Archive for the ‘Price Inflation’ Category
When is a crime not a crime?
Enron Corp.’s 2001 collapse revealed the extent of its manipulation of spot gas prices. Twelve years later, European Union regulators may discover energy traders never learned the lessons of the scandal.
BP Plc (BP/), Royal Dutch Shell Plc (RDSA) and Platts were visited by EU inspectors last week over allegations they “colluded in reporting distorted prices” to manipulate the published prices of oil and biofuel products, the European Commission in Brussels said after the raids.
While ENRON was a scandal due to manipulation it was the accounting — which was fictitious — that brought the company down.
Of course when you’ll lie and cheat about one thing you’ll do the same with something else; right? We’ve already established what you are; now we’re simply arguing over how big of a liar, cheat and fraud you might happen to be.
But look at what an “energy consultant” has to say:
“We’re making exactly the same mistakes we did with Enron, just with a different commodity,” Robert McCullough, an energy consultant, said by telephone from Portland, Oregon. “The same manipulation we saw in electricity and gas pricing is what we’re seeing in oil.”
They’re not crimes, they’re not felonies, they’re not things that should land you in prison for bilking people, they’re “mistakes.”
We will NEVER solve any of these problems — not in the energy markets, not in the land title business, not in the lending business generally, not in student loans, not in colleges, not in board rooms, not on Wall Street generally — until we call things what they are.
A shark is a shark. A rattlesnake is a rattlesnake. An alligator is an alligator.
And a violation of black-letter law, whether in land titles, front-running, intentional misrepresentation by a company or anything else is a crime, not a mistake.
You want to know what drives me to want to say “screw this!”, turn off the computer and decide to raise a few goats and chickens instead of innovating, building and employing, and which has destroyed my interest in the latter over the last decade and a half?
THAT is what has done so and will continue to do so — and until it stops my position, and that of many other entrepreneurs, on this point will not change.
That doesn’t square with soaring U.S. stock prices and company profits that have emboldened investors. Bond buying that pushed the Fed’s balance sheet to a record $3.21 trillion and other unprecedented actions by Chairman Ben S. Bernanke “saved the world,” David Blanchflower, a former Bank of England policy maker, said in response to Stockman’s assertions.
“The reason that stocks have erased all their losses is entirely because of QE,” said Blanchflower, who teaches at Dartmouth College in Hanover, New Hampshire, and served on the BOE’s Monetary Policy Committee from 2006 to 2009. “To argue that that’s independent of the actions of the Fed shows no understanding of what the Fed is doing and what they did.”
He did eh?
QE destroys purchasing power both on a forward and present-terms basis.
Shooting up heroin may mask the fact that you’re not performing any real work and make you feel really good, but the fact of the matter is that statistical facts are what they are.
Where is the saving, of the world or anywhere else?
More to the point: How does, in the intermediate and longer term, business continue to make “record corporate profits” except by impoverishing everyone when there is no return on saving and no actual job growth?
And if you impoverish everyone by forcing them into penury and at the same time you try and fail to restart the borrowing leverage machine what happens to asset prices when the market figures this out?
Oh sure, it may look like it’s working for a while, but you’re simply digging a bigger hole! Rather than recognize the failures that already happened forcing more and more previous economic surplus into the current economy to maintain the illusion makes the economic destruction you must face worse.
This isn’t a zero-sum game, it’s a negative-sum game. Crooning because stock prices are up is idiotic; what matters to the intermediate and long-run economic prosperity of the nation and her people as a whole is the ability of people to produce economic surplus which they can then choose to spend on things like retirement and education or they can invest it in new ventures, powering forward jobs and the common economic condition.
QE does exactly the opposite – it powers economic profligacy by government through making government deficits appear “sustainable” when in fact they are not while destroying both direct purchasing power and return on saving, forcing saved funds into the economy to cover current costs. It therefore enables and causes the shifting of personal economic surplus to economic deficit and dependency while at the same time destroying the tax base that makes paying those handouts possible.
This is the best-telegraphed train wreck in the last 100 years and we’re headed right for the gorge with a missing bridge!
You can argue politics but you can’t argue the facts when it comes to arithmetic.
Math doesn’t care what political party or persuasion you might follow.
The simple fact of the matter is that we have now degenerated from a society based on the Rule of Law to one that is based on stealing whatever is not nailed down and half of what is, use the guns that government has to suppress the “little people”, and do your level damndest best to take their guns lest they shoot you — which, incidentally, is exactly what a looter both deserves and under the law is entitled to receive.
