The Myth of US Inflation — The Facts of US Inflation — War Could Threaten — China Total Social Financing — Jay Powell Jobs, Jobs, Jobs — Deaths From All Causes Collapsing — Poor Poor Zimbabwe

There were great expectations last week that the US CPI inflation numbers would reveal an outbreak towards higher levels. Recently rising commodity prices, especially oil, were seen as as a harbinger. Falling long Bond prices were also thought indicative of a possible end to CPI dis-inflation and deflation. BOOM cannot understand such expectations. The US economy is overwhelmingly based upon services rather than goods and many millions of Americans are now unemployed or under-employed. In fact, US economic activity is 80% dependent upon services rather than goods and 10 million jobs have been lost in the last 12 months. So how can CPI inflation pressures be sustained?

The prices of services in any economy, as compared to the prices of goods, are not so energy dependent and neither are they much affected by a falling currency. The prices of goods are different. They are affected by both rising energy costs (especially oil) and a weak currency (but only in relation to the currency of the prime trading partner that provides imported goods). Wages rising can affect both but with so much underemployment and unemployment in the advanced economies, the threat of wages rising is a long distant memory.

As long ago as 2008, service jobs accounted for over 80 percent of total U.S. employment. A report by Deloitte in 2018 stated that “services dominate in output, value added and employment”. It’s not just a US phenomenon. The report also stated “services account for more than 70% of employment in all OECD countries”. Even 40% of world trade is services based.

The United States central bank has embarked upon desperate money policies for over a decade aimed at creating CPI inflationary growth and it has failed. It continues to fail. Japan has tried all these monetary policy tricks for over 25 years. Their CPI inflation rate has barely risen above zero% on average over that period despite hurculean central bank efforts.  

Ignoring this lesson, mainstream economists and media analysts everywhere across the globe continue to mis-read inflation expectations. They are always on “inflation watch” and their central bankers are always determined to “control CPI inflation” if it appears when the threat of such is almost completely imagined.

It’s not just mainstream, conventional economists and journalists that fall for this trap over and over again. The members of the smaller economic religion called Austrian economics also have the exact same fear. They continually search out the “ever present threat of inflation” without any deep understanding of money creation and money circulation dynamics. They go further by endlessly warning of the outbreak of hyperinflation. BOOM cannot understand why this myth persists. It appears that human beings prefer belief over facts. That is the only explanation. Delusion is preferred to a sober assessment of reality in human endeavors throughout history.

THE FACTS OF US INFLATION

The official US CPI inflation rate was released last week at 1.4 % annualized. The rate has effectively not changed over the last 6 months. The all-important core consumer prices inflation rate which exclude food and energy also came in at 1.4 % year-on-year. That is a fall from the 1.6 % – 1.7 % seen each month during the last 6 months.

Let’s drill down into the numbers released on 11th February. Consumer Durable Goods rose in price by 3.5% year-on-year. Bingo. There lies some CPI inflation. Non Durable Goods rose by only 0.7 %. Not so worrying.

New vehicle costs rose by 1.4 %. Used cars rose by 10 %. Why? Because many Americans (most?), either living in poverty or faced with the prospect of poverty, simply cannot affod to buy a new car anymore. Supply chains for new cars have also been affected by the covid panic.

Furniture and Bedding rose by 1.5 % year on year. While airfares collapsed by negative – 21.3 %. That is CPI deflation writ large. Medical care, hospital costs and Doctors’ fees rose by an average of 2.73 %. But Prescription Drug costs dropped by negative – 2.4 %.  They fell rather convincingly.

During 2019, Medical Care Services costs were increasing sharply by 6 %. Over the last year, however, they have collapsed to grow by only 2.9 %. Meanwhile, the costs of Medical Care Commodities have contracted by negative – 2.3 %.

Accommodation rental cost inflation has dropped from around 4 % to 2 % and looks like it is falling off a cliff. Health Insurance price rises have also plunged  from around 20 % to 2.9 % and, again, it looks like it is falling off the proverbial cliff.

Meanwhile, many citizens may have decided to stop looking for work and are spending more time on the Internet. The cost of Wireless Telephone Services has surged from negative – 3 % to a positive number of around 4 %. That is an effective 7 % increase in just 12 months.

Prices in food, oil and some commodities are rising in price in US Dollar terms over the last 4 months. However, BOOM cannot see how that can be sustained into the future unless the US Dollar keeps falling. Also TIPS have been rising in price, presumably due to increasing demand from poorly informed investors. TIPS are bonds issued by the US Treasury that protect against CPI inflation. TIPS stands for Treasury Inflation-Proected Securities. BOOM suspects that their recent rise in price will soon be over and price declines should begin.

Back in history, forty years ago in 1981, the United States witnessed CPI inflation rates around 15 % year-on-year. Wages were increasing by 9 %. Energy costs increased then by almost 50 % as the oil supply shock hit the world. In 1973, food prices were increasing by 20 %.  Those days are long gone but the central bankers of the world still imagine that this can all happen in our current situation. Many mainstream and Austrian economists agree but they are all dreaming dreams of delusion. We live in a very different world.

WAR COULD THREATEN

The one price which BOOM does watch very closely is the price of oil. Why? Because oil has the potential to increase very rapidly in price due to geo-political tensions and the risk of warfare. A war could trigger a huge, sudden rise in the oil price if it interfered with the supply chain. In this regard, the Strait of Hormuz in the Persian Gulf is of major concern. But any disruption to China’s oil supply chain anywhere could trigger a massive price rise in oil. And if that price stayed high for long enough, then all economies that import their energy could be threatened. And China is the biggest importer of oil by far.

