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


The Military Budget is Another Bubble

October 30, 2012

As students of the Austrian School of Economics understand, financial bubbles are caused by central bank monetary policy and government intervention in the economy.  The housing boom and subsequent crash in the first decade of this century is an excellent example of the Austrian Business Cycle Theory (the Austrian School’s explanation for booms and busts in the economy).

For more than 4 years between June of 2001 and September of 2005 the Federal Reserve kept its Federal Funds interest rate under 4 percent.  Artificially low mortgage rates resulted.  This coupled with large investments by the Bush Administration for low income homebuyers created the largest housing boom in American history.  As interest rates were gradually increased by the Fed, reaching a decade high of 5.25 percent in June 2006, investments in housing that were made at lower interest rates became unsustainable at higher rates.  As adjustable rate mortgage rates rose, defaults increased eventually causing home prices to plummet.  The housing bubble had burst.

Of course, pundits, politicians, mainstream economists, and others dependent on big government for their sustenance blamed the free market and deregulation for the housing boom and bust.  Yet, time and again in the Twentieth Century, from the stock market crash of 1929 to the dot com bubble of the late 1990s, the fingerprints of Fed manipulation and monetary price fixing have been all over every economic downturn and crisis.

Now, there are other bubbles in our economy that have yet to burst.  These are the bubbles that are insulated from bursting by politics.  They include higher education and defense spending.

In terms of defense spending, the political forces that protect it are currently working overtime to maintain that bubble.  In January, under provisions of the Budget Control Act of 2011, defense budget cuts totaling about $50 billion a year for the next 10 years go into effect.  Opponents of the cuts, like Senator Lindsey Graham are claiming “It would be like shooting yourself in the head. It would be the most destructive thing in the world.”  John McCain has even warned that the cuts would leave us unable to defend the country!

Then there are the threats of wide spread layoffs by defense contractors and the devastation to local communities like Newport News, Virginia that defense budget cuts would bring.  Corporate officials and community leaders have teamed up to decry the cuts based solely on the harm they would do to their bottom lines and tax bases without any regard for whether as a nation we should spend the money on more armaments.

After all, defense spending accounts for close to 20 percent of all federal spending.  The U.S. spends more on defense than the next 13 highest spending countries combined!

This enormous government bubble has been financed for years by deficit federal spending monetized by the Federal Reserve – in other words debt.  Since at least Reagan, military spending has been erroneously used as a fiscal stimulus to the economy, financing millions of jobs in the military-industrial complex.  And it has been used to launch several seemingly endless wars and other lethal adventures worldwide.

The country doesn’t need that much military and can no longer afford it.  As the real fiscal cliff approaches, political defenders of the military-industrial complex are going to find it more and more difficult to protect their bubble.  With hundreds of trillion of dollars in future unfunded liabilities on the books of the federal government, the only answer for Washington is to continue to print more money.  Eventually interest rates will rise increasing the interest payments on the debt.  More printing will occur perpetuating a financial spiral which will destroy what’s left of our economic system.  Cutting a measly $50 billion a year from military spending now should be a no-brainer.  But it probably won’t happen because anymore politics takes precedence over reason in Washington.

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

Keynesians are Clueless

March 25, 2012

Paul Krugman, New York Times columnist, Nobel Prize winner, and Keynesian economist extraordinaire is about to have his new book released entitled, End this Depression Now.  In it, the Duke of Deficit Spending argues that a speedy, robust recovery from the Great Recession which started in 2008 is just a quick policy decision away.  If only our leaders can muster the “intellectual clarity and political will” needed to raise federal spending further, Americans will begin consuming again, businesses hiring, and the current depression will be over in a flash.  Once again Krugman is being true to his economic philosophy – namely that increasing aggregate demand through loose fiscal and monetary policy is a cure-all for what’s ailing the economy.  Let it be said that there is not a more consistent deflationist than Paul Krugman in all of the economic profession.

Now, why anybody would still listen to Krugman is a mystery to me.  After all, he entirely missed calling the financial crisis of 2008 while Austrian economists were spot on with their prognostications.  I suppose most laymen don’t know the difference and most economists and academics are as Milton Friedman proclaimed so long ago “All Keynesians now”.  Thus ignorance of and loyalty to a failed philosophy are powerful forces to make people do irrational things.

