18 Dec 2010

A Sneak Peak at the Lara-Murphy Report

Inflation, Shameless Self-Promotion 8 Comments

In the Lara-Murphy Report, we have a section “Pulse on the Market” where we give quick tidbits on various news items for people who don’t slavishly read Wenzel or ZeroHedge. Here’s the blurb I wrote for one issue:

==> Inflation or deflation? Depending on how you parse the numbers, you can “see” price inflation or deflation. Much of the mainstream press, fueled by Keynesian analysis, thinks that when the economy is recovering from the shock of a financial crisis, it takes years for the spending spigots to open up and put upward pressure on prices. And indeed, their preferred index of “core inflation” (which takes out food and energy prices!) shows a modest 0.7 percent increase from last year—the weakest dribble since the 1960s. On the other hand, those of us alarmed by Bernanke’s injection of a trillion new dollars in high-powered money into the banks, can point to not only stocks and bonds (which we believe are in another bubble), but also to producer prices. Specifically, the further up the chain—away from the beleaguered consumer—you go, the bigger the price spikes. In the past 12 months, here are the hikes in the various indices maintained by the Bureau of Labor Statistics: crude producer goods, up 12.8%; intermediate producer goods, up 6.3%; finished producer goods, up 3.5%. In contrast, the Consumer Price Index (which includes food and energy), rose only 1.1% from November 2010 to November 2011. We will watch these trends very carefully, but it sure looks like Bernanke’s is pumping in money on one end, while the unemployed, debt-ridden consumer has very little to spend on the other.

What do you kids think? As my recent mea culpa indicated, I obviously was wrong in thinking all the money-creation would have shown up in conventional CPI by this point.

But does that mean the Keynesian (or even Sumnerian) position has been vindicated? If money has been too tight lo these past two years, as Scott believes, would we see such high increases in the various PPI components?

I don’t remember seeing Krugman or Scott predict that producer prices would zoom upward. For sure, Mish didn’t see that coming. I remember Scott shrugging off gold prices as due to mining difficulties or whatever, and I know Krugman says that commodities are volatile.

That’s fine, and perhaps commodities have leveled off and will be fairly flat in 2011. But again I repeat, from the perspective of people who correctly predicted that official CPI wouldn’t zoom upward in 2009-2010, did they also beforehand call the big jump in producer prices?

If so, let me know. As Sitting Bull (?) says in that goofy movie with Dustin Hoffman, “I would like to meet this man, and smoke with him.”

8 Responses to “A Sneak Peak at the Lara-Murphy Report”

  1. Dan says:

    I don’t understand why you give up so much ground on inflation. First off you concede their bs definition for inflation when you talk about it in terms of rising prices. Second, if you are going to argue in terms of price inflation then why look at the CPI. If there is ever a sure fire way to make bad predicitions it would be to rely on the government to accurately release data that would make them look bad.

    We just had the biggest bubble in the history of the world pop and not only have prices not came down enough to get back to reality, but prices are rising again at an accelerating pace. Its not like if you were listening to krugman over Jim Rogers that you did better in the markets. Obviously preparing for inflation has been a great investment. If you are sitting in cash waiting for the big deflation you are going to get crushed. It doesn’t matter when the day of reckoning will be and only matters that you prepare for it.

    The Fed has been devaluing the dollar for almost 100 years and now they are printing money at a rate we have never seen before. I don’t understand how people fear deflation.

    • Matthew says:

      Simple, the state media says “Deflation” when they mean “Property price disinflation.” There are a few asset classes disinflating concurrently with many other assets classes experiencing price inflation. The rise in the level of the money supply is inflation. Inflation began, factually, on the POMO schedule publicly released beforehand by the NY Fed. So they tell you exactly when they increase the money supply. So, it is fact that we are experiencing inflation.

      Yes, listen to Rogers/Faber, but also pay attention to timing by listening to the Fed.

  2. Blackadder says:

    If money has been too tight lo these past two years, as Scott believes, would we see such high increases in the various PPI components?

    If the claim is that money has been too tight over the past two years, looking at what the PPI has done over the past one year. The PPI fell off a cliff in the second half of 2008. It’s still about 6% below the peak.

    • bobmurphy says:

      Right, I don’t deny that Sumner could come up with a story after the fact. I’m saying, in early 2009, did Sumner say, “OK, oil just fell by 70% [or whatever], and then it’s going to more than double again, but unemployment will keep going up, if they keep money tight like this.” ?

      In other words, when Sumner (correctly) kept telling me I was nuts for thinking CPI was going to blow up, I don’t recall him ever saying that PPI might very well blow up.

      • Blackadder says:

        If a deflation hawk doesn’t mention the PPI when it’s showing double digit deflation, doesn’t that suggest that he doesn’t think it’s an important indicator?

  3. Scott says:

    OK, maybe I’m in over my head but:

    By increasing the monetary base, the FED only put new money in the hands of the financial system. Sparse lending (due to fear) has kept it mostly out of the hands of people economically more distant from the banks (consumers). It will take awhile for the new money to work its way ‘out’ from the leaky tendrils of the banking cancer, supposing the FED even allows it?

    So, aren’t we seeing exactly what we should expect to see, given the situation? Inflation higher up the division of labor, as big borrowers/producers close to Wall Street get access to cash and bid up the prices of raw materials, with a sort of price squeeze going on in the middle as distant Main Street consumers have limited access to the new money?

    I think the FED ONLY wants to flood financial markets with money, and will try to squeeze people further down to keep the banks liquid and the CPI low. After all, that seems to be the only ‘inflation’ anybody cares about. That’s pretty much what it wants to accomplish, right?

    Isn’t that pretty much always its game? To ‘boost investment’ with easy credit, and at the same time try to keep CPI inflation down?

    Also, I think you can’t ignore the effect of China’s moneyprinting in pushing up the price of commodities, independent of anything going on in the US.

  4. John says:

    I think this argument is over my head, but how is the price of government bonds not a sign of price inflation? It would be like saying that rising home prices weren’t a product of inflation during the housing boom. Banks got injected with tons of fiat money during the financial panic and used it to buy “safe” government debt. Just because this money hasn’t made the price of milk go to $20 a gallon doesn’t mean that the money hasn’t bid up prices.

    • Matthew says:

      Exactly, the money “goes somewhere” we know where the majority of it is now, however, when interest rates begin to rise the money will leak out of the bonds and head into different assets specifically and unevenly. Price inflation will occur over time, it is a process. “The risk is what happens if foreign accounts, US banks and private investors who have purchased, in total, MORE than $2.5 trillion in Treasury debt since the beginning of 2008 decide that it’s time to sell.” Now that, is a bubble. It has already started to leak as Bernak disappointed with “only” $600B, eventually he will re-inflate again but he wont be able to get us to revisit all time lows in yield.