Inflationomics: The Other New Central Bank Policy To Save The Economy

inflationomicsBy John Schroder

There is an old saying that ignorance is bliss.  Indeed that may be true.  The uninformed, those who pay no attention to what is going on both economically and politically probably are quite content being oblivious to it all.  However, in my case, I cannot help but be perturbed as to the track being taken in terms of current policies adopted by the central banks (and politicians) in the developed nations, which primarily includes Europe, The United States and Japan.  And never in my entire adult life has any central bank professed to actually want inflation as they do now.  On the contrary, zero inflation and a stable economy was always supposedly the intended preference.  But not any more, inflationomics is now the other new goal of these wizards of modern economic alchemy (helicopter money being the other policy currently being touted in a recent rash of sales pitches, the metaphorical raising the flag up the pole to see if it catches wind).

However, we suppose this act of desperation is understandable.  Central bankers are frightened to death of deflation and truth be told we are in and have been in since 2008 an economic scenario quite similar to the economic depression of the 1930s.  No one in government or the mainstream media wants to come out and blatantly say it, and of course it does not seem that way because a number of social welfare programs put in place after the economic depression some 70 plus years ago has provided a support system eliminating the need for Hoovervilles and the unemployed selling fruit on street corners.  But, while politicians are quite adept at oratory ambiguities, the numbers do not lie.

Economics is like gravity: Ignore it and you will be in for some rude surprises  – Charles Wheelan

The University of California Berkeley completed a study back in April 2015 whereby they examined social welfare expenditures.  What caught our attention was not the annual cost of US$150 Billion for such programs but rather the comment that: Inflation adjusted wage growth from 2003 to 2013 was either flat or negative for the entire bottom 70 percent of the wage distribution.  The report goes on to say that about 75 percent of all public support program participants are from working families.  In other words, the already existing inflation has eroded the purchasing power of lower wage workers AND public assistance programs are NOW being utilized to supplement that loss.  While the bean counters at the US Bureau of Labor Statics continue to espouse an inflation rate of less than one percent, the Shadowstats service pegs US inflation at 8.5% as of July 2016.  Quite a difference, would you not say?

Now the central bankers want to INCREASE inflation even more (and the talk is to increase the current 2 percent inflation target up to 4 percent or some other number).  Ladies and gentlemen, if they cannot effectively control whatever inflation exists now and do not even want to admit there is inflation, how the heck are they going to control or manage even more inflation?  This is lunacy on steroids and the lower wage working class plus the middle class will be ravaged even further with more devaluation and loss of purchasing power of their income and money.  How do we know they want to do this?  While US Federal Reserve Chairwoman Yellen appears mum on the topic, San Francisco Fed President John Williams has already suggested that central banks consider unorthodox measures, such as a higher inflation.  Mr. Mark Thoma, writing for Moneywatch, clearly is pushing for this policy idea of even more inflation.  Mr. Greg Ip of the Wall Street Journal chimes in as well on the subject also in favor of more inflation for the masses.  In terms of Japan, an August 27, 2016 article from Fortune Magazine is titled: “Bank of Japan Will Act Without Hesitation to Revive Inflation.”  You have to give it to the Japanese, they never quit even when they already have proof what they have been doing is not working.  Kamikaze economics at its best.

But Here Is The Problem:

What if the methodology of the US CPI is wrong?  What if Mr. John Williams of the Shadowstats service (not to be confused with Mr. John Williams of the San Francisco Federal Reserve bank, another person altogether) is correct?  What if the US CPI figures are bogus and are being intentionally grossly under reported as an excuse not to offer true cost of living increases to workers and social security recipients?  This entire argument about now doing the unthinkable (actually promoting more inflation) all rests upon the validity of government statistics – and fails miserably if those figures are suspect or outright false.

If Socialists Understood Economics, They Would Not Be Socialists  – Friedrich Von Hayek


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Not to go off on a tangent, but let us return one again to the percentage of the population relying upon public assistance.  According to the May 2015 US Census Bureau Report about 20 percent of the entire US population or 50 million people were enrolled in some kind of government assistance program.  However, that percentage number can be a bit misleading because it includes the part of the population not eligible to participate in the workforce (meaning infants and the elderly).  When we plug those numbers into the formula using only adult aged eligible workers, the percentage shoots up to a much higher number.  Plus, when you add other forms of social welfare programs into the equation (Social Security, Medicare, Medicaid, unemployment insurance) you get a statistic that approaches 50 percent of the US population.  But we are not trying to complain or rail against social welfare insurance.  In fact, we would suggest it has avoided a social welfare crisis of the kind that was clearly evident during the 1930s economic depression.  However, our main point is that such welfare insurance has become an institutionalized income subsidy for the  large number of people that are in fact working, albeit those at the lower end of the income scale.  The statistic brain web site reports that as of August 25, 2016: There are currently 39 US states whereby public assistance actually pays better than an US$8 per hour minimum wage job, 6 US states where such public assistance pays better than a US$12 per hour job and 8 US states whereby such public social welfare benefits actually pays better than the average US salary for a school teacher.  Once again, inflation or currency debasement has been the culprit in helping to erode purchasing power and now they want more of this.

