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Second Half 2011 Inflation Predictions, Political Impact, and More

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April 26, 2011 – Comments (18)

HT To EPJ:

USDA ups Inflation forecast for meat:

"As forecast right here at EPJ, price inflation is going to heat up significantly in the second half.  Gas prices are already climbing. Clothing prices are starting to uptick and now the US Department of Agriculture is warning on meat prices.

The USDA now says meat prices will climb 6% to 7% this year over 2010, up from its March 25 forecast for a 4.5% to 5.5% increase.

Beef prices are projected to jump 7% to 8%, up sharply from the government’s March estimate of a 4.5% to 5.5% rise. Beef prices are already running 12% higher than they were a year ago.

Pork prices, which gained more than other meats last year, will be a half-percentage point higher, rising 6.5% to 7.5% over 2010.

Depending on what happens to money supply growth, the price hikes could be even greater than these USDA forecasts." 

McDonald's has already doubled its inflation forecast as well.

Forecasting Its Impact On Politics

The timing could not better, folks. Consider this, inflation has already been a destabilizing force in the Middle East, most likely as a secondary spark rather than a primary, but certainly a force.  According to the World Bank, global food prices rose 36% last year (you can probably double that, but whatev.)<------ Lots of scary stuff in that World Bank link, but the scariest thing is their general economic ignorance, in which food prices rise because other stuff rises in price (but of course, no reason is given why those things rose in price!)

Though QE2 is coming to a close, don't expect an immediate slump and contraction.  Just as it takes time for new currency to bid up prices, it takes time for prices to stabilize and contract if the stimulus is removed. It all depends on the behavior of the market actors, and we know how often they want to do their own thing :)

So we can reasonably expect that inflation will still be upticking towards 10% for food and energy as the Presidential primary debate season begins.  How delightful? 

This means that there will be questions-a-plenty for our field of candidates on monetary policy, the dollar, economic approaches, and of course, the Ben Bernank.

Here's Business Insider's Joe Wiesenthal's view:

"It's inconceivable to think that in the GOP primary, candidates won't be asked for their position on Bernanke, quantitative easing, the role of the dollar, and of all the candidates, only Ron Paul has made a career on all these issues. In fact, after decades fighting his fight, he must be somewhat shocked that in just the last few years, his ideology has become so popular (or maybe he's shocked that it took so long).

In 2008, the GOP primary was dominated by...candidates like Mitt Romney and John McCain and Fred Thompson and even Rudy Giuliani. They were content to basically ignore what Ron Paul had to say. This time, they'll be fighting on his turf."

Like I said, how delightful?

Why I'm So Darn Excited

I'm not excited because Ron Paul is going to win. This isn't a racetrack. I'm not betting on horses. The real batte is the ideas. Whose ideas are going to win?  For at least half a century, the ideas of totalitarians have dominated the popular culture. Finally, we got to see a battle unfold where the ideas of liberty will get a fair hearing (unlike the sham of 2008). Oh, I'm sure the Republican leadership will try anything to keep him from speaking his voice, but I'm at least optimistic that his message will reach a far broader audience this time around.  Again, it'll be fun. Enjoy it. It might be our best shot. 

Last Word of Warning

The elephant in the inflation-debate living room is that pesky small sum of $1.47 Trillion and counting in excess reserves. Is The Ben Bernank going to pull a Joker and torch it in front of his compadres (I can see him exclaiming "this country needs a better class of criminals!")

What to do... What to do.... And why the heck is paying interest on it??? EPJ tackles those questions in an amusing write-up here:

One important example of  Bernanke's new Federal Reserve "tools" is the paying of interest on deposits that banks leave with the Federal Reserve. It has resulted in over a trillion dollars accumulating at the Fed, as what is known as "excess reserves". The Fed is paying banks EIGHT times equivalent market rates when they keep the funds as excess reserves.

If I may quibble with Mr. Wenzel, it's not eight times the "market rate" since there is no real market rate for low-risk assets anymore. But his point, that on the Fed-centrally-planned market, the banks would earn 1/8 as much in interests for low-risk/no-risk investments is well taken. 

Which leads to questions: even if we accept the MMT story that this money is merely an asset swap, where does the money come from to pay the interest on excess reserves? Over a three month period, that interest adds up to $1 Billion. Where did that $1 Billion come from.

And if this is simply an asset swap, where is the other $1.47 Trillion in assets?

I'm not being a smart aleck, I really don't know. If you do, feel free to comment.

David in Qatar

 

18 Comments – Post Your Own

#1) On April 26, 2011 at 9:00 AM, rd80 (98.50) wrote:

Some excerpts from this morning's WSJ:

"Kimberly-Clark Corp. plans to raise prices on its Huggies diapers and wipes by 3% to 7% while Procter & Gamble Co. announced a 7% rise in prices for its Pampers diapers and 3% increase on wipes."

"Procter & Gamble, which reports earnings Thursday, told retailers last week it is raising the price of Charmin toilet tissue and Bounty paper towels in addition to the Pampers products."

"Clorox Co., which reports next week, says it is raising the price of Glad trash bags by 9.5% beginning in May. The cost of some of its salad products, like Hidden Valley ranch dressing mix, will also rise."

Not to worry.  Paper and plastics can just be pulled out of core inflation numbers and then these price hikes won't matter.

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#2) On April 26, 2011 at 9:01 AM, PeteysTired (< 20) wrote:

Don't you understand?  The Fed has marvelous Excel models (maybe even Lotus 123) they use to know exactly the right amount of money to create to make interest payments. 

I have no idea where we are headed, but the Bernanke and other central banks are stuck.  Gov'ts all over the world are borrowing more than their people produce.  For central banks to keep their jobs, they are left with the job of figuring out a way to pay for it  Unfortunately, all of us will end up paying  :(

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#3) On April 26, 2011 at 10:03 AM, mtf00l (45.17) wrote:

PeteysTired

I'm inclined to agree with your analysis.  Sarcasm accepted.  The central bank doesn't pay for anything.  They're a middle man enterprise that merely creates an electronin ledger entry.  Then you, I and all taxpayers have to produce the interest payments back to the banks.  They have no skin in the game however they keep, distribute and spend the interest received as operating costs, salaries and bonuses.  When the central bank pays interest, as is stated above, it again is nothing more than an electronic ledger entry passed on to the taxpayer as public debt.

As for the political season, I'm confident all the candidates will look, sound and smell great!  When it's all over, we'll get the clown who was the most popular and who is gleeful and excited to be the puppet of the elite.

Depressing, isn't it. Welcome to America circa 2011.

Perhaps tomorrow i'll feel differently.

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#4) On April 26, 2011 at 12:54 PM, smartmuffin (< 20) wrote:

You're not betting?  What kind of libertarian are you?!

I'll bet you could get some pretty decent value on a "Ron Paul to win the GOP nomination" prop.  Not that I engage in that sort of behavior myself, of course.

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#5) On April 26, 2011 at 1:50 PM, ajm101 (31.92) wrote:

Hah.  Obama will run again against Mitch Daniels or Romney and will win.  Ron Paul will be shut out entirely, just like the last however-many times.  

The idea that there will be a battle of ideas in the national discourse is so pathetic it's funny.  Maybe Bristol Palin and Donald Trump will start a reality TV show, that's the best you'll see.

Prepare to be disappointed.

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#6) On April 26, 2011 at 2:12 PM, whereaminow (20.24) wrote:

ajm101,

Until you've actually cared, you wouldn't understand disappointment.

I've been through that. I have no concerns.  These things take time. 

Should I take a negative attitude? Should I bemoan the lack of ideas among the usuals?  Oh, woe is us...

Or should I be excited that at least we have one.

I like to point this out.  Everyone likes to call us doom-and-gloomers, but isn't it obvious that we're the optimists?  

David in Qatar

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#7) On April 26, 2011 at 2:43 PM, ajm101 (31.92) wrote:

I'm a recovering optimist.

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#8) On April 26, 2011 at 2:50 PM, rfaramir (29.30) wrote:

"if this is simply an asset swap, where is the other $1.47 Trillion in assets?

I'm not being a smart aleck, I really don't know. If you do, feel free to comment."

