With all the talk about "Tapering" you'd think the FED was actually considering reducing it's money pumping. But in actuality that is not it at all. The FED is afraid that it is creating a a bubble in the stock market so it is looking for ways to continue its pumping but shift it enough so that the money goes somewhere besides just to the stock market. In other words, it is still worried about the economy and realizes that it is doing more harm than good but feels trapped, so it is looking for new ways that might work better. If the FED can figure out how to free up the log jam of "excess reserves" held by the banks, liquidity could be sloshing around the economy before you know it and … [Read more...]
Understanding Inflation and What to Do About It
Inflation erodes our purchasing power causing manufacturers to have to raise prices or reduce quantities in order to make the same profit margin. Neither consumers nor manufacturers benefit, so who does? Why is inflation so prevalent? Yes, the level of inflation will vary and may recede briefly but the erosion continues. To say that low inflation is better than high inflation is like saying a death of a 1000 cuts is preferable to beheading. Either way you are dead, one just takes longer. With low inflation however you may not notice the cuts since they are so small. Unfortunately, just because the government says the cuts are small doesn't mean that they actually are. See Can We Trust … [Read more...]
The Language of Inflation
Just the other day I was thinking about language and how it molds our thought processes. In some aboriginal tribes they don't have words for past, present and future tense. They would just say "I go home" this could mean "I went home", "I am going home" or "I will go home". It has been proven that in societies like this the concept of time is very muddled if almost non-existent. How can you plan for your future if you don't understand the concept of time? Lest we English speakers get all smug about the superiority of our language, ancient Greek was more precise than English in many aspects such as the word Love with at least three different words that we translate as "Love". And Eskimos are … [Read more...]
Deflationary Forces Overpower FED
Despite Bernanke's famous helicopter speech the FED's powers really are not unlimited. There is only so much they can do to stimulate the economy. After all they can't force people who are concerned about their future to borrow money. Just like a turtle people naturally recoil and pull back when times are uncertain. And even if they wanted to borrow bankers are reluctant to lend in uncertain times. This results in a phenomenon called Pushing on a String where no matter how hard the FED tries very little force is exerted on the economy. Robert Prechter believes that this is exactly what has been happening over the last few years where the FED has been trying to stimulate the economy but the … [Read more...]
Inflation and Your Retirement Nest Egg
Inflation has a big effect on the future value of our nest egg. As we begin to think about retirement we dream of our "magic number" that amount of money that we will need to retire comfortably. But with the rate of inflation constantly changing in is like trying to take aim at a moving target. To make matters worse it's not just the value of the money that is changing it is also the amount of interest you can earn on that money. With the FED actively working to keep interest rates low your savings often earn virtually "Nil" in the way of interest and to make matters even worse once inflation and taxes take their bite your nest egg might actually be shrinking. In today's article Dennis … [Read more...]
Consumer Price Index Definition
What is the Consumer Price Index? The Consumer Price Index is simply a basket of goods that is used by the Bureau of Labor Statistics to gauge how much price inflation the economy is experiencing. It is "weighted" based on how much of each good the average family uses. Therefore if 41% of your expenses are related to the housing category and 3.6% of your expenses are related to the apparel category and Apparel goes down by 1% and housing goes up by 1% your overall expenses will still be going up. In other words, if you spend $820 on rent a month and $72 on clothes a 1% increase in your rent would add $8.20 to your monthly rent expenses while a -1% would only save you $0.72 on … [Read more...]
A Monetary Master Explains Inflation
Today we'd like to host a discussion between Terry Coxon, a senior editor of The Casey Report and David Galland, a partner in a research firm employing about 40 analysts. David says... Terry is my go-to guy. He cut his teeth working side by side for years with the late Harry Browne, the economist and prolific author of a number of groundbreaking books, including the 1970 classic, How You Can Profit from the Coming Devaluation. The timing of Harry's book should catch your eye, because his analysis that the dollar was headed for a big fall was spot on. Anyone paying attention made a lot of money. As coeditors of Harry Browne's Special Reports, Terry and Harry made a formidable team for … [Read more...]
Deflation Warning: Money Manager Startles Global Conference
History shows that the U.S. should pay attention to economies in Europe The economy has been sluggish for five years. There's no shortage of chatter about "why," yet few observers mention deflation. One exception is a hedge fund manager who spoke up at the recent Milken Institute Global Conference. The presentation by Dan Arbess, a partner at Perella Weinberg and chief investment officer at PWP Xerion Funds, was startling because of how deeply it broke from the standard narrative. We've been wrong to assume that the economic crisis is over, Arbess said. ... The threat of deflation is once again rearing its head. "The persistent risk in our economy is deflation not inflation," Arbess … [Read more...]
Syria in the Throes of Hyperinflation
Living in the United States or other "stable" countries, we tend to think that Hyperinflation is a relatively uncommon event but that is far from the truth. In our post What is Hyperinflation? We list 26 instances of hyperinflation 11 of which have occurred since 1990. It seems that every couple of years there is another one. Even in the midst of deflationary pressures we have seen Zimbabwe (which ended in 2008), North Korea (2010-13) and now Syria. In Surviving a Hyperinflation we noted that "Hyperinflation only occurs in countries where the government has already broken down. Weimar Germany was mired in a social Civil War… Zimbabwe never had a working democratic government and the … [Read more...]
Rising Inflation vs. FED Tapering
Up until recently we rarely heard the word "tapering" but now it seems to be everywhere. Why? Because in June FED chairman Ben Bernanke floated a "trial balloon" and mentioned "tapering". By this he meant that he was considering slowly closing the faucet that is currently gushing easy money, i.e. $85 billion a MONTH. The stock markets promptly had a temper tantrum and Bernanke blinked and said, oh I was only kidding... I will eventually have to scale back but it won't happen any time soon... don't worry. He also said that the Fed's 6.5% target for US unemployment should be considered a "threshold, not a trigger" and that the FED would continue to support the economic recovery, "even as the … [Read more...]