INFLATION PUSHES DOWN THE CPI
Jim Willie CB February 1, 2005
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Jim Willie CB is the editor of the "HAT TRICK LETTER"
Wait a minute!!! Isn't that backwards???
Welcome to today's world, where the financial sector has turned everything upside down. Most past effects are working in opposite fashion nowadays. Back in summer 2003, an irreverently titled series of articles was put forth, "Ass-Backward Economics, part I, part II, part III, and part IV." The foundation mindset for US Economic policy and direction, well, has its head squarely up its derriere. It is no surprise that various traditional relationships are no longer working. The entire system is twisted so badly, it can hardly be recognized from past cycles. In many ways, the business cycle is broken. It should come as no surprise that certain consumer prices are actually being pushed down as a result of the utter desperation that is Fed policy. Assumptions should not be made. Dynamics of forces are exerted in very bizarre and atypical ways, ways the press & media fail to report adequately. The CPI bears little resemblance to an indicator of prices within the US Economy. It is indeed a strange mix.
The Federal Reserve is surely stimulating, but its policy stimulus is feverishly assisting Asia while it tragically crushes the real economy within the USA, of tangible businesses outside the financial framework. New application of money and credit is actually putting DOWNWARD pressure on prices which comprise the Consumer Price Index. That is not to say prices across the spectrum are national falling, no way. Cost inflation is raging rampant rampaging. These lost relationships and many other related topics are discussed and analyzed in the Hat Trick Letter issues, along with investment opportunities which profit from the grand commodity bull market.
We will not venture down the tired road of hedonic distortion in aggregate economic statistics. Quality improvements are legendary in the Consumer Price Index, Gross Domestic Product, income, savings, productivity, and elsewhere. In the CPI to be sure, such self-serving improvements have been made to justify lower adjusted prices for numerous product items. Faster central processors (CPU), faster disk storage access, and faster connectivity for both personal computers and larger servers enable wizards in the USGovt ministries to claim that computer & network system expenditures are 10 to 12 times larger than reality. This practice goes hand in hand with associated lower price adjustments, from greater speeds. Anti-lock brake systems are a critical enhanced feature in automobiles. So presto, car prices are suppressed to account for greater functionality and quality. Additional television backplane connectivity and other features enable end product prices to be adjusted downward here too. Hedonic adjustments turn an economic stall into strong growth in the GDP, notwithstanding chronic containment of the deflator (price inflation offset). For instance, Q3 of 2004 conveniently avoids all reference to higher energy prices!!! Hedonics keep the CPI down by directly lowering prices for a raft of products. The deception is blatant, obvious, and shameful. Let us put the wonders of hedonics aside. The other side of the CPI deception is intentional weighting of large items in order to suppress the index itself.
Inflation factors which push the Consumer Price Index down are many:
- Ample low-cost mortgage funds have lifted housing prices, but have smothered the housing rental market where bargains are commonplace.
- Zero percent deals for car sales have kept new car sales on "life support" for so long that easy financing and rosy incentives have become the norm, thus smothering the used car market, and their prices.
- Dollar supply explosion has provoked a falling US$ and rising systemic cost inflation, which causes more business failure, more liquidations, more bankruptcies, and accompanying distressed lower prices.
- Credit explosion is directed toward Asian imported products, which has forced a monstrous trade gap, thus enabling a massive Asian industrial expansion, followed by continued flood of low priced goods inside the USA.
THE HOUSING MARKET
Over 30% of the weight in the CPI is devoted to rental prices. What an absurdity. Who cares the motive for such incompetence, misrepresentation, and distortion? It s what it is. The tide is surely coming in to provide ridiculously magnificent mortgage funds for potential homeowners. Fanny Mae, Freddy Mac, and other federal mortgage pools have made the application process a slam dunk. Low income, low asset ratio, complications from inspection, money under the table for closing costs, not a problem. Come on down! Regardless of loan quality, Fanny will enable a portfolio recycle of funds, origination points being earned. No distinction is made for new construction or existing homes. The ratio of housing value to rental income is an excellent indication of price-earnings ratio commonly reported to stocks. In the case of housing, the value-to-income ratio is at least 5% above the previous bubble peak in 1989. Rental prices are way down on a relative basis. Homeowners who chase a property for purchase leave the rentals wanting. Deals to rent a house are commonplace. The result of the multi-year housing boom which began in 1994 or 1995 has been to greatly suppress rental prices. A primary beneficiary in the statistics world has been the CPI.
THE AUTOMOBILE MARKET
Over 30% of the weight in the CPI is devoted to used car prices. What an absurdity. Who cares the motive for such incompetence, misrepresentation, and distortion? It s what it is. The tide is surely coming in to provide ridiculously magnificent lending funds for potential automobile owners. However, the deals are for new cars almost exclusively. Dealer lots are overrun with used cars. South America simply cannot take up the slack, as they have done in the last few decades. The bulk of the practical cost for a "beater" car is not so much the cost of metal, plastic, glass, and rubber. It is the cost of passing inspection for safety and emissions. What usually had been timely cash-back incentives to move end-of-year inventory have become routine year-round lures. What had been attractively low rates for financing sales have become routine year-round lures. Late summer last year, even with heavy incentives, inventory did pile up, like three months worth. Detroit is desperate not to accumulate gargantuan inventory, as labor contracts dictate not to relax on production schedules. Japanese market share has risen every single year, partly because they have joined the easy finance parade. A veritable flood of used cars work against the supply & demand curve. The result of the multi-year car sales game which began in 2001 has been to greatly suppress used car prices. A primary beneficiary in the statistics world has been the CPI.
