by MN Gordon Economic Prism
Federal Reserve Chair Janet Yellen says the 0.4 percent May CPI increase is noise. Perhaps she is right and it is noise. But just what type of noise is it?
Is it the type of noise to ignore…like a street vagrant’s mutterings of gibberish? Or is it the type of noise, like a fire alarm, telling us to get out because our home is about to go up in smoke? The difference is stark.
Though Yellen didn’t elaborate, we assume she means the CPI noise is something to ignore. That price inflation isn’t a real concern. Here at the Economic Prism we think otherwise.
Regardless of whether it shows up in the CPI, the price of just about everything that’s needed to live is going up. In fact, according to MarketWatch, the price of health-care, gas, housing, pork, beef, chicken, orange juice, milk, and coffee, are all going up. Who cares if you can get a really good laptop for $500 when pork prices have risen over 50 percent in the past year and beef prices are up 74 percent since 2009?
Obviously, prices for the real necessities are going up much faster than incomes. Moreover, they cut into family budgets like an oversharp butterfly knife. But Yellen wants to ignore it. For Yellen fears deflation not inflation…and she’ll do near anything to prevent it. Here’s why…
Fearing the Deflationary Spiral
Deflation, in its most simple terms, is when prices become cheaper – or dollars become more valuable. Sounds like a good thing to us. Who doesn’t like being able to buy more for less? Nonetheless, deflation scares the dickens out of central bankers and central governments.
The way they see it, when prices on consumer goods become cheaper, purchases are delayed further and further into the future. Why buy a new car today when next month it’ll be cheaper? Why buy it next month when two months from now it’ll go for even less?
As people stop buying all but the bare essentials, companies lose money and cut jobs. Economists call this a deflationary spiral…where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.
But what really makes deflation dangerous is debt. If an individual loses their job it’s near impossible for them to make a mortgage or a car payment. Even a slight reduction in income can make servicing existing debt difficult.
Conversely, that’s why central bankers love a little inflation…it stimulates demand and reduces the burden of debt over time. Over a thirty year mortgage, a 2 percent inflation rate cuts a house payment in half. Similarly, the government’s debt obligations are also lessened.
Janet Yellen’s Unwise and Inhumane Policies
Unfortunately, the Fed’s shenanigans to prevent deflation are not without consequences. Namely, they distort the price structure of the entire economy. Houses, stocks, junk bonds, and treasury debt all go up. The value of the currency and the price of credit go down.
People and businesses see these price movements and make decisions about how to borrow, spend, save, and invest. Congress sees rock bottom interest rates and gets a free pass to run up the debt to $17 trillion. Some lunatic pays $84 million for a painting of a half black and half white rectangular canvas with an additional black stripe called Black Fire I.
But not only is artificially cheap credit propelling stocks and treasury debt into the outer stratosphere. That, of course, is bad enough. Yet that’s nothing.
Alas, we live in a day and age where central bankers are creating money from thin air to buy both government debt and stocks. Can you believe it? Financial markets, and by extension all markets, are being manipulated unconditionally.
“To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target,” said Yellen some 20-years ago.
We wish this wasn’t such a bitter pill to swallow. But if you believe in ideas of liberty, freedom, and limited government, then the fact that everything is rigged by a class of appointed bureaucrats is not only unwise and inhumane…quite frankly, it’s downright intolerable.
[MN Gordon (send him email) is the editor of the Economic Prism. Visit Economic Prism. The Economic Prism is published by Direct Expressions LLC. Subscribe Today to the Economic Prism E-Newsletter at http://www.economicprismletter.com]