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Tim McMahon
What is Quantitative Easing?
Quantitative Easing aka. Money Printing
Quantitative Easing aka. money printing is a government sleight of hand that results in an increase in the money supply. According to Wikipedia quantitative easing is different from the typical method whereby governments buy or sell government bonds on the open market to keep market interest rates at a specified target value. That requires a cooperative market. In unusual times, i.e. when the market is panicked, and banks don’t want to buy bonds, the central bank implements “quantitative easing” by purchasing relatively worthless financial assets from banks and loaning them new electronically created money. So this is straight forward money printing compared to the more round about tradtional method.
Thus Quantiative Easing increases the excess reserves of the banks creating liquidity for the markets.
Effects of Quantitative Easing
Legendary economist, Milton Friedman once said: “Inflation is always and everywhere a monetary phenomenon.” In other words, inflation is always caused by printing too much money. But the results are seen in prices of commodities like food, clothing and energy after the printed money works its way through the economy.
Generally, after a round of “Quantitative Easing” (aka. Money Printing) it usually takes one to two years for it to show up in popular pricing. The time lag gets smaller as people catch on to the cause and begins to anticipate more inflation. The time lag is also why many people fail to see the correlation between money printing and inflation. Continue reading
Cost of Living: How Much of Your Budget Goes to Food?
March 26, 2012
Knowing what percentage of our cost of living is spent on food is always a good thing to know. We recently published an article by Lynn Carpenter on her Real Basket of Goods in it she compares the cost of several ordinary food items over the decades. Her weekend meal basket included “one loaf of bread, one pound of coffee, one dozen eggs, three pounds of mid-price beef, one box of Corn Flakes or Cheerios, five pounds of potatoes and one Hershey bar.” In this article she determined that over the years a minimum wage earner would have to work 9.25 hours in 1938 to buy this food. But by 1961 a minimum wage earner only had to work 3.75 hours to buy the same food. Since then the number of hours needed stayed about the same during the 1970′s but spiked to 5.5 hours in 1981 and subsequently dropped back to about 4 hours. Continue reading
Inflation Adjusted Gold vs Stocks vs Bonds
Recently our good friends at Casey research published the following chart comparing the inflation adjusted returns of Gold compared to stocks and bonds for the period 1971 through the present. From this chart we can see that as bonds fell during the late 1970′s gold rose equivalently and stocks were basically flat. During the 1980′s bonds rose and gold fell while while stocks rose slightly. During the 1990′s stocks rose sharply gold fell and Bonds were volatile but basically flat to slightly up. During the 2000′s gold was up sharply, stocks were volatile and bonds were pretty flat. Continue reading
Why (and How) China is Boosting the Price of Gold
The History of Gold Prices (and How We Got Here)
To get the full picture of the current price of gold we have to look back nearly 100 years. In the 1800′s and early 1900′s gold played a key role in international monetary transactions. The gold standard was used to back currencies. Each country determined a fixed exchange rates for its currency, i.e. how many ounces of gold each unit of currency was worth.
Trade imbalances (importing more than they exported or vice versa) could rectified via the exchange of gold reserves. A country with a deficit would have to ship gold to the country with an excess. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend.
However, during WWI and WWII economic warfare was employed in an effort to combat poverty in ones own country by employing a policy called “Beggar Thy Neighbor”. This involved shifting demand away from imports onto domestically produced goods, either through government policy, rather than free markets. The primary vehicles were tariffs (or import taxes), import quotas, or by devaluation of the currency (i.e. changing it’s value in relation to gold). For example, During the 1930s, the British created their own economic bloc to shut out U.S. goods because they felt they couldn’t compete with cheap U.S. goods.
In July 1944, towards the end of the war 730 delegates from all 44 Allied nations gathered in Bretton Woods, New Hampshire. During this conference the U.S. held most of the cards because it was the least financially damaged by the War. The original plan presented by John Maynard Keynes was to establish a world-wide currency called the “Bancor”. Each nation’s individual currency would be pegged to the Bancor (rather than Gold) at a fixed rate. Governments would then be required to buy or sell Bancors in order to maintain the value of their currency at the pegged rate.
However, at Bretton Woods… Continue reading
Can We Trust Government Inflation Numbers?
Independant Inflation Tracking Numbers
Updated Feb. 27, 2012
By Tim McMahon~ editor
For some reason people don’t seem to trust the government. I can’t understand why. Surely the government only has our best interests at heart and wants to take care of us like good parents, and they are just protecting us from ourselves. And of course all politicians are honest, selfless, hard-working civil servants. Right?
Well, Okay maybe they don’t always have our best interests at heart. And maybe it would benefit the budget if they didn’t have to pay so much for cost of living increases but surely they aren’t fudging the Consumer Price Index are they?
I frequently get emails, and occasionally phone calls, asking just that question. Often the conversation will go something like this: I know that a few months ago when I went to the grocery store my favorite Arnold Oatnut bread cost $2.50 and only a few months later it is costing me $2.89 so lets see that’s a 15.6% increase in six months so annual inflation must be around 31% right? And the government is telling us that inflation is less than 3.5% so they must be lying!