Money laundering by large international banks has reached epidemic proportions, and U.S. authorities are supposedly looking into Citigroup Inc. (C) and JPMorgan Chase & Co.
Governor Jerome Powell, on behalf of the Board of Governors of the Federal Reserve System, recently testified to Congress on the issue, and he sounded serious. But international criminals and terrorists needn’t worry. This is window dressing: Complicit bankers have nothing to fear from the U.S. justice system.
To be on the safe side, though, miscreants should be sure to use a really large global bank for all their money-laundering needs.
There may be fines, but the largest financial companies are unlikely to face criminal actions or meaningful sanctions. The Department of Justice has decided that these banks are too big to prosecute to the full extent of the law, though why this also gets employees and executives off the hook remains a mystery. And the Federal Reserve refuses to rescind bank licenses, undermining the credibility, legitimacy and stability of the financial system.
The Federal Reserve, Simon, has ignored its legal mandate for 100 years and gotten away with it. Remember this?
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
2% 10 year Treasuries are not moderate interest rates.
And 2% inflation does not constitute stable prices.
2% inflation means that over a working man’s life (45 years, 20 -> 65) you need 2.44 units of currency to buy at 65 what you needed at 20.
Stable? Like hell.
That’s a willful and intentional violation of the law, flouted in the face of Congress and the American people with each and every Fed meeting and set of testimony before Congress.
The Fed is not interested in the law and if they are not compelled to hold within the boundaries of a single paragraph that defines their goals in the very enabling statute that created The Fed itself then should it be a surprise that the very same Fed intentionally ignores institutions that violate money-laundering statutes and even those that violate consent decrees and deferred prosecution agreements?
The bottom line is that until there is prosecution and people start going to prison nobody will care, because there is no penalty that is meaningful — fines are immediately shifted onto “the little people.”
What we need is prison, and where it needs to start is with the clown-car brigade at the FOMC and its chairSatan.
Six critical dynamics will trigger the devolution of Peak Government.
With the fiscal cliff looming, it’s time to check in on the Peak Government thesis.
Chris and Adam at peakprosperity.com asked me to revisit my Peak Government thesis, which describes how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability.
Let’s start by examining the six critical dynamics that lead to the inevitable devolution of Peak Government.
In a misguided attempt to maintain an unsustainable Status Quo, the Federal government is borrowing unprecedented amounts of money that then must be serviced. And the Federal Reserve is expanding its balance sheet by trillions of dollars (“printing money”) and intervening in stock, bond, and other markets for the purposes of managing perception (“the recovery is here!”)
These government funds are not just paying the government’s bills – they are being used to guarantee loans and mortgages that subsequently enter default, transferring what was private debt to the public and subsidizing politically powerful special interests.
Guarantees and subsidies both incentivize what is known as moral hazard: the separation of risk from consequence. This can be summarized very simply. People who are not exposed to risk act completely differently than those who are exposed to risk. When risk has been transferred to the taxpayers by guarantees, give-aways, and subsidies, then speculation and mal-investment are incentivized. If the bet pays off, I get to keep the gain, but if it loses, then I personally lose nothing, as the loss is transferred to the taxpayers.
The net result of these policies – borrowing immense sums to prop up an unsustainable Status Quo and institutionalizing moral hazard – leads to misallocation of scarce capital on a grand scale. In effect, the money borrowed by the federal government and electronically printed by the Federal Reserve is mal-invested, because those receiving the funding are personally not at risk and face no consequence if the money is squandered on speculation or unproductive programs. Once moral hazard has been institutionalized, it becomes a positive feedback loop. Since everyone in the system faces little personal consequence from mal-investment, the institution loses the ability to police itself.
Even worse, concentrations of private wealth readily influence public institutions via lobbying and political contributions, exacerbating moral hazard and mal-investment of the publicly borrowed money.
Erosion of Trust in Government
Mal-investment inevitably yields poor results, and just as inevitably, the government seeks to mask the dismal results of moral-hazard riddled policies and agencies. This “perception management” is driven by political expediency, as public outrage at failed policies and unproductive spending would eventually lead to a political price being paid by the leadership. So failed policies are declared great successes, negative data is massaged into positive data, and unflattering frauds involving public funds are buried or transformed into pseudo-realities.
This institutionalization of mal-investing borrowed funds and the politically expedient falsification of fact to manage perceptions have a destabilizing consequence: The public loses faith in public institutions.
