Conservatives were correct: we have record-breaking inflation! What’s next?

Summary: Today we look at inflation, past and present. It tells much about who to trust for economic analysis, the current state of the US economy, and what we can expect in the future.

The world as it appeared in 2008
What some saw in 2008, before the deflationary bust



  1. Introduction
  2. The inflation picture
  3. Implications
  4. Why has inflation fallen since 2011?
  5. Others see the rise in real rates
  6. For More Information


(1) Introduction

During 2010 and 2011 the media overflowed with confident and dire warnings from conservatives of inflation — or even hyperinflation — coming quite soon. They were totally wrong, as economists such as Paul Krugman said at the time. Instead inflation has slowed, by some measures hitting record low rates. As the posts at the end show, readers of the FM website saw the correct side of this debate (this has been added as a win on the Past Predictions page).

Today we look at what actually happened, and what this might mean for our future.

(2) The inflation picture

The public looks at the CPI to measure inflation. Many economists (e.g., Alan Greenspan) prefer the Personal Consumption Expenditures (PCE) price index. The April numbers (annualized):

  • overall PCE: -3.0%
  • core PCE (excludes food & energy): +0.1% (the YoY change of 1.05% is the lowest on record, back to 1960)
  • trimmed mean PCE (another measure of the core rate): -0.1% (lowest since record begins in 1977)

Three of the most important economic factors appear on this graph:

  • Treasury interest rates (blue, here that of the 10 year bond),
  • inflation (green, here using the CPI), and
  • real interest rates (red, here measured by the difference between the two).
Blue: Treasury rates; Green: CPI; Red: real rates.
Blue: Treasury rates; Green: CPI; Red: real rates.

We see the effects of the Fed’s increasingly aggressive monetary policies, intended to boost CPI inflation and lower real interest rates. They have not done these because the recovery is wonderful, but because it is too slow. Note that one of these is unlike the other two.

  • QE1 from November 2008 to June 2010 — it broke deflation, boosting the CPI and forcing down real rates.
  • QE2 from November 2010 – June 2011 — another boost to CPI, further depressed real rates.
  • QE3 from October 2012 — still running, but with inflation falling and real rates rising.

Houston, we might have a problem.

(3) Implications

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The World of Wonders: Everybody Goes Nuts Together (part 2 about Monetary Magic)

Summary:  We live in an age of wonders, in which things unforeseen or even unimagined become daily fare for the news, or remain unremarked.  This is the 3rd chapter in this series, attempting to open your eyes to the amazing things taking place.  Today we have the second half of a guest post by Nathan Lewis looking at the monetary madness that slowly infects the major nations, as we confuse the ability to print money with magic. Here he looks at the history of using monetary magic as an easy solution to a nation’s financial problems.

This is part 2 of Nathan Lewis’ essay; part one was Monetary Magic applied to cure America’s economic ills.

Enter into the Hall of the Center Banker. Prepare to see wonders.
Enter the Hall of Center Bankers & see the wonders!


  1. Introduction
  2. Everybody Goes Nuts Together
  3. About the author
  4. Leave a Comment!
  5. For More Information
  6. A Last Resort, if all else fails …

(1)  Introduction

An amazing aspect of our age of wonders is how easily we have come to accept fantastic new developments as “the new normal” (the evocative phrase coined long ago by Alan Watt). The world’s major central banks — Bank of Japan, European Central Bank, Peoples Bank of China, and the Federal Reserve — have all, in different ways, taken measures beyond anything they imagined before 2000. People were shocked in 2002 when Bernanke explicitly said that:

… the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

Now they put Bernanke’s words into action — indeed, going beyond that by guaranteeing much of the world’s banking system — but we’re no longer shocked. Rather the majority of economists and financiers has a confidence in the effectiveness of monetary policy — hence the enthusiasm about the coming recovery in late 2013 — and complacency about Central Banks ability to avoid the disasters of the past users of monetary magic.

Today Nathan Lewis takes us on a tour of past monetary follies, showing how people get the economic theory that justifies what they want to do.  We are rationalizing animals.

(2)  Everybody Goes Nuts Together

Excerpt from the Q4 2012 Letter of Kiku Partners
by Nathan Lewis
Part 2.

A trillion dollar platinum coin! Har har. One of the remarkable and recurring characteristics of episodes of government printing-press finance throughout history is that a broad swath of the population, including sophisticated intellectuals, begins to spout complete nonsense in favor of further money-printing. There have always been silly people, especially regarding economic topics, but sometimes these silly people rise to the forefront and find a large and enthusiastic following.