REAL ECONOMY STRESS FROM HIGHER COSTS
Past articles such as "The Failure of the Fed Reflation Initiative" addressed the details and dynamics behind the colossal backfire of higher costs across the entire US Economic spectrum. That is ok for the financial sector, which enjoys high bond prices, high housing prices, and high stock prices. It is anything but ok for the real economy. Households must deal with higher costs for gasoline, home utilities, food, professional services, and more. Businesses must deal with with higher costs for shipping, building utilities, construction materials, industrial metals, fertilizers, lubricants, other petroleum-based products, and more. Labor costs are not rising so much, but health care costs are increasing over 10% per year, and have been for years. The uniformly higher cost structure will continue to act like an unsteady air supply on the US Economy which seeks new fuel not only to grow but more importantly to sustain its massive asset bubbles and enormous debt burden. In a sense, Chinese output and lower labor costs deny our economic fire that needed fuel. Asia tilts our pricing power and wage structures greatly.
Higher commodity and energy costs are a direct consequence of the falling USDollar. The US$ exchange rates are on a severe downtrend for a host of reasons. Yawning trade gaps and burgeoning federal budget shortfalls from the twin tower deficits offer a powerful thrust in the currency markets to send the US$ down down down. Low interest rates within the USA sphere render the USDollar vulnerable on a competitive basis internationally. Europe, England, and Canada all offer higher short-term and long-term rates. So the US$ slides relentlessly lower.
The human toll and the commercial fallout lead to distress from profit margin squeeze and shrinking household budgets. The unfolding damage comes from business failure, inventory liquidation, business and personal bankruptcies. Job outsourcing goes hand in hand with the frantic attempt to maintain cash flow and liquidity for operations and debt service. It is an uphill battle to remain competitive. The result of the distress to businesses and households has been to greatly suppress product prices in the real economy, where things are made. A primary beneficiary in the statistics world has been the CPI.
ASIAN DEVELOPMENT & FLOOD OF IMPORTS
The bottom line outcome of the grand Fed Reflation initiative was two-fold. In the financial sector chamber (alternative reality room), it puffed up bonds and housing, and to permit continued levitation of stocks. In the real economy chamber (genuine reality room), it encouraged household debt to send a strong current of money directly to China.
Recovery is heralded, although exaggerated. Its makeup resembles an obese gentleman racing down a pathway, burdened by an 80-lb millstone around his gut, twisted from one leg twice the length of the other leg, roused into a frenzy by massive timed doses of amphetamines, sweating fluids as quickly as he takes them in. Much new money goes toward evermore debt tied to cars, household appliances & furniture, home electronics, vacations, and elevated lifestyle. Debt pays as often for an orgy of excess as for the meeting of needs. While income growth from wages has almost collapsed since the year 2000, consumer spending has risen 10% on an inflation adjusted basis. An overlooked statistic is that US consumer debt has been growing in lockstep with the Chinese trade gap (bilateral to USA).
Total consumer debt, from both revolving and installment sources, has risen almost 22% since January 2001, from $1711 billion to $2085 billion through November 2004. During the same stretch of time, the Chinese trade deficit accumulated by a commensurate $440 billion. Hmmm, similar magnitude!!! Up to the past spring, during the last four years our consumer debt (+$331B) and Chinese surpluses (+$322B) had grown by roughly the same magnitude. Since last summer though, consumer debt has advanced by another $42 billion, while the Chinese booty from surplus has outpaced the indebted drag by gaining $117 billion. One can conclude that the early foundation of economic recovery opened a Chinese savings account, but the next gear for that false recovery has filled that Chinese savings account.
The result of Fed stimulus has been a massive Asian factory buildup. Their central banks have ensured that currency corrections do not interrupt the "grand giveaway" by mindless US officials. The Asian imported product influx has greatly suppressed product prices in the real economy, where things are made. A primary beneficiary in the statistics world has been the CPI.
BRIEF CONCLUSION
The more the Federal Reserve stimulates with its tired antiquated weapon of ineffective cheap money, the more it works to keep the Consumer Price Index under a heavy thumb, held down, kept low. This is an unrecognized paradox. Monetary expansion, carried out US style (read: VIA DEBT), pushes down the CPI incredibly. The CPI measures poorly the prices across the economy. It is a pathetic statistic designed to reflect run down rent, crushed used cars, distressed sales, and cheap Asian imports. The Fed has been pushing on a string for so long, that a pile of string has backed up to actually weigh down and alter the scales used in CPI weights & measures. Chairman Greenspan is the world's foremost monetary drug dealer. His middle men (financial sector) love him. He answers to their orders. However, their customers (real economy - Joe Sixpack and Main Street vendors) are suffering.
The financial sector absolutely loves the CPI as an index to measure price inflation. Its inadequacy as such a proper measure is completely irrelevant. What is relevant is that it measures a narrow range of consumer prices, each kept down from monetary expansion (inflation). Therefore, the CPI remains tame as monetary inflation rages out of control, thus signaling a "green light" to our Fed and the banking system to proceed with the massive extension of debt. The financial sector loves it, since assets inflate most easily, with the least resistance. The damage to the real economy comes primarily from the cost inflation which results, better measured by commodity prices (CRB index) and the Producer Price Index. The CPI has become a joke, a tool for inflationists to suppress easily via statistical games, a tool to justify their continued inflationary policy. Their games are blatant, hidden, and work from misdirection. The financial sector benefits while the real economy suffers.
THERE ARE NOT ENOUGH BAGHOLDERS IN THE WORLD FOR THE US DEBTS.
THERE IS NOT ENOUGH MAYLOX IN THE WORLD TO HANDLE US INDIGESTION.
THERE IS NOT ENOUGH ASPIRIN IN THE WORLD TO TREAT THE US HEADACHE.
THERE IS NOT ENOUGH SPACE TO DOCUMENT THE STATISTICAL DECEPTION.
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.
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