Diminishing Returns on Public Debt
Massive borrowing also has a consequence. Interest on the immense sums being borrowed squeezes out other government spending.
This triggers two self-reinforcing feedbacks. Public spending that is not rewarding moral hazard is cut, as those in charge protect their perquisites, and taxes on what’s left of the productive economy increase, reducing the private investment that is the bedrock of capitalist growth and innovation.
This institutionalized mal-investment leads to diminishing return. Where each dollar of additional public debt generated nearly a dollar of additional GDP in the early 1960s, now borrowing a dollar generates negative growth, as the cost of servicing the debt exceeds the meager yield. Thus the Federal government borrowed and spent a staggering $6 trillion in a mere four years (2008-2011), while the GDP has yet to return to 2007 levels when measured in real (inflation-adjusted) dollars.
All these forces reinforce each other in a death spiral. As trillions more are borrowed, interest payments crowd out spending, causing the Central State to borrow even more, which generates even more interest costs, and so on. As moral hazard infects the entire government and its numerous private contractors and beneficiaries, there are few constraints on rising public debt and mal-investment of public funds. As trust in institutions that increasingly depend on perception management rather than real solutions declines, public faith in government deteriorates further.
The Hidden Tax of Inflation and the Institutionalization of Falsification
The government has one trick to create the illusion that it is “keeping its promises.” It prints money to meet its obligations, depreciating the nation’s currency by expanding the money supply. Creating money out of thin air does not create wealth, productive assets, or prosperity. What it does is lower the purchasing power of money, which we call inflation.
Inflation robs every holder of the currency and is effectively a form of government-sanctioned theft, or if you prefer, a hidden tax on productivity, as productive people and enterprises are taxed to support crony-capitalist, unproductive mal-investments and the rising interest on public debt. In effect, inflation is a way of transferring wealth from the productive to the unproductive, which then leaves the productive with less capital to invest in innovation. This starves the economy of capital while robbing purchasing power of every citizen, establishing a positive feedback loop of lower income, lower capital formation, and lower productivity.
Since the government has obligated itself to adjust Social Security payments to inflation, the culture of understating inflation (i.e., falsifying data) has been institutionalized, for the Central State has the impossible dual mandate of increasing inflation so that it can meet its obligations with cheaper money while keeping the inflation-indexed cost-of-living adjustments low, lest program costs balloon out of control.
A “modest” rate of 3% inflation will, in a decade’s time, reduce the purchasing power of stagnating paychecks by a third, while setting the “official” rate of inflation at 2% or less will inexorably reduce the purchasing power of Social Security payments.
If the rate of inflation was to rise at a rate similar to that of the late 1970s, i.e., 10% to 12% per year, while the “official” rate was held to half the real rate, all those whose incomes did not rise by 10% a year would be impoverished as the purchasing power of their incomes evaporated. Meanwhile, even as its policies impoverish most of its citizens, the Central State would assure everyone that it was meeting all of its obligations as promised. This is how trust in government is not just eroded but ultimately destroyed.
Self-Reinforcing Feedback Loops of Self-Interest
Government at all levels responds to shrinking tax revenues from a declining economy and budgets squeezed by higher interest payments by seeking additional revenues by whatever means are at hand. Tax rates are raised, junk fees are imposed, fees for minor infractions are jacked up, and deductions and exclusions are eliminated.
The public that does not work for the government (that would be five-sixths of the workforce) increasingly resents what it perceives as predatory extortion in an economy where everyone’s disposable income is falling.
Unfortunately, there is a great divide between those who work (or worked) for the government and those who work in the private sector. Those in government service understandably view the promises made to them in good times, eras that we now understand were brief speculative bubbles, as sacrosanct.
The promises were based on the abnormally high returns earned by pension funds in the brief windows of speculative frenzy, and even supposedly conservative pension funds based their projections on annual yields of 6% to 8%. As the Federal Reserve has attempted to reignite borrowing by lowering interest rates to near-zero, low-risk yields have fallen to 3%, less than half the expected returns.
As a result, there is a massive and sustained shortfall of public-employee pension funding, a shortfall that must be paid out of general tax revenues at a time when those revenues are declining as employment and business activity stagnate.
The net result in many communities is that schools and other local services are falling apart as budgets are slashed to meet skyrocketing pension obligations. From the point of view of parents, the pension promises that government employees hold as sacrosanct were unrealistic, and what should be sacrosanct (but is not) is the education of their children.
