Interesting, Very Interesting

From a blog called "The End of Money" by Dr Chris Martenson

"However, as you know I am a huge critic of the way that our government collects and reports inflation numbers and I think the stock market is making a huge mistake in believing the ‘official inflation numbers’. For example, in the most recent GDP announcement it was reported that food costs are up 2.4% over the past year.

Hmmmm. Could they have forgotten to include the cost of orange juice which is up not 2.8%, not 3.9% not even a horrendous 9.2% but rather 66.0%(!!) over the past year?

In fact, this is not an isolated example. The following links to charts of all the major grain types reveals similar patterns. I wonder how food costs can be said to be up 2.4% when the actual price increases are up over 15 to 30 times that amount? A fair question, to be sure.

Corn (up 87% over the last year)

Wheat (up 58%)

Oats (up 44%)

Continuing into other basic materials I cannot find any that even remotely correspond to the government’s numbers

Oil (Unchanged)

Copper (up 60%)

Silver (up 75%)

Aluminum (up 39%)

These charts show, in frightening and graphic detail, that inflation is running at anything but the ~3.3% that the government recently reported."



Traditionally, the purpose of economic regulation and the central banking system has been to insure enough money/credit is available to fund economic activity and some growth in the level of economic activity. When the growth in the supply of money
(including money you can borrow as well as money you have) exceeds the increases in the production of things to buy, you have "more money chasing fewer goods" and the price of the goods are bid up. This is what we think of as inflation, and this appears to be occurring now. It is "strange" that the government's numbers contradict the market price changes Dr. Martenson observes.

One aspect of the problem of inflation is that a period of inflation can lead to a period of deflation. For instance, if the price of houses have been inflated, people might decide they can't afford to buy a new house right at the moment. Demand for new houses decline as the supply continues to grow. Sellers reduce their asking price slightly, but this creates a new problem. Potential buyers get nervous about borrowing to buy something the price of which is falling and may fall further. So they wait to buy to see if the price falls further. Now the builders are getting squeezed - they not only reduce prices further, they stop building more houses. Now economic activity is curtailled, people are getting laid off. In this part of the cycle, the Federal Reserve can make more money available, and thereby lower interest rates a little but people are now not only expecting prices to keep going down, they're afraid the ecomic slowdown might cost them their jobs, or at least cost them their raises and bonuses, and so they are reluctant to borrow until they feel more confident about their prospects.

Meanwhile the people who have been laid off are trying to sell their houses at lower and lower prices. Many times they will find they can't sell their house for enough money to cover their mortgage, so they'll leave their house on the market until they can't make their monthly payments and the "bank" forecloses. Now, the house goes on the market for a real bargain basement price, further reducing the price others can hope to receive if they sell. At this point, the builders have practically shut down, and more and more people are being laid off.

We're getting close to this point in the cycle. What can the government do?
Encourage the Federal Reserve bank to make more money available to help consumers buy more? That policy becomes has become less effective since confidence has become eroded. The failing housing industry is particularly a cause for concern because (I've read) that 30% of the job creation in our country in the last ten years have been linked to the housing industry, and these are the jobs that pay relatively good wages as compared to jobs in the "service" industries. As this employment is eliminated the prospect of economic contraction brcomes almost inevitable.

Of couse, the Fed is well aware of these risks and has been making credit available to keep the economy afloat. My opinion is that the money is being borrowed, but not to buy houses, but by hedge funds and venture capitalists to buy stocks. This would explain why the stock market keeps going up while the economic environment is deteriorating. I've stopped predicting the fall of the stock prices because, wirh this flood of Fed money going into the market rational expectations do not apply. But I will say this, when the market does start to fall there's going to be a lot of hedge funds trying to liquidate their very large holdings in a very short period of time.

So what's the good news? Got me.