Today in the U.S., these are the proponents of “Modern Monetary Theory,” expressed in simpler terms by the extraordinary popularity of the “trillion dollar platinum coin” meme, especially among liberal-leaning commentators {see posts about it here}. It took the Huffington Post by storm for a few weeks {see the articles here}. The notion is really just plain old money-printing, with a diverting story involving legal loopholes and a shiny geegaw to make it all seem a little more interesting than it really is. However, these indications of popular sentiment also translate into political realities: with these articles burning up the Internet, Congressmen and Federal Reserve board members find it easier to go along with the popular flow than to fight the tide as a Ron Paul-like fire-and-brimstone prophet of monetary doom. Perhaps it all got to be a bit much even for Ron Paul, who retired recently.

This is fundamentally a political process, so it is helpful to see what people tend to do in these situations. Try this one:

Yet each of these issues [of money], great or small, was but as a drop of cold water to a parched throat. Although there was already a rise in prices which showed that the amount needed for circulation had been exceeded, the cry for “more circulating medium” was continued. The pressure for new issues became stronger and stronger. The … populace and the [liberal party] were especially loud in their demands for them; and, a few months later, … with few speeches, in a silence very ominous, a new issue was made of six hundred millions more;—less than nine months after the former great issue, with its solemn pledges to keep down the amount in circulation. With the exception of a few thoughtful men, the whole nation again sang paeans.

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What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!

Summary:  Although one of the most power agencies of the US government, obsessively discussed in the financial news, it remains one of the least well understood. Here we examine the limitations on its power.  Readers can decide for themselves if these limitations are too tight, or too loose. Next in a series about Central Banks, the giants of State power.

From The Independent Word


  1. The power of Central Banks
  2. Inflation
  3. Hyperinflation, the quick killer
  4. Deflation, the quiet killer
  5. Legitimacy — the ultimate limit
  6. For More Information

(1)  The power of central banks

The development of central banking in the century before WWI was one of the last few innovations necessary to produce the nearly omnipotent  modern State.  Central banks provided the mechanism to not only easily finance large projects, such as wars and great societies, but also harness large banks to the State’s needs (for their mutual gain).

The ability to print money, set interest rates, and harness banks’ power to lend gives the illusion of omnipotence. But life means limits.  Central banks have both hard boundaries to their abilities — and a hidden weakness.

Central banks have well known limits to their powers of monetary stimulus, no matter how exercised.

For more about the Federal Reserve see What every American needs to know about the Federal Reserve System.

(2) Inflation

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
— Milton Friedman, The Counter-Revolution in Monetary Theory (1970).

Central banks can stop and start inflation by controlling the nation’s money supply.  Stopping inflation requires painful measures, but with the certainty of success.  Starting and managing useful inflation requires more skill.

Why create inflation?  Unanticipated inflation acts as the magic sauce of monetary policy. Quiet, mild, relentless. It lowers the real interest rates. If we also have wage growth slightly above inflation, then our crushing debts evaporate painlessly (as we erased aprox 1/3 of our WWII debt). Bernanke literally wrote the book on this, Inflation Targeting (1998).

There are two limits to central bank’s ability to manage inflation.  First, the nation’s currency.  The central bank can expand the money supply without limit — with effects varying depending on its internal circumstances. But it will depress the value of the currency.  A weak currency can boost exports, beneficial if not offset by the increased cost of exports (eg, China and Germany have done this successfully). At some point, however, a currency collapse comes — with horrific consequences.

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It’s the end of the world we’ve known since WWII (updated status report)

Summary:  This is an updated status report about the end of the post-WWII world.  The global recession has accelerated the transition, revealing the current order’s weaknesses, and showing the people in the emerging nations that they have outgrown it.  The major nations continue to defend the current systems, a futile effort wasting time and resources that could be better spent adjusting to the new world now evolving.  This post updates previous posts in this series; links appear at the end.

By S. D. Siegel


  1. Decline follows the peak, as night follows day
  2. What happens next?
  3. Can we predict the form of the new world order?
  4. For more information

(1)  Decline follows the peak, as night follows day

Thou know’st it’s common; all that lives must die,
Passing through nature to eternity.
— Queen Gertrude to Hamlet (Act I, scene 2)

The post-WWII era peaked in the 1990s, with the end of the Soviet Union in 1991, the crushing of the emerging nations in 1997-98 (leading to their search for new systems), and the trough of WTI crude oil at $12 in 1998.

Decline started soon after, resulting from structural flaws in the major nation’s political processes.  Symptoms include:

  • growing domination of the financial sector in the politics of US and Europe (eg, the failure of regulators to rein in the technology and housing bubbles before they burst),
  • the ill-designed stage 3 of the European Monetary Union started in 1999,
  • Bush Jr’s tax cuts in 2001 and 2003 undercut the solvency of the US government,
  • the US reaction to 9-11: the War on Terror’s massive changes to America’s internal political regime and external grand strategy, and
  • the major nation’s inability to craft effective energy policy in response to the first signs of global oil production peaking (eg, rising oil prices).

The decline so far consists of two sets of interrelated dynamics.  First, a reversion to the mean of history:  the center of economic power returns to the East, ending a few hundred year long aberration.