Those of us in the private workforce with spouses, relatives, and friends in government service understand the frustration of those who work for government, but should the self-interest of the few dominate the public budget and chart the course for the many?
The key difference is that the government holds the power of coercion and the citizens do not. Thus those in government who seek to serve the interests of their unions, colleagues, departments, and agencies can impose fees and taxes on all citizens to fund their own perquisites and power.
From the point of view of those inside government, sharply rising parking tickets, higher property taxes, and so on are small prices to pay for essential services. But as citizens observe government services degrading even as fees and taxes increase, they see little value being added, even as self-service and moral hazard remain in institutionalized abundance.
Two destructive feedback loops are generated by this divide: Governments, desperate for more revenues, ignore public resentment and loss of trust, which only deepens the disconnect between those in government and the public. And the private citizenry sees a lack of accountability, soaring public debt, accounting trickery, political dysfunction, and mal-investment of public funds as the hallmarks of their government.
Charles Hugh Smith – Of Two Minds
Inflation by any other name – Rising rents have pushed up the CPI to highest monthly change in three years. Shifting the Fed bailouts onto the working class and poor.
The Consumer Price Index (CPI) attempts to measure the change in price for a basket of American goods and services. I say attempts because measures like the “owner’s equivalent of rent” are simply an estimation as to what a home owner’s place would rent for. In the early 2000s with home prices surging, it missed a glaring trend that a place that would rent for say $1,000 was now costing the home owner $2,000. This was missed and the data understated this important fact. Since housing is the biggest line item for Americans and the CPI is heavily relied upon, many just assumed overall inflation was “healthy” during this time. Today we are facing a situation very similar to stagflation where unemployment remains elevated while the standard of living decreases. Those that claim inflation is nonexistent or healthy point to the CPI but ignore the headwinds that are starting to emerge. The last two months have seen the biggest increase in the CPI since the middle of 2009.
The CPI is now being impacted by rising rents
There is an odd situation occurring in the US right now. The Federal Reserve essentially owns the mortgage market and has caused interest rates to drop to record lows. This was all in part to conduct a shadow bailout of the too big to fail banking industry but the repercussions are being seen in other areas where the quality of life for most Americans is being squeezed. Just take a look at rents:
Rental rates have gone up strongly since 2008 at a fragile time when household incomes have fallen. So you ask, how is this feasible? First the housing market is now controlled by the Fed and banks while inventory is incredibly low. Many homes are being purchased by Wall Street investors and are put back on the market as rentals for higher prices. The lack of supply and demands of a growing population has simply pushed prices up. Ironically the same financial system that turned a stable American item like housing into a casino are now back at it profiting hand over fist thanks to the Fed and generous rewriting of accounting rules.
It is important to always remember the most important fact and that is household income is stagnant. We are also seeing continued inflation in food and energy:
Yet income remains the same. This is the slow eroding process of losing the standard of living in America. Millions are living this every single day.
Read the rest at My Budget 360
Standard of living, meet falling US dollar – how a falling US dollar benefits banks at the expense of working Americans.
There is certainly a cost to a falling US dollar. Many Americans are living the consequences of this multi-decade long trend. The Federal Reserve has only added fuel to this trend but many families are now realizing that there does come a cost to unrelenting debt based solutions to fiscal problems. Shopping at the local grocery store I’ve noticed that some items have doubled in the last few years. Fueling up is also more expensive. The issue with living on a low dollar policy is that eventually, you end up in a low wage capitalist system. The easy money slowly inflates away especially on global items. We are seeing this in the US in various arenas especially with higher education. The end result is that the standard of living for the vast majority of Americans has fallen dramatically in the last few decades.
US dollar trend
Think about what this has done in a more practical sense:
-Energy is more expensive because it is traded on a global market (you are trying to compete with others with a declining currency)
-Education. Massive debt has devalued the dollars even further. Very few families can actually afford to pay the sticker price of tuition and need to go into debt just to finance college. Most of the middle class jobs are now in fields that require degrees since the jobs are not growing in manufacturing (that is, making actual things):
-Food gets more expensive since you are also competing globally here. Take a look at your grocery bill and compare it to your bill from 10 years ago. This stands in stark contrast to household income that has been stagnant for over a decade.
We rarely hear about the massive decline in the US dollar in the mainstream press. This is not likely to come up in any of the campaigns because the Fed and government realize they need to inflate our debt away. Who in their right mind thinks we are ever going to pay off that growing $16 trillion debt? The middle class in the US is a shrinking group.
Read the rest at My Budget 360