Sorry for the long post but I can’t explain it any shorter and I don’t want to break it into pieces…that said, this is important. It is the canary in the coal mine.
On The Peter Schiff Show last week, a caller (journalist) debated Peter on the government reports that show some slow growth and inflation being caused by increases in consumer and global demand. Peter explained, remarkably well I believe, that all the government numbers are reporting is the illusion The Fed has created by printing money and that none of these “positive” signs are real. The transcript I wrote of that conversation is towards the bottom, but I need to explain some background terminology and concepts to make it all tie together.
In a nutshell, The Fed is lying to us (as it always does), and we need to understand how so we can prepare for what’s coming our way. And it’s all bad.
"See, that's why there's no jobs that's being created. That's why the average American still feels like we're in a recession. That's why the states have all these budgetary problems because there's no real economic growth, it's an illusion created by The Fed." -Peter Schiff
You may have noticed that commodities, including agricultural prices, oil, silver, cotton, etc… are all rising. But why? Answers to these questions will never be found on the news or from the government. You must seek these answers out for yourself. Trusting what the news or the government tells you is asking the wolf how safe the hen-house is. Think about it…the news right before the economic and housing collapse was that everything was fine, that anything bad was contained, that the world was in order.
I remember picking up the WSJ from my doorstep on the way to my car for work. I was already convinced the housing market was about to implode, an unpopular opinion with my friends. And there it was, in black and white on the front page, Greenspan from The Fed quoted as saying that the housing market was just fine, no need to worry…right before it wasn’t and the market cratered. I remember laughing out loud when I read it as I got in my car. That was when it really solidified for me…The Fed, the Politicians, they have no problem lying to you. None. There it was on the front page. A black & white, immortalized for all time in-your-face lie. They tell these lies and the news repeats them, as if repeating them enough will make them true.
Knowing they lie is useful, because you can still find the truth elsewhere and just ignore them. What upsets me more, is that even with so many lies immortalized in the newspaper and on YouTube, so many people still believe them. Everyone needs to just stop trusting the previously proven, oh-so-many-times untrustables. And now, we have a new set of lies to deal with.
The government will blame rising commodities on the weather, supply shocks, global demand, etc… but that’s what they have to say to maintain the illusion. The Fed uses the CPI report (Consumer Price Index) to determine when to raise interest rates. The CPI is a “basket of goods” report that shows The Fed how much the average consumer is paying for a variety of products. Inside the CPI is a component known as the “core” CPI. The core includes energy and agricultural (gas and food) inflation, obviously this is where most of the inflation is right now. This becomes important to know a bit later. When The Fed sees inflation in the CPI, as the prices of what we buy everyday start to rise, they are supposed to raise interest rates to slow that rise down.
The theory behind demand-based inflation is that it is caused by a growing economy when consumers are spending a lot of money and the supply of products can’t keep up with demand. When that happens, those products get more expensive because there’s fewer of them and lots of people who want them and have lots of money to buy them. In reality, producers will just increase supply, but for now, we are just talking about what the Fed considers “demand-driven” inflation. So when this happens The Fed is supposed to raise interest rates, which makes debt (money) more expensive, which slows down how much consumers buy and corporations expand. So if this is your standard “inflation” as The Fed claims, why isn’t The Fed raising interest rates?
Because in order to maintain the lie, they can’t.
It’s not theoretical demand-driven inflation as The Fed claims it is, it’s “Fed-Driven” inflation through reckless money printing and raising interest rates doesn’t fix that. The way The Fed sees it, if they raise interest rates it will only hurt the economy because that raises the cost of borrowing money which means companies will avoid borrowing money to expand and consumers will avoid borrowing money to spend.
Just looking around you, in your own life and circle of friends and relatives. Does it f-e-e-l like the economy is growing? Does anyone have that “pre-dot.com” feeling that jobs are plentiful, salaries are rising, money is everywhere, times are good and all anyone wants to do is spend, spend, spend? No. Do you still know people out of work or working part-time when they wish they could work full-time? In the real world, there is no growth. Jobs are still sketchy. Companies are still cost-cutting, the housing market is still declining and I believe the general consensus is, the economy is still terrible.
So now The Fed has painted itself into a corner. They don’t want to admit their money printing is causing the inflation, but if its “demand-driven” inflation which they keep telling us it is, then people start asking them why aren’t they raising interest rates since that is what they’ve always done before. So what does Bernanke at The Fed do? For the first time ever, he tells everyone last week that The Fed will ignore the Core component (the most rapidly rising part that includes gas and food) of the CPI as it relates to decisions on whether to raise interest rates or not.
The Fed simply decided to ignore the part of inflation that is hurting us the most as an excuse to explain away why they aren’t raising interest rates to slow down this Fed-claimed “demand-driven” inflation. The reality is, The Fed is printing so much money to pay for our bloated government and bailouts and debt we owe the world that The Fed, all by itself, is raising the cost of everything that all of us pay and keeping the economy exactly where it is.
The Peter Schiff Show Transcript
Schiff: These agriculture prices…is weather part of it? You can say yes but I don’t think the weather we’re getting in 2011 is so crazy…is so different than anything we’ve seen in the last 20 or 30 years in agriculture. Yet, the prices we are seeing, we’ve never seen before.