Inflation As Hopeful Debt Eradicator

Who actually would want inflation?  Anyone or any government drowning in debt.  While the economic policies of the last 8 years have helped the owners of assets (stocks, bonds, real estate) regain 95 percent of the wealth lost in the previous rout, the fact is that was achieved through ever increasing government deficits (read debt to finance those deficits) and digital money creation (to monetize the debt that was being created to finance the deficits).  I personally think the asset re-inflation was an unintended by product and not necessarily the intended result, although some may wish to disagree.  However, savers, anyone on a fixed income and those without inflation hedges in their investment toolbox are of course going to wiped out by higher inflation.  They already have been hurt exponentially, but even more inflation, even more currency devaluation simply means even more pain.

Mr. Stefan Gleason, President of the Sound Money Defense League, opines in a May 17, 2016 editorial that: Under the current system where central banks can create new money with a few strokes of a computer keyboard, politicians know when they dole out lavish entitlements and spending programs which future generations of taxpayers cannot cover, the Federal Reserve is there to bail them out with more money printing. Of course, the result is more inflation in the real economy, and the purchasing power is continuously whittled away. Rather than overtly defaulting on entitlements programs and government creditors, the default is stealthy in nature. The default doesn’t come in the form of missed payments, it’s a default on the value of our currency.

So why do it?  Why deliberately and intentionally hurt savers, investors, the retired and the lower income earners of society?  Quite simple really.  Deflation is the friend of savers and the financially solvent and inflation is the friend of those drowning in debt (with the hope those debts can be inflated away, along with unfortunately the value of the currency as well).  Deflation also helps lower wage earners because their earnings actually buy more as prices go down and by effect the value of the money they earn goes up.  Personally I think all central bankers should be required to take a Hippocratic oath similar to those in the medical profession (if you cannot help, then at least do no further harm to the patient).  Although I do realize that is wishful thinking on my part.

In any event, at least in terms of the US Federal Reserve, be aware of the three items now on the agenda.

  1. Helicopter Money (they are trying to fly that one again both literally and figuratively).
  2. More Inflation (if a teaspoon of poison does not kill the economy, why not dump in the entire bottle?) and
  3. US$4 Trillion Dollars worth of QE4 (or whatever number they are up to now), which would blow up the Fed’s balance sheet to more than US$8 Trillion Dollars worth of securities.

And on that note, you might be interested to learn that the Japanese Central Bank has just about nationalized the entire Japanese economy.  Well almost.  The Japanese Central Bank is now one of the largest single shareholders of Japanese companies traded on the Nikkei.

I actually was hopeful that these guys would wake up and do the right thing eventually.  It was Winston Churchill who was famously quoted as saying: Americans can be counted on to do the right thing after they exhaust all other options.  However, that does not seem to be the case, not this time.  In fact, I recently read something that claimed the banks in Europe are setting up contingency plans to prepare for a financial nuclear winter.  I do not know exactly what that means but I can tell you it certainly is a show I do not want to buy tickets for.  In terms of a safe haven, Hamlet advised Ophelia to get thee to a nunnery.  I am not suggesting you hide out in a monastery and to be honest I doubt it would do any good.  But, I do believe, just as was the case during the 1930s economic depression that not all countries will suffer equally.  In other words, I tend to think the so-called beyond the BRICS group of nations will at least suffer a minor case of influenza in comparison to Europe’s and America’s hard core economic pneumonia (metaphorically speaking of course).  So, be awake, be aware and be prepared.

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About The Author: This article was written by John Schroder of Ascot Advisory Services.  John’s firm has been helping clients in the Dominican Republic for the last 17 years with residency application services, naturalized citizenship filing, banking assistance and legal services pertaining to real estate (title transfers, legal representation at closing, sales contract review).  You can contact him by telephone at 809-756-1917 or click the about the author link above to reach a contact page to send an email directly.


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