Category Archives: Inflation & The Dollar


There is much noise that the Fed will raise interest rates to combat “inflation.”

Over the last year to the end of February, wages are up 2.8% (nominal). The price of oil, as a metric for energy prices, is up 32%.

Guess what is driving “inflation.”

The Saudis are still pumping as hard as they can, but justifying it on the grounds that they are storing the above-quota output, not selling it internationally. It seems to me that a tank in Saudi and a tank in Oklahoma are pretty much fungible, except that we at least think we know how much is in the Oklahoma tanks.

The bottom line is that global inventories of oil are continuing to expand to new records, more or less on a daily basis. The EIA is forecasting that US shale is set to expand production by 109k barrels from March to April, rising from 4.853mmbpd to 4.962mmbpd, and offsetting OPEC’s entire February production cut.

At some point we are going to see a reaction and that will be the end of “inflation.” For a while, anyway.

Going Out On A Limb

I think the end of this bubble is beginning, as yields spike and the dollar soars:

“Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air:
And, like the baseless fabric of this vision,
The cloud-capp’d towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve
And, like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.”

― William Shakespeare, The Tempest

The economy is not strong. There are 100+ million adults not working (“not in the labor force”) out of a total population of 325 million, to say nothing of the myriad of government employees who are employed, but not contributing any value to the economy.

Consumption is being sustained by debt, both private borrowing and government money-printing. By January 2009, the United States had accumulated $10.6 trillion in debt. The gross national debt – just federal government debt – stands at $19.7 trillion as of the end of FY2016. Spending is on a pace to add another $2.4 trillion this fiscal year (2017), surpassing $21 trillion by next September. Krugman applauds, and of course this is Obama, not Trump. Yet.

Debt-funded consumption in excess of income has crowded out savings and therefore investment. As investment has declined, so, logically enough, productivity growth has fallen (see previous post). Simultaneously, government has been growing, making a lethal cocktail for real household disposable incomes, which have been declining for years. Pensioners who think they are in good shape are not noticing that defined-benefit pension funds are already starting to cut benefits and many, especially state and local government funds, are woefully under-funded. Social Security is in negative cash flow, and drawing on the general tax revenue pot to make up the difference. The stock market is ludicrously over-valued and promises zero or negative returns to pension funds for years to come. As Margaret Thatcher notably said “Socialist governments traditionally do make a financial mess. They always run out of other people’s money. It’s quite a characteristic of them.”

Powerful deflationary forces are being unleashed. The world is awash in oil and efforts to keep the price up will eventually fail. OPEC in aggregate will not cut supply because its governments (as well as the non-OPEC ones) depend on the flow of oil money to stay in power. I expect oil to reach the lower $20s if not below. Most of the world is engaged in a race to the bottom, cutting interest rates to devalue their currencies and boost exports. They are therefore exporting deflation to the US. I expect to see CAD in the 0.60s and the EUR in the 0.80s. Consumer price inflation in the US appears comparatively strong due to the inclusion of OER¹ in the CPI, which is not done elsewhere, and due to the uncontrolled rise in healthcare and education prices, funded by government subsidies and debt. These prices end up being a form of taxation by the 0.01%, who are on the receiving end. The protest vote in the US election should be no surprise.

OER, a completely fictional number to start with, is high as a result of low interest rates financing housing bubbles. These will end as badly as the previous lot. I choose not to be a homeowner, largely because I don’t want to face a huge capital loss.

In short, the economy is a Potemkin village. Things are not as they are made out to be. Even a fractional increase in rates may trigger a deflationary crisis, especially considering the shortage of dollar liquidity outside the US.

¹ OER, Owner’s Equivalent Rent, is weighted about 25% of the CPI basket. It is estimated by a telephone survey of selected homeowners, asking them how much they think it would cost to rent their a property like theirs.It has nothing to do with what it actually costs them to own and live in their properties.  I am not kidding. Now do you think CPI means anything?

The Black Hole

Here is a prime example of the kind of nonsense that passes for economic wisdom at the Jackson Hole meeting.

In a lunch address by Princeton University economist Christopher Sims, policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.

“Fiscal expansion can replace ineffective monetary policy at the zero lower bound,” Sims said. “It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.”

Ever hear of Abenomics, Mr Sims? Oh I know, not large enough. Please.

