The Dow is an Indicator of Price Inflation

March 17, 2013

Proponents of the Austrian School of Economics have been predicting that Obama’s lavish spending and Fed Chairman Ben Bernanke’s money printing through his various quantitative easing schemes would cause price inflation in our economy.  For their part, Keynesians have been highly critical of Austrians for this prediction claiming that current government fiscal and monetary policy will not lead to price inflation.  They claim we have had 4 years of stimulus spending (however not enough for their liking) and quantitative easing, yet if you look at the government numbers on price inflation prices are not rising.

Well, I suppose if you trust in government like Keynesians do, you will follow its rigged statistics without asking questions.  Over time the Bureau of Labor Statistics (BLS) has changed how its price inflation number is calculated.  For a full review of how it has changed consult statistician John Williams’ site Shadow Government Statistics.  Consistently, the BLS’s current calculating method has yielded a price inflation number averaging between two and three percent.  However, if price inflation were still calculated the way it was before 1980, the price inflation average would be closer to ten percent.  If it was calculated the way it was between 1980 and 1990 the number would be closer to six percent.

Comparing price inflation numbers of the 1970s with today is like comparing apples and oranges.  Washington has changed the parameters of the measure making a comparison useless unless, like John Williams, you calculate the number using the old formulas.

The same is true about the current euphoria over the Dow’s breaking of its all-time high.  In nominal dollars the Dow is at an all-time high.  But, what good is it if the value of the Dow has lost its purchasing power?

Let’s look at USDA retail price data for beef for example.  Currently, the value of the Dow will buy 3,332 pounds of beef at the retail level.  But at 14,500 points that is about 20 percent less beef than the Dow could buy in January 2000 when its level was at 10,600 points.

But, what’s that, you are a vegetarian so the increased price of beef doesn’t matter to you?

Okay, well, the Dow’s value could currently purchase 15.35 tons of bananas.  That sum would keep any troop of monkeys occupied for a while.  But, it is the same amount of bananas the Dow could have purchased in February 2008 when it was only at 12,266 points and 60 percent less in 1999 when the Dow was around 10,000 points.

And who could argue against the fact that the price of gasoline affects the prices of all other goods and an increase thereof is the most harmful to the working class.  Once again, price inflation can be seen by comparing the Dow’s current high with its previous value.  At today’s current high value, the Dow could purchase 3,812 gallons of unleaded gasoline in the U.S.  This is about the same amount it could have bought in January 2012 when the Dow was only worth 12,633 points.  The short window of time, 15 months, is indicative of how price inflation does exist in a big way in our economy.

In the final analysis, Austrians are right and Keynesians are wrong.  There is significant price inflation in our economy that has been caused by Obama’s prolific spending and Bernanke’s reckless money printing.  In fact, the numbers are indicative that price inflation has been with us for a lot longer time.  When will Keynesians realize this? Perhaps they will when the BLS publishes a true price inflation statistic.

Article first published as The Dow Is an Indicator of Price Inflation on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

My Cousin the Keynesian

March 6, 2013

I have this cousin, let’s call him Giovanni.  He is a great guy – industrious, hospitable, great family man.  He is my go to source when it comes to information and analysis about sports in general and baseball in particular.

It is an entirely different story when it comes to economics.  Oh, he is financially successful, but like most Americans he doesn’t understand how the market works.

Now, I am not talking about the “free” market, just the market, which exists everywhere and in every place.  The market is the arena of commerce and whether it is free or not depends on government allowances in the various geographic areas of the world.

So, technology has made it possible for Giovanni and me to rekindle our familial relationship that was forged many years ago through the trading of Matchbox cars.  Well, actually, he is so much older than I am that he made and brought them to me when his family visited ours.  I told you he was a great guy.

He is also good at chasing me through cyberspace by email, facebook, and on open threads of sites where I post my blog to argue economics with me.

Last Friday, he emailed me an article titled “A Breakthrough Speech on Monetary Policy”.  The author, Anatole Kaletsky, is an award-winning journalist.  The “Breakthrough Speech” in question was delivered by Adair Turner, Chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers on the planet.

Clearly both men are dyed-in-the-wool Keynesians because Turner’s speech and Kaletsky’s article both recommended that politicians and central bankers print up lots of money and dole it out to consumers in order to stimulate the economy to end the economic stagnation that the West currently finds itself in.  Specifically, Kaletsky believes the Fed should take the $85 billion it is currently spending to buy government bonds from banks and instead distribute it to every man, woman, and child in America.  He believes, “There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment,” thus ending the West’s economic doldrums.  Further, Kaletsky believes this proposal would not cause price inflation because, “links between monetary financing and hyperinflation are theoretically dubious and historically unjustified”.

So, after digesting this economically nonsensical article, I owed Giovanni a response.

Firstly, I indicated to him that monetary inflation does lead to price inflation unless perhaps productivity keeps up with increased money supply.  Just in the 20th Century, one could look to the Weimar Republic and many Latin American countries from time to time.   Zimbabwe is the most recent example.  In fact, all of history is littered with societies that attempted to inflate their way out of depression and instead brought about hyperinflation.

Secondly, I told him that personally I would gain greatly from Kaletsky’s proposal, but that it would harm the economy in the long-run and further destroy an already disappearing middle class.  Given many Americans spendthrift mentality, could you imagine what would happen if they received “free” money each month from the government?  First off, Uncle Sam would never be able to rescind the policy.  It would be like trying to cut Social Security benefits.

Beyond that, there is no doubt, that unlike the banks, leveraged to the hilt American consumers would spend all of their new found riches on a plethora of consumer goods.  The economy would experience another phony boom based on monetary inflation.  Employment would improve for a while.  The new money would bid up the price of goods and services thereby causing domestic price inflation.

Personally, my real estate investments would increase in value allowing me to sell them to some economically naïve person with free government money in his pockets.  The value of my gold holdings would increase exponentially.  I would be sitting pretty, protected from the impending economic bust that was made inevitable by the phony inflationary boom.

As prices rise, so would interest rates.  All the investments begun at lower interest rates would become more expensive.  Many would not be sustainable at the higher cost of money.  Sound familiar?  It should because this is what happen in the 1990s with the bubble and what also happened in the 2000s with the housing bubble.

As defaults on loans increase, unemployment picks up and the market is thrust into another downturn.   I am sure at that point Giovanni and other Keynesians will blame the free market.  But, of course, the only thing that was free in all this was the money the Fed gave to consumers.

Predictably, his response to my response was that I am living in a fantasy world.  Unfortunately, he is wrong.  The devastation that millions of hard-working Americans would experience if the above plan is enacted wouldn’t be a fantasy. It would be a tragedy.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina