Prices are falling. The Fed will interpret this as “deflation” whereas it is more related to lack of demand. They will interpret falling prices as “deflation” and view this as dangerous to the economy. Here is a summary of the PPI and Ex-Im prices indices. Tomorrow (Thursday) the CPI will come out and my guess is that it will also be down. This raises the likelihood of more QE, thus more destruction of real savings and capital, and will result in continued stagnation.
Prices are falling. Here are today’s numbers of the Producer Price Index for May 2012, and the Export-Import Price Index for May. These are YoY charts:
Why, we ask, are prices falling when money supply is expanding world wide?
1) Demand is weak because the world is falling into stagnation or recession.
2) Monetary expansion has failed to re-start failing economies.
One more chart, on GDP for the G20 to prove my point:
Successive rounds of monetary inflation have resulted in several rounds of boom-bust cycles, each of which have destroyed real savings/capital which is the reason we and the rest of the world are stagnating. More monetary stimulation will only further destroy the real capital needed to drive economies.
The thing to understand here is that the Fed doesn’t understand this. They fail to see that the mechanics of monetary inflation actually do the opposite of what they intend. They will see falling prices not as a result of lack of demand, but rather a dangerous “deflationary” trend. “Deflation” as they define it are falling prices and wages. Rather, it is actually a decline on money supply. This confusion has ruled Fed policy for generations. The result has been our roller coaster economy.
The Fed views falling prices as a very dangerous signal that they must do something. That something is the same thing they have been doing which is to attempt to create price inflation by expanding the money supply. That hasn’t worked before and it won’t work now. The result will be a benefit to the financial markets, but more and more stagnation. Think “Japan.”
The CPI comes out tomorrow and my guess it will also be down. I think we’ll start hearing the “D” word soon.
Jeff, I would go a bit further to what you have said and add to it that at the same time the FED is trying to inflate the economy the rest of the administration is doing its best to transform it into some kind of hybrid capitalist/Marxist utopia.
The transformation process is confusing the market place as they indirectly take over more and more of the private sector though legislation and agency rules and regulations e.g. energy policy in reference to carbon fuels and the take over on health care which everyone knows is going to result in single payer. The result of the social and other policies initiatives creates an operating environment where there is little to no reason to invest in this country. The only reason that money flows in is that it is much worse else ware meaning the EU since they are farther along the process to the perfect social welfare state. Kipling said it best in 1919.
“The Gods of the Copybook Headings” is a poem written and published by Rudyard Kipling in 1919. The central message of the poem is that basic and unvarying aspects of human nature will always re-emerge in every society. The copybook headings to which the title refers were proverbs or maxims printed at the top of 19th century British schoolboys’ notebook pages. The students had to write them by hand repeatedly down the page. There were two reasons for the education system (not yet corrupted by the progressives) doing this. One was to prefect handwriting, for practice makes perfect. The other was to ingrain in the students things that would benefit them later in life.
The Gods of the Copybook Headings
AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.
We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.
We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.
With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.
When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: “Stick to the Devil you know.”
On the first Feminian Sandstones we were promised the Fuller Life
Which started by loving our neighbor and ended by loving his wife
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: “The Wages of Sin is Death.”
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”
Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.
As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;
And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!
[...] fears inexorably lead to money printing inexorably leads to inflation. #wearescrewed #cpihttp://dailycapitalist.com/2012/06/13/the-dreaded-d-word/ Link excerpt: Prices are falling. The Fed will interpret this as deflation whereas it is more [...]