I think it is obvious that you can’t finance anything with inflation. Latin America has been trying that for years, with disaster after disaster ensuing. Right now I am looking at a framed Zimbabwean hundred trillion dollar bill. This obsession with creating inflation, obviously intended to devalue the enormous pile of debt that Keynesian policies have created, is possibly the most dangerous and ludicrous aspect of the madness that has seized mainstream economists.

It is a perpetual search for the magic bullet that will resolve the economic failure of liberal socialism, which is playing out around the world. Economists seem to believe that just because the Keynesian free lunch has failed to materialize doesn’t mean that it can’t be teased out by some manipulative action. Sorry folks, it is just a mirage. It will always be out of reach because it does not exist.

Information is lost in both Jackson Holes and black holes.

Welcome To The Asylum

-1% germany

Yup, that means what you think it means. “Now with 0% financing and 1% of the purchase price paid refunded to you.”

What’s Next

Expect another commodity price collapse as the weakness of the economy becomes more and more apparent. The recent rally in prices appears to have been entirely driven by short-covering as long positions have actually declined slightly. Record inventories and soft demand are likely to lead to a sharp drop in prices.

This will cut short any ideas of inflation.

Friday’s employment report? Yet another meaningless random number.

So Late We Get Smart

Alan Greenspan, interviewed by Bloomberg Radio, said he was not optimistic about the future: “No. I haven’t been for quite a while. And I won’t be until we can resolve the entitlement programs. Nobody wants to touch it. And that is gradually crowding out capital investment, and that’s crowding out productivity, and it’s crowding out the standards of living where do you want me to go from there.”


There was one item of huge significance in today’s BLS report – the largest drop in weekly earnings in history at 0.7%. That is intensely deflationary.

Stupid Comment Of The Day

From Bank of America: “Everyone, including ourselves, is selling into strength”

Really. Selling. Surely, there’s a buyer for every one of those shares? Or has “Everyone” finally developed the one-sided trade? You know, where money appears from thin air replacing your shares without the need to find a buyer? Seriously:

1. For every security sold by someone, one is bought. By someone else. Except for HFTs, who are frequently and illegally both the buyer and the seller.
2. Every security, at all times, is owned by someone.
3. When someone buys a security, their money goes to the seller. There is no change to “money in the market” or “money on the sidelines.” Those are not meaningful phrases.

German 30-year bonds are now yielding 0.83%. 30-year JGBs are at 0.84%. Eurozone consumer prices are most likely now in deflation, Japan prices are flat. Since the peak in 2008, commodity prices have fallen by 83% (basis GSG) or 69% (basis RJI). I am further increasing my already chunky position in long Treasuries.



The S&P is back within 5% of its all-time highs and the risk-on mode is in full swing – “Bad news is good news” – as the market relies on the folly of central bankers to flood the world with yet more liquidity. Needless to say, the US recession is well-established at this point – unless of course, your name is Janet.

Having said which, apparently even QE-crazed Kuroda has started to realize that QE does not work. Of course, letting the market work is not an option, so plan B is negative interest rates, which of course means eliminating cash so that everyone can be appropriately punished for saving.

We’re so far off in the weeds that we can’t even see what a functional economy looks like from here, let alone hope to attain one without an intervening catastrophe.

30-year government bond yields.

Country Feb 23/16 Feb 18/16 Jan 30/15
Japan 0.97% 1.02% 1.26%
Germany 0.87% 0.96% 0.996%
USA 2.62% 2.69% 2.25%

The War On Cash

The Keynesian central bankers believe that they can manipulate people into spending their money rather than saving. It is of course, completely insane because saving and investment are the backbone of a healthy economy. But that doesn’t matter to these people, who believe that consumption drives the economy. Therefore the idea of saving is anathema and the consumer must be encouraged to pile on more and more debt.

Their preferred manipulation strategy is to punish “idle” cash by inflating it away – hence the 2% inflation goal. This isn’t happening so now plan B arises – simply make interest rates negative so that “idle” cash simply disappears. They like this less, of course, because, unlike inflation, it is immediately and directly visible. But so be it, they say.

The bottom line is that the government is the enemy of the citizenry as it seizes every opportunity and strategy to strip the economy of saving and investment and suck every available resource into government consumption and vote-buying transfer payments.