We’ve had floods. We’ve had droughts. But we’ve never had commodity prices surge like this. So I think you’d have to say that it’s probably more the money supply issues, than the weather, that is driving even agriculture.
But also, in your statement you also attribute rising commodity prices to rising global demand.
But, you know…where is the demand coming from? How is it that the world can demand more commodities? Well, they have more money. They have more money to bid the prices up, so the demand is a function of the new money that now exists that people can spend.
Journalist: We can’t also ignore the gigantic economic growth of China and the million people added to the middle class every so often…
Schiff: Yeah, but economic growth doesn’t cause prices to rise. Because when economies are growing they’re producing more, you get more supply when you have economic growth. What causes prices to rise is money supply growth. Economic growth brings prices down. Its money supply growth that brings prices up. And that’s what’s happening.
You’re focusing on demand that is a function of new money printing, not demand that is a function of new crop production. And so the demand is being fed by the central banks (The Fed).
Caller: But the growth of demand in China has not added to the amount of the acres of wheat being harvested globally, you have more people wanting to eat a middle class diet, wanting to eat beef that’s fed with corn…
Schiff: But where are they getting the money to pay for all that food?
Caller: Their mostly getting it from things they export to us over here.
Schiff: Right, and that’s the inflation. Because where are we getting that money? We’re printing it.
So China is selling us products, and we’re printing money to pay for them and then the Chinese are taking that money that we printed and use it to buy food. So they’re bidding up food prices with the money we’ve created.
Take The Fed out of the equation, take all this money out of the equation and the prices wouldn’t be going up.
Caller: So you’re attributing the entire economic growth of the U.S. which leads to China importing more Chinese products to the Federal Reserve.
Schiff: I don’t think we have economic growth in the United States. I think the illusion of growth is being created by the monetary polices of the Federal Reserve. But our economy is not really growing. All we’re doing is printing money and spending it, but that’s not growth.
See, that’s why there’s no jobs that’s being created. That’s why the average American still feels like we’re in a recession. That’s why the states have all these budgetary problems because there’s no real economic growth, it’s an illusion created by The Fed
But it looks like growth in the GDP but it doesn’t feel like growth.
Angrywoodchuck: The future of this ponzi scheme, can only end badly.
Categories: Economy, Federal Reserve, Housing Market, National Debt, Uncategorized
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So when there is a demand driven inflation during economy growth, the prices will come down after supply increases, then does inflation stay low during the economy growth?
In a demand driven economy, prices will come down as competition increases and new companies enter the market to produce that particular product due to the out-sized profits to be made by a surplus of demand for that product.
For example, the flat screen TV. The first flat screens were extremely expensive, well outside of the average consumers reach and only a handful of companies produced them. As these companies became more and more efficient at reducing the costs of production, they were able to enjoy larger and larger profits as well as lower prices to reach more and more consumers. But they controlled the market, so they could keep prices high…not too high to be unaffordable, but high. Think of it is a temporary monopoly.
Competitors and start-up companies saw how large the demand for flat screen TV’s would be, and so began the design and production of their own. As these competitors entered the market, they began competing in price with each other and with the first producers of these TV’s. This creates a downward spiral of prices as each company competes for market share by lowering their prices, reducing their costs, adding value to the product or some combination of these. This is how a free market works. Companies go where the demand is. So in effect, we the consumers decide where that demand is and where capital is spent by companies who want to satiate our demand which inevitably leads to competition which leads to ever declining prices. It’s an efficient process that makes sure money is only spent where we the consumer want it spent.
So in a growing economy, there should be no “inflation,” or if there is, it should be temporary until new entrants to the market begin producing the same product and create price competition. In fact, I wouldn’t call it inflation. Inflation should not occur on an existing product unless there is sudden, unexpected shortage of that product. For example, apples should never suffer from inflation. If someone produces a newer, better apple then that is a new product with new attributes and the price of that apple will be temporarily higher (because it is a new “better” apple, so you’re paying extra for the “better” part) until other farms produce that same type of new apple and through competition the price will begin falling again. However, if we are talking about your standard apple, the price should only go up if there is a frost or disease that decreases the number of apples available for sale. Again, that is temporary, so not really inflation.
We have been taught that inflation is a matter of fact. We look forward to our “cost of living” increases at work, which is exactly what it says it is. It adjusts our paychecks upwards slightly to compensate for inflation. What we fail to understand is that the only reason that we are experiencing inflation is not because of new temporarily high priced flat screen TV’s or a temporary shortage of apples, but because The Fed has been printing money all year to pay for all of our politicians pet projects and to fund the expansion of government and all this extra money has caused everything to cost, generally speaking, about 4% more than last year. In other words, it’s not that everything has gotten 4% more expensive, it’s that our dollar has decreased in value by 4%.
Certainly there are shortages of things like oil; refineries go down, oil rigs catch fire, oil producing nations go to war. We have shortages of oranges and orange juice prices goes up as frost kills the Florida crops or a blight hurts the fruit. But if you think about it, these are all temporary, focused shortages on specific products. Eventually, more oil is pumped out of the ground to compensate for the disruption and the following year there is no frost in Florida and oranges return to their normal price. So you have to ask yourself, if “inflation” is always specific to a commodity, and always temporary, how did it come about that everything in the “$1 Store” would only have cost $0.04 cents in 1900? You can thank The Fed for that one.