Keynes was right. The Fed is pushing in $600 billion. Consumer price increases are still going down.
So we might be tempted to think that the feds can push on the string all they want; they鈥檒l never get consumer prices to rise.
But it鈥檚 not that simple. It may be true that you can鈥檛 increase consumer prices simply by putting money into the banking system. But the Fed is now going one step further. It鈥檚 funding the US budget deficit 鈥� practically the whole thing. That frees all the money that would have gone into US Treasuries to go elsewhere. Where? Darned if we know.
But just look at cotton prices. And gold. And farmland in Iowa and Indiana. Farmland yields (not crop yields鈥inancial yields, from renting out the land) are at an extreme low. Prices have been bid up 鈥� thanks to record low interest rates and record high agricultural output prices.
And look at prices of Indian stocks. They鈥檙e selling near record levels too.
All over the world, prices are going up 鈥� especially in emerging markets, where economies are growing fast.
But in America, consumer prices 鈥� when you take out food and energy 鈥� are going nowhere.
Just what you鈥檇 expect in this strange correction.
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