Inflation and the Two Americas

Greetings from Sedona…

The price indices for producers and consumers were released this week triggering the usual barrage of instant analysis by a virtual army of talking heads of every persuasion in today’s version of counting angels on pinheads.  None of it is worth anything, mainly because the analysts, (including nearly all of the free market variety), accept the premise that there is something called the general price level.  There is no such thing.  There are only specific prices for specific quantities of goods and services delivered at a particular place and time.

This critical insight developed by the Austrian school of economics is the key to unraveling the delusional thinking of the economics profession generally and the fed chairman in particular.  Inflation (the expansion of the quantity of money) causes prices of products and services to be higher than they otherwise might be in the absence of that monetary inflation.  Some prices will go up more than others and at different times.  Some prices may even go down.  Which prices go up or down, and how much they will rise or fall is unpredictable.  Creating and index in an attempt to aggregate these price movements is worse than futile.  Such indexing (e.g. the CPI) creates dangerous illusions.

That consumer prices (per CPI data) are rising at around a 2-3% year over year rate allows the power elites to spin an illusion they are doing the right things while at the same time sucking the financial lifeblood from the vast majority of Americans.  Worse yet, they have gotten away with convincing nearly everyone who should know better that we should exclude consideration of the very things that are most important to the budgets of the fast majority of people – food, gasoline, heating oil.  This resulted in the development of what is called the “core” CPI which is calculated to be rising at less than 2% year over year.

When looking at the finances of specific people, we find a very different story regarding the toxic effects of fed policy.  Gasoline prices have soared from about $2.65 per gallon to over $3.50 per gallon in the last year.  There is precious little our average Jane and Joes can do when they must use their cars to get to work with no viable mass transit alternative.  The same goes for heating oil.  As for food – let them eat iPad!

On the other side of the CPI ledger, housing, by far the largest component in the CPI (see graphic), is roughly flat over the last year.

This is supposed to be good for Jane and Joe.  Really!  Their taxes are soaring.  Insurance costs are moving up.  Utilities are not exactly decreasing.  So what is keeping housing from creating a sharply rising CPI?  Well, the price of the home is dropping fast.  Great news for Jane and Joe – the one price that they would love to see increase is actually decreasing.  Way to go Benny B!!!

Now that we clearly see how the folks are taking it in the rear are doing, let’s look at how the other top five or ten percent are getting along in the “new normal” of 2011.  While Jane and Joe have a lot of house on their balance sheet, they have very little in the way of stocks.  People like The Donald, Warren, Billy and Google billionaires may have millions tied up in their house it represents a small part of their balance sheet compared to stocks.  Guess what has been zooming upward, but is not counted as price inflation!  That’s right, the stock market, by design courtesy Benny B!  That was about the only thing Benny wanted that he actually accomplished.

The longer term trends are no better.  Since 2000 the headline CPI is up 32% and the core CPI up only 25%.  Energy prices have doubled along with college costs.  Medical care is up 55%.  Housing costs are up only31%, again reflecting the same middle class squeeze since the price of homes is about flat over that period.

On a personal level I remember paying about $1.25 per gallon of gasoline ten years ago.  At one point the price touched $1.  Today we are closing in on a triple.  If I had to commute to work for the type of jobs most people have, I would be in serious trouble.

That current trends resulting from the fed’s monetary inflation are working to the detriment of the bottom rungs of the financial ladder is the rule, not the exception.  It is well understood that borrowers win from inflation because the debts are paid off in depreciated dollars.  Who are the biggest borrowers?  The wealthy, of course.

This Weeks Stupidity Award Goes To?

As a libertarian, I am never in favor of compulsory taxation.  However, if tax we must, then let’s do it in harmony with nature and economics.  Consumption taxes are a better way to go than income taxes (which should be called productivity taxes).  Sin taxes are even better.  Leave it to the politicians to mess that up as well.

The New Hampshire legislature just voted to reduce its cigarette tax by ten cents to $1.68 per pack in the hopes of attracting more smokers to its state.  Now, I used to be a stupid smoker almost 25 years ago.  There is no way a dime a pack would influence my choice of domicile.  In addition, how utterly idiotic can the morons running the government over there be to actually want more people with disgusting, unhealthy habits to come to their state?  Maybe they are all doctors salivating over the additional fees they will earn by treating smoking induced illnesses.

Now that is probably unfair because, the Pauls notwithstanding, doctors tend to stay away from electoral politics.  The New Hampshire legislature is most likely dominated by lawyers.  Since it has been over thirty years since I practiced any law, I am out of practice in divining what goes on in a lawyer-legislator’s mind.

All the best to you all,

Stephen Reiss
[email protected]

Read more at SedonaCyberLink