Not that I *know* know (you know), but my best guess is that the Fed creates it at their whim. That's why we're supposed to ignore it and only focus on the 'swap' part. Since the Fed have the power to create such computer entries at will, and do so regularly, and since it's *just* fiat money they are creating, meaning it is all meaningless (and valueless) in the end, they think we should ignore that minor precursor to the swap.

But that's exactly why we're upset about it! That effortless expansion of the supply of what we use as money contradicts one of the main justifications of the choice of any money: it's usefulness as a store of value because it is hard to create more of (or similary because its quantity is relatively constant).

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#9) On April 26, 2011 at 2:54 PM, rd80 (98.50) wrote:

where does the money come from to pay the interest on excess reserves?

My best guess is it comes from the interest earned on the bonds, MBS, short-term window borrowing, etc. held on the Fed's balance sheet.

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#10) On April 26, 2011 at 2:57 PM, whereaminow (20.24) wrote:

ajm101,

I hear ya.  But I have decided that I will enjoy this circus no matter how ridiculous it gets! At the very least, I get to see Ron make our authoritarian wannabes look ridiculous at the debates.  That is always fun. Like this episode:

rfaramir 

That's what it appears. Is there any way we could be incorrect?  Also, do you have any ideas on what they might do with these excess reserves?

David in Qatar

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#11) On April 26, 2011 at 3:03 PM, whereaminow (20.24) wrote:

Here's what you do with $1.47 Trillion in excess reserves.

=D

David in Qatar

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#12) On April 27, 2011 at 3:59 AM, Harold71 (22.83) wrote:

I have to admit I was pretty excited when Ron Paul said he was in the running for 2012.   I think the country is definitely more attuned to the economic issues, fundamental monetary system problems, basically everything Dr. Paul has been concerned about for decades!

Whatever happens this country, and the world, are absolutely in for a wee bit o' revolution....maybe more than a wee bit...

And I dig that.

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#13) On April 27, 2011 at 4:04 AM, mhy729 (32.35) wrote:

lol @ #11...great clip

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#14) On April 27, 2011 at 5:50 PM, mtf00l (45.17) wrote:

I predict no revolution whatsoever.  We'll all tune in and the status will continue to quo. =D

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#15) On April 27, 2011 at 10:43 PM, russiangambit (29.21) wrote:

I don't think Ron Paul has a chance because the majority of the US population still has no clue what is going on. I saw an article on CNN about the high gas prices  and I was really curious what the average Joe was saying about that. There wasn't a single comment that said anything about FED or monetary policy. The first 50 Ir ead all blamed evil speculators and evil oil companies for price gouging. And , of course, Obama played right inot this last week by saying his administration will look into speculation in oil prices. When everythign else fails - blame speculators. It is pretty disturbing.

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#16) On April 27, 2011 at 10:59 PM, whereaminow (20.24) wrote:

rg,

That's very true. In fact, I brought this up on another thread. 

We have a developed an anti-conspiracy theory posse at CAPS. It's pretty much an alstry backlash, and even though his blogs are not worth reading, that backlash carries over to other threads.

But the funny thing about this new anti-conspiracy posse is that they are mostly Democrats. Somehow, Democrats are immune to conspiracies.  Even when they spend every downturn blaming economic woes on "evil speculators", "lack of regulation", "price gouging", and all the other crazy conspiracies that have been proven false over and over and over again.

For some reason, these idiotic conspiracies are no problem to our psuedo intellectual bodyguards of the State.

CAPS is a fun little melting pot, isn't it?

David in Qatar

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#17) On April 28, 2011 at 12:29 PM, mtf00l (45.17) wrote:

I had a law professor once who said the way he got balance in politics was to listen to one hour of Rush Limbaugh and two hours of anybody else.  Alstry may just be our Rush Limbaugh...oh, wait,...do you think he's addicted to pain killers?

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#18) On April 28, 2011 at 1:02 PM, whereaminow (20.24) wrote:

mtf00l,

I actually think that's a pretty good comparison. Neither one truly understands the core beliefs that are shaping policy (individualism vs. collectivism), both are pretty good at throwing out soundbites, and ultimately both due more harm to individualists by shaping the debate in the way collectivists would like (superficialites over reflection and reason.)

David in Qatar

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