Gasoline 20 Cents a Gallon?
By Tim McMahon, editor
Many of us aren’t old enough to remember Gasoline at 2o cents a gallon. I can remember gas during the 1960′s at 29.9 cents a gallon. The last time that gasoline averaged 20 cents a gallon was in 1942. That was during WWII ! But if you know us here at InflationData.com you probably know that we usually talk in inflation adjusted prices. So adjusting for inflation, the price of gas in 1942 would have been $2.78 if you are paying in January 2012 dollars. But that is still a long way away from the average price of Gas in 2011 of $3.48.
We track the inflation adjusted price of gasoline based on the annual average price using the Consumer Price Index (CPI) generated by the U.S. Bureau of Labor Statistics and a chart is always available from the menu bar above under Inflation Charts and Data / Inflation Adjusted Prices.
But this article isn’t about inflation adjusted prices using some artificially created index, and it isn’ t about prices of gasoline during WWII. How would you like to buy a gallon of gasoline for 20 cents today? Yes, two thin dimes! Well, I recently I read an interesting article called Why Gas Prices Are actually Falling and in it was this picture:
So there you have it a store that is currently selling Gasoline for 20 cents a gallon. And if you look at it closely you will find that he is actually making “excessive” profits as the monetarists might say. You see, today as I write this, Silver is trading for about $35.51 per ounce. A silver dime contains 0.0724 ounces of silver. So at current prices a Silver Dime is worth $35.51 x 0.0724 or about $2.57 so the guy who is selling gas for two silver dimes is actually getting $5.14 per gallon of gas!
So that leads to one of two conclusions Continue reading
Is There a Correlation Between Inflation and the Stock Market
When inflation is high and commodity prices are rising on what seems like an almost daily basis, have you ever wondered how that might affect the price of stocks?
Recently I received the following question:
In the years leading up to the great depression and the great recession, the DJIA nearly quadrupled.
My question is… what the cost of living did in these time periods and if there is a correlation between the stock market and the cost of living?
John Kelsch
John,
Great question! You would think that if all commodities are going up stocks would probably go up as well, since companies produce commodities. But that isn’t always the case. Often high inflation can actually squeeze profit margins and cause companies to lose money or barely break even. So lets look specifically at the correlation between stock prices and the inflation rate.
First let’s look at the average inflation rate for the entire decade and the average annual rate of return in the stock market. In this case we will use the S&P 500 since it provides a fairly broad-based reference for the stock market.
In the following chart we can see Continue reading
How Does Inflation Affect You?
When people go the the grocery store and see ever higher prices they know how inflation affects them. But when they are feeling more philosophical they might reason that if all wages and prices increased at the same rate it would all balance out in the end right?
Well theoretically yes but in reality it never works that way. Prices of various items all increase at different rates so some people are benefiting while others suffer. Those on fixed incomes suffer the most because the cost of things they are buying increases but their income stays the same.
This is where COLA or “Cost Of Living Allowance” comes in it is an adjustment that is made to compensate for the increase in prices due to inflation. Continue reading
Wanna Beat Inflation?
In a recent article entitled Is Gold really a good Inflation Hedge? I showed the history of Gold and how it really was a fear hedge rather than an inflation hedge.
Interestingly, I just read an article entitled “Wanna Beat inflation? Forget Commodities!” by newsletter author Dan Ferris.
It seems almost like heresy to hear that statement from Dan since he writes commodity and oil-based newsletters. But some of the statistics he presented were very interesting so I thought I would pass them along to you. Continue reading
Real Mortgage Rates
What is the Real Mortgage Rate?
At InflationData we are constantly talking about “real rates” typically by that we mean the inflation adjusted price. For instance we publish the inflation adjusted price of Oil, the inflation adjusted price of Gold, inflation adjusted stock prices and even the inflation adjusted cost of getting an education.
But today when we are talking about Real Mortgage Rates we are not talking simply about the inflation adjusted price of a mortgage. To calculate the real cost of your mortgage you must also take the appreciation of your house into account. So for example if your mortgage rate is 5% but your house appreciates 5% your real mortagage rate is zero. The formula for Real Mortgage Rate (excluding inflation) is mortgage rate (M) minus appreciation (A) equals Real Mortgage Rate (RMR) or M – A = RMR.
The Real Mortgage Rate and the Housing Bubble
Back in 2005 at the peak of the housing bubble housing prices were appreciating at what in hindsight were unsustainable levels. In those days, home prices were increasing at 17% per year.
So if 30 year mortgage rates were at 6%… the real cost of owning your home was 6% minus 17% appreciation or a negative 11%. In other words, by borrowing 6% you could net 11% profit on your home. No wonder people were buying houses like crazy. The real mortgage rate was -11%! Had the federal government not subsidized loans through Freddie and Fannie… mortgage rates would probably have risen in step with housing prices and there wouldn’t have been a bubble. Continue reading
