Big Inflation Coming 3 by Adam Hamilton

by Adam Hamilton - Zeal Intelligence

Published : November 10th, 2012

Well, Americans voted and the winner is inflation. Half our voting populace inexplicably decided to award a second term to Obama. Four more years of mind-boggling record deficits and record national debt growth! Obama’s Administration spent roughly 50% more than the government took in, which can essentially only be financed in two ways. Borrowing from foreigners and running the printing presses.

The latter of course is pure inflation. And the Fed bent over backwards with its quantitative-easing campaigns to buy massive amounts of the Treasury debt Obama ran up on our children’s credit cards. It created trillions of new fiat dollars out of thin air to purchase Treasuries to finance Obama’s trillion-dollar-plus annual deficits. And with Obama sticking around, this dangerous trend is only going to accelerate.

The ironic thing is inflation wreaks the most damage on the people with the least. Its corrosive effects on purchasing power are felt most at the margin, among the poor and minorities whose overwhelming support of Obama carried him to victory. They apparently didn’t care about the crushing unemployment rates among blacks, Hispanics, and the young from Obama’s policies, but they will care about inflation.

Inflation is a simple supply-and-demand phenomenon, economics 101. When the supply of money grows faster than the economy, the underlying pool of goods and services on which to spend it, it takes more money to buy anything. Relatively more dollars are competing for relatively fewer things, bidding up their prices. With more dollars in circulation, each one is worth less. So prices inexorably start rising.

For most of the half of Americans working hard enough to actually owe income taxes, inflation’s price impact is generally manageable. I don’t care if my bills double next year, I can afford it. But for everyone on fixed incomes, including all the Obama supporters receiving debt-financed government checks for welfare or social security, inflation is devastating. Deficit-driven rising prices will slaughter them.

Unfortunately inflation is widely misunderstood, which is just the way the pro-big-government Democrats want it. They need to spend far more money than the productive American taxpayers can pay in order to bribe the unproductive lazy for votes. And if they can convince the Fed to print money to “pay for” all this excessive spending up front, the tremendously negative economic impact can be hidden for years.

Inflation is the most nefarious and regressive stealth tax possible. It slowly strangles and starves the poor, who lack the resources to avoid it. Meanwhile the rest of us simply deploy our capital in tangible assets like gold, silver, and real estate that will preserve our purchasing power through the inflation. So Washington has a huge vested interest in keeping Americans as complacent as possible about inflation.

Thus the primary inflation gauge, the US Consumer Price Index, is heavily watered down. A wide variety of statistical manipulation and subterfuge is deployed to make prices look like they aren’t really rising as fast as they are. Per the CPI, prices have only risen 9.6% since Obama took office. This is about 2.4% a year. But if you look at your own financial records, you’ll find your expenses rising far faster since then.

Many contrarians believe the true price-inflation rate in the States is closer to 8% to 10% annually, which certainly seems far more realistic given how fast the costs of living are rising. One of the best ways to get a read on future inflation is to look at its cause, monetary expansion. If you want to estimate how much smoke is going to be produced, start by investigating the fire. The Fed’s monetary growth has raged.

If the Fed insists on helping to finance Obama’s rampant overspending by ramping the US dollar supply much faster than the US economy is growing, then rising prices are inevitable. Once this new money has been created by the Fed, it is baked into the pipeline. History has proven countless times it will eventually adversely impact price levels as too many dollars start chasing too few goods and services.

The broad measure of the US money supply today is known as MZM, or money of zero maturity. It is a liquid measure that includes all currency, checking accounts, savings accounts, and money-market accounts redeemable on demand. It excludes time deposits such as certificates of deposit. Since it is the best US-dollar-supply yardstick available today, it is also probably the best indicator of future inflation.

This first chart looks at MZM over the past 9 years, Bush the Younger’s last term and Obama’s first. The yellow line is the actual MZM money supply reported weekly by the Fed, in trillions of dollars. The blue line shows its absolute annual growth. Finally for comparison’s sake, the year-over-year growth of the CPI is also shown. Though its custodians try to hide rising prices, it is somehow still widely accepted today.

During most of Bush’s second term, before he appointed the notorious inflationist Ben Bernanke to take the Fed’s helm, MZM growth tracked closely with CPI growth. The Fed gradually increased the money supply, so prices only gradually rose. Rather conveniently for Bernanke, an academic with a long pro-inflation record, the Bureau of Labor Statistics changed its CPI’s methodology in mid-2006 shortly after he assumed office.

Politicians get uncomfortable with headline inflation above 4%, as Americans start to become aware of it. It also drives up the interest rates the US Treasury has to pay on its debt, making borrowing more expensive so politicians are forced to spend less. So the BLS bowed to its political masters and revised its index to more aggressively edit out rising prices. Maybe if it would simply claim inflation wasn’t a threat, its real-world impact would magically vanish. Read more>>  Big Inflation Coming 3 by Adam Hamilton