In the first place, Krugman shows his ignorance with the title of his book, End this Depression Now.  The statistics indicate that we are not currently in a depression.  Secondly, current numbers indicate that the deflationary spiral that Krugman has been predicting and fears the most is not happening.  On the contrary, while he continues to fret over falling prices leading to a double-dip recession, long-term trends point strongly toward oncoming double digit price inflation.

What it all boils down to is that Krugman and other Keynesian economists are about to miss the next economic crisis.  Austrians have been arguing all along that we can’t solve our economic problems by doing the same things that got us into the mess in the first place.  Deficit spending and a ridiculously loose monetary policy will not cleanse the market of all the mal-investments made during the preceding artificial boom (housing bubble).  It will only put us deeper into trouble.  What was needed was a drastic cut in government spending, a cut in taxes, and the setting of interest rates by the market not the monetary oligarchs at the Federal Reserve.

So because policy makers in Washington listened to Krugman and his ilk over the voices of reason, we are about to enter the next cycle of boom and bust.  It will consist of phony growth, rising prices, and rising interest rates which will ultimately pop the bubble and send the economy into another tailspin.  The proof is in current trends.

In spite of Krugman’s ill-timed book, we are not in the middle of a depression.  Consumer spending is way up.  In the fourth quarter of last year balances on credit cards rose 9.27 percent.  In February, retail sales in the U.S. improved in 11 of 13 industry categories and marked the biggest gain in five months according to Commerce Department figures.

Then there is job growth.  400,000 private sector jobs have been created just in the first two months of this year.  More workers mean more spenders and more spenders mean more jobs, right?

Oh, and let’s not forget how well the financial markets are doing.  The Dow is up 7 percent YTD, the S&P 500 is up 11 percent YTD, the Homebuilders Index is up 23 percent YTD, and the S&P Financials are up 21 percent YTD.  These are not numbers indicative of a depression.

But, all of this good news is coming at a cost, literally.  We are approaching the place this commentator wrote about on October 16, 2009.  Bernanke and the Federal Open Market Committee are going to have a big decision to make in the near future – raise rates and burst the Fed induced bubble or leave rates low and watch prices skyrocket.

Price inflation is already heating up.  It was only a matter of time before all the stimulus, low interest rates, and money printing kicked in to produce higher prices.  The money supply has increased by 14.6 percent year over year ending in February.  That makes 39 consecutive months of double digit year over year rates of monetary inflation.

The result has been higher gasoline and food prices.  College and healthcare costs continue to rise.  And the Manufacturing ISM Report On Business® for the 4th straight month shows the number of industries experiencing higher raw material costs on the rise and the number of industries experiencing  lower raw material costs on the decline.  It will be just a matter of time before those higher raw material costs find their way into higher prices on the merchant’s shelf.

So while Krugman and other Keynesians clamor for more federal spending and easy money to produce a speedy, robust recovery from the Great Recession, they are missing that the next boom and bust cycle has already begun.  But, that’s okay because Austrians have been predicting it for some time.  In the words of Yogi Berra, “It’s déjà vu all over again”.

Article first published as Keynesians Are Clueless on Blogcritics.

It’s Déjà Vu All Over Again

November 25, 2009

Ben Bernanke has apparently added a little stand-up comedy to his bag of tricks.  This past week, Chairman Bernanke indicated his belief that there are no “obvious” asset bubbles in our economy right now.  To quote Bankruptcy Ben, “It’s extraordinarily difficult to tell, but it’s not obvious to me … there are any large misalignments currently in the U.S. financial system.” 

What is he thinking?  The stock market is currently a huge bubble.  From October 2007 to March 2009, the Dow Jones Average fell by about 50 percent.  This is indicative of the fact that the previous market highs were out of whack for market conditions and needed to come down to reality.  That is how the free market works when it is given the opportunity.  Since last March, in just nine months, the Dow has rebounded off its low by an astounding fifty-three percent!  It’s a bubble being fueled by all the cheap dollars the Fed is injecting into the economy. 

If you don’t believe me, Mary Miller, director of fixed income for the T. Rowe Price Group indicated at the company’s symposium in Baltimore on Thursday, “I’m familiar with one institution that just borrowed $400 million – because they could – and then called up and said, ‘What should we do with it?”  That is what a lot of banks are doing with our money that has been given to them – not lending it but speculating once again in another Fed induced bubble.  It is outrageous.