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Update on the inflation hysteria, the invisible monster about to devour us!

Summary:  The boomers lust for inflation.   Conservatives fan this fear for political gain.  The government hopes for gentle inflation to deleverage the US economy.  Evidence suggests that disappointment lies ahead for all.  Here we review the evidence.

Most were too young, too poor, too inexperienced to get rich during the Great Inflation of the 1970’s.  Some benefited by inheriting their parents’ gains.  But for most boomers this is their last chance to win the life lottery.  Loaded with debt but able to borrow, ignorant of economic theory and history but eager to speculate, they hysterically warn of the Big Bad Ben causing inflation.  Please don’t throw us in that inflation patch they cry, while buying gold and silver — holding short-term debt, buying that third rental property with 10% down, and investing in foreign debt.  Most of all, the magic of inflation is their only way to shed debt without drastic cuts to their standard of living in retirement.

Governments use unanticipated inflation as their magic sauce for policy.  Slowly accelerating inflation played a big role in evaporating the massive US WWII debt, reducing it from 108% of GDP in 1946 to 25% in 1975.

Now we’re primed and ready for it.  Probably to be disappointed, since anticipated inflation has none of the magic we and the government hope for.  See this post for an explanation why.

This is an update of the 22 February post More invisible signs of looming US inflation!  The situation remains unchanged.  Hysteria with little factual basis.  Before we start, some important notes about this complex subject:

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Inciting fear of inflation in our minds for political gain (we are easily led)

Summary:  Americans today are easily led by fear, as our leaders well know.  Commies and Islamo-whatevers under the bed.  Global warming.   Alar on apples (see Wikipedia).  Repetition makes it so, the secret to successful propaganda.  Today we look at at a favorite of conservatives seeking political advantage:   inflation (scary even if imaginary).  See the links at the end for more information.

We start with Michelle Obama doing the traditional First lady gig, speaking to reporters on the first anniversary of her “Let’s Move” anti-childhood obesity campaign:

We also want to focus on the important touch points in a child’s life. And what we’re learning now is that early intervention is key. Breastfeeding. Kids who are breastfed longer have a lower tendency to be obese.  {Source:  Politics Daily}

Sara Palin replied while speaking at a Long Island Association on 17 February.

It’s no wonder Michelle Obama is telling everybody you need to breast feed your babies.  The price of milk is so high!  (Source:  CBS)

For the truth we go to this graph from Understanding Dairy Markets website.  Note the scale does not start at zero, exaggerating the change.  The ten year change is 1.8%year. In the 2010 price was approximately the same as that of 2007.

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More invisible signs of looming US inflation!

Summary:  The inflationista’s are (again) hysterically sounding alarms about looming US inflation.  Or even hyperinflation.  Let’s review the data.  Can we see serious inflation?  No.  These fears are to a large extent fanned by conservatives for political purposes.  Left and Right both see that Americans are most easily herded by fear, like sheep.  The more graphic, even outlandish, the greater the effect.

Before we start, some important notes about this complex subject:

  • There are good reasons to worry about future inflation.  And future deflation.  That’s a difficult aspect of our situation.
  • No known metric reliably forecasts future inflation; data must be evaluated with respect to the overall context of macroeconomic conditions.  These things are complex.
  • Inflation is a monetary phenomenon.  Rising raw material prices are not inflation.  Also, raw materials are only a small fraction of end prices (e.g., raw food is only one-third of food costs, aprox).
  • Wages are a large fraction of end prices, and they’re flat.
  • The combination of rising sector prices, flat wages, and tight money is deflationary.  As it was in 2008 (remember the big inflation scare, ending in a bust.  We have the first two today; QE2 prevents the third).   Without wage growth, rising food and energy consume more of people’s budgets, expenditures on other things must drop.  Which looks like America today.  For more see this post and this post.  Update:  we see this in today’s response to rising oil prices — treasury yields have fallen.
  • Inflation is rising in the emerging world, becoming a serious problem.  That’s natural, as they’re growing rapidly (we wish we had such problems), and many act to keep their currencies undervalued (see this explanation by Dave Altig at the Fed) .  This divergence between the developed and emerging nations could force the long-expected decoupling, and perhaps a new world order.  For more see this post.

Some indicators that can warn of inflation

  1. Monetary measures
  2. Is the Fed printing money?
  3. Measures of the money multiplier and velocity
  4. Watch the dollar drop in value!
  5. Energy Prices
  6. Direct measures of inflation
  7. For more information

(1)  Monetary measures

In 1976 Milton Friedman was awarded the Nobel Prize for “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy”.  Most importantly this, from The Counter-Revolution in Monetary Theory (1970):

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. … A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.

Friedman’s insight laid the foundation for modern analysis of inflation.  It’s widely ignored in laypeople’s analysis of inflation, of the sort now flooding the media.  Let’s look at some measures of the money supply.  First, a reminder of some vital details:

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