However, any sudden surge higher in the price of oil would trigger a surge in the US Dollar because it is the currency required for most oil trade settlements. A surging US Dollar is dis-inflationary inside the US and inflationary outside it. This effect is only a problem if it lasts for a long time. So both the speed of any oil price rise and its persistence (or lack of such) are the two dynamics to watch for if this scenario ever occurs. Also, if China’s economy is threatened in such a manner, then the whole world will be affected. Of that, there is little doubt.

This only leaves one question. Are the politicians crazy enough to wage war? BOOM thinks we all know the answer to that question.

TOTAL SOCIAL FINANCING

China’s Total Social Financing in January increased by 5.2 Trillion Yuan. That is equivalent to a fresh new money boost of almost US$ 800 Billion in one month. Fresh new money is water for the economic garden. Without it, economies struggle to grow. BOOM expects a further similar increase to occur in February.

Chauncey Gardner said in Being There (the famous book and film). “In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.” He could have said  “Water the garden and the garden will grow”.  The key is knowing how to water a garden, when to water and where to water.

JAY POWELL JOBS, JOBS, JOBS

US Federal Reserve Chair Jerome (Jay) Powell, the nation’s chief central banker and “inflation fire fighter” is aware of the terrible lack of inflationary pressure inside the US economy. He thinks he now has no ammunition left to create CPI inflation and has turned towards inciting the Federal Government to “create massive numbers of jobs just as we did after World War Two to employ the returning soldiers”.  To show that he really cares (sure, Jay), he especially expressed concern about minorities and workers who have lost their lower-paying jobs.

“Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy,” he said in remarks to the Economic Club of New York. “It will require a society-wide commitment, with contributions from across government and the private sector.”

Recovery, he said will require “near-term policy and longer-run investments” to make sure that employment grows.

Thanks for your concern, Mr Chairman. The President, Mr Biden also cares deeply (sure, Joe) and is urging Congress to pass a US$1.9 trillion emergency spending bill. He is also keen on an infrastructure spending plan that presumably will involve yet more trillions of dollars. So, where will he get all that money from? Answer — Mr Jay Powell, of course. It’s a tag team approach by two gentlemen who really care about the plight of the average American. Or perhaps not?

Mr Powell said he felt the country needed a more organized and directed strategy to meet its economic potential. Does that mean a central planning committee, Jay? Perhaps he has been watching how China does it?

US REAL GDP FORECASTS

The Atlanta Federal reserve GDPNow model estimate for real GDP growth in the US  (seasonally adjusted annual rate) in the first quarter of 2021 is now 4.5 percent as at February 10th. This estimate has been reduced from around 6 % in Mid January. That drop in estimate is ominous as far as BOOM can see.  The average of other forecasters called the “Blue Chip Consensus” is just 2 %.

BOOM expects the GDPNow estimate for real GDP to fall further as the first quarter progresses. So what exactly is real GDP?

From Investopedia:  “Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices) and is often referred to as constant-price GDP, inflation-corrected GDP, or constant dollar GDP”.

DEATHS FROM ALL CAUSES COLLAPSING

Euromomo is the website where the statistics for deaths from all causes in Europe are published each week. The numbers are updated every Thursday. Last week the graphs showed that death numbers from all causes are collapsing all across Europe (including the UK) and in every nation. This is happening during a “terrible pandemic” from the “horrible” Covid 19 virus and it is also in the middle of a severely cold winter. How could that be?  The sceptic would suggest that it is not due to masks, lockdowns, social distancing and vicious police actions. The true believers in government interventions would say the opposite.

Reference:  https://euromomo.eu/graphs-and-maps/

POOR POOR ZIMBABWE

Zimbabwe has embraced the U.S. dollar as a currency shortage continues. Worn and damaged US Dollar notes are now being repaired and cleaned in Zimbabwe, where a lack of small currency is making completing transactions difficult.

The Reserve Bank of Zimbabwe is paying attention to its unusual national “money laundering problem,” where the lack of currency for small transactions has led to an industry of entrepreneurs buying badly damaged U.S. dollars on the cheap and repairing them with thread, glue, soap and other means to make them suitable for commerce.

Merchants have been refusing to transact business with decrepit notes, so apparently the central bank of Zimbabwe has become involved and insisted that retailers and traders accept old and worn out U.S. currency as legal tender. The shortage of notes has led to a big slow down in every day smaller transactions.

The central bank even got the U.S. Embassy in Harare to issue a statement via Twitter. And they issued this statement in support, also on Twitter. “As already advised by the US Embassy in Zimbabwe in its tweet on 16 November 2020, the Bank wishes to inform and restate the position of the US government that US$ notes do not expire no matter their age, and the US government does not even consider old, worn notes to be mutilated as long as more than half of the note is intact, and the value of the note is clear.”

In economics, things work until they don’t. Until next week …………  Make your own conclusions, do your own research.  BOOM does not offer investment advice.

CLICK HERE FOR PODCASTS:   OUR BRAVE NEW ECONOMIC WORLD

EMAIL: gerry {at} boomfinanceandeconomics.com

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HOW MOST MONEY IS CREATED

BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR (but they always need a Borrower to do so)THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY

Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how the banking system and financial sector really work. 

https://www.youtube.com/watch?v=EC0G7pY4wREhttp://
How is Most New Money Created ?

LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).

From the Bank of England Quarterly Bulletin Q1 2014    —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.

Youtube Video —  https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction

and

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Paper:  Money in the Modern Economy  PDF —  CLICK HERE

Quarterly Bulletins Index

http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.

On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —

“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”

Reference: https://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.html
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans
“In the first instance, the process of money creation requires a willing borrower.” 
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”

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MOLS Denmark

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