What is even more outrageous is Bernanke saying essentially that the current stock market fueled by his printing press is not a bubble.  The economy is still in the dumper – I won’t bore or depress you further with all the numbers, but the stock market continues to climb to exorbitant highs.  Give me a break and come clean Mr. Chairman.

Bernanke is clearly being disingenuous because if he acknowledged the truth it would indict the system that he has made a very good living from.  The Federal Open Market Committee must be agonizing over whether to leave interest rates at essentially zero and continue to perpetuate the stock market bubble or raise rates and watch that bubble burst.  It is going to happen sooner or later – sooner would still be painful but less extreme.  Bernanke may not know it but the no win quandary he faces explains to a degree the Austrian School of Economics’ Business Cycle Theory.

Under the theory, business cycles, circular boom and bust periods, are not considered a natural phenomenon of free markets.  Instead, government interference in the economy, specifically through manipulating the money supply, is the culprit.  Booms are caused by artificially low interest rates and busts occur when the Fed decides to provide an “easy landing” for an overheated economy by raising rates.  In both cases, low rates and higher rates, fallible humans at the Fed decide the rate levels.  Thus, the market plays little if any part in the determination.  Having been taught in an American public school, I was cynical myself of this analysis.  After all, my Franklin Roosevelt loving social studies teachers taught me that capitalism has certain failures which we need the government to correct for us. 

However, by looking at historical data it is possible to see the correlation between low rates (the cause of booms) and higher rates (the pin that punctures the bubble) and booms and busts.  Because I have a day job, I only had time to analyze rates and recessions since 1971.  1971 is significant because that is the year Nixon opened the flood gates for the Fed’s printing presses by abolishing the last vestiges of the Gold Standard.  The following is the year of recession followed by the lowest rate during the preceding period, the highest rate during the preceding period, and the spread between low and high rates:

November ’73 – 5% – 11% – 6 points
January ’80 – 4.75% – 15.5% – 10.75 points
July ’81 – 15.5% – 20% – 4.5 points
July ’90 – 5.875% – 9.75% – 3.875 points
March ’01 – 3% – 6.5% – 3.5 points
December ’07- 1% – 5.25 – 4.25 points


The most important observation that can be made from examining the data is there was a significant spread between the lowest rate and the highest rate before each recession.  These wide disparities in rates sent the wrong signals to investors and entrepreneurs.  In other words, because money and credit were in abundance during artificially low rate intervals entrepreneurs invested in ways that market forces would have prevented if the supply of money was realistic (market determined).  Thus, a misallocation of resources took place.  Too many products were produced; too many houses were built; too much money was invested in companies with little or no earnings.  All this happened because money was cheap and plentiful.  Remember folks borrowed millions and invested in dot com companies before many of them even went online.  Also, remember that right now we still have a glut of homes because Alan Greenspan kept rates near one percent for close to three years!  Of course it was the housing crisis that led to this current recession.

When the Fed pulls the rug out from under the artificially propped up economy by raising rates significantly, thereby increasing the cost of money, people stop borrowing and many lose their jobs because products and services are no longer being bought with borrowed money.  With higher interest rates, adjustable rate mortgages rise and homebuyers default on their debts.  Asset prices fall and unemployment rises due to further cutbacks in consumer spending.  The bubble is burst and recession sets in.

Now, recessions are unfortunate, but necessary like vomiting is essential during the flu – to rid the organism of bad material.  In the case of the economy, the bad material is all the mal-investments that were made during the boom. 

Of course, our economy was not given the chance to vomit the mal-investments made during the last boom.  Through so-called “stimulus” and the easy money policies of Bernanke’s Fed we are into our 24th month of recession.  What’s more the reckless monetary policies of the Fed have blown up another bubble in the stock market. 

Which brings us back to the beginning of our article – Bernanke must be joking; there is a huge bubble in the stock market because there is no good reason for the extraordinary rise in stock prices given that consumers aren’t spending; commercial real estate is about to hit a crisis; and unemployment is still rising.  The only explanation is a bubble caused by artificially low interest rates.  In the words of Yogi Berra, “It’s déjà vu all over again.”  The bright side is perhaps Bernanke can find work as a stand-up comic after his tenure at the Fed is over.  He does get a good one off every now and then.