Monday, November 8, 2010

The Boiling Frog: Effects of QE2 On The Bottom 80% of the U.S. Population

An old metaphor: If you take a frog and drop it into a roiling pot of boiling water, it’ll jump right out, unscathed. But if you put that same frog in a pot of cold water, and then slowly raise the heat, that frog won’t move. It’ll stay in that pot of water, calm as can be, right up until it is boiled to death. 
Would you boil this little guy?
I’ve been arguing that the unpayable Federal government debt, coupled with irresponsible Federal Reserve policies, will inevitably lead to a hyperinflationary event and currency collapse. In order to prepare for a web seminar on hyperinflation in America, I’ve been looking at the issue of how to safeguard assets before a currency collapse, and how to identify opportunities in the midst of a hyperinflationary crisis. 
But along the way—inevitably—it’s led me to consider the issue of the effects of hyperinflation on the American people. Not even hyperinflation—just regular old rising consumer prices: How will they affect the average household.
It’s disturbing.
Even if you don’t buy my hyperinflation call in the least—and a lot of very smart people don’t—the recently announced Quantitative Easing 2 policy of the Federal Reserve has had and will have a profound effect on the dollar.
And a profound effect on the American people—especially the bottom 80%. 

Bernanke’s stated purpose in QE2 is to spark consumer spending, and thereby reignite the economy. To do this, Bernanke and the Fed will pump $600 billion into the Treasury bond market, in monthly $75 billion increments—at minimum. According to the Fed’s statement, if more “liquidity” is needed, then by golly, more liquidity will be pumped into the economy.
QE2 is really the official start of a race-to-the-bottom debasement of the U.S. dollar. 

No one doubts this—and no one would dispute that such a currency debasement will bring about upward pressures on consumer prices across the board. Indeed, this is the explicit purpose of QE2: The Fed is trying to induce inflation, as it believes that inflation will bring about a reignition of the stagnant American economy.

A lot of commentators have been discussing what QE2 will mean for equities and the various bond markets. People are talking about the Treauries’ yield curve—but not much about what QE2 will mean for the rest of the American population: The middle class, the working poor, the poor, and even the upper-middle class.
So let’s give it a go:

Taking Bureau of Labor Statistics data for 2009, which can be found here, we can put together this simple chart of household incomes and expenditures for last year, divided by quintiles:
Data, from Bureau of Labor Statistics, can be found here.
Data in unadjusted U.S. dollars. 

(A note on the data: Housing expenditures include mortgage payments or rents, utilities, and heating, including heating oil. Transportation data includes use of public transportation. Food includes “Food Away From Home”—a remarkably high proportion of expenditures, at 41% for the entire population, skewering to almost 50% for the top quintile, and almost 30% for the lowest quintile. The figure “% of Annual Expenditures” represents how much food, housing, clothing and transportation—the basic necessities—represents of the total expenditures of each quintile. The figure “% of Income” shows the basic necessities as percentages of after-tax income for each quintile.)

Now, it’s no trick to see that rising prices of basic necessities—as a result of plain vanilla Fed-induced inflation, and not the hyperinflation I am positing—will affect everyone: But especially the middle class, the working poor and the poor.

It would be nice if we could quantify that effect. But we can’t just input a hypothetical inflation rate, apply it to the data, and come out with a number expressing how much each percentage point of inflation will affect each quintile of the population.

We can’t because, as prices rise, people buy less of a necessity: Higher gas prices means people drive less. Higher food prices means people eat less, or less quality of food. Higher heating oil prices means people heat their homes at a lower temperature—or in some cases not at all.
But although we can’t easily quantify it, we can comfortably make certain claims about the effects of rising consumer prices on the population.

The first claim I would venture to make—and one that I don’t think will be particularly controversial—is this: Any household spending more than two-thirds of their after-tax income on food, housing, clothing and transportation will suffer an immediate, negative impact from the Fed’s efforts at induced inflation.

That covers pretty much the bottom three quintiles of American households. So 60% of the U.S. population will suffer an immediate effect of rising prices—the stated policy goal of Ben Bernanke’s QE2.

QE2 is having the immediate intended effect of pushing up asset prices, bouying up the financial sector—but it’s also pushing up commodity prices, which have been rising ever since QE2 was first toyed with as a policy option back in the spring.

Lag times may vary, but rising commodity prices inevitably translate into rising consumer prices for basic necessities on Main Street. QE2 is directly responsible for the rise in the last few weeks of all commodities. This will inevitably lead to higher consumer prices.

This inevitable effect of rising prices for the basic necessities gives lie to the stated goal that the Fed has of helping the American people by way of QE2. The policy is not helping—on the contrary: A minimum of 60% of the population will feel immediate, unavoidable pain directly as a result of QE2. They will spend more for basic necessities than they spent previously for them.
Or else, if they don’t spend more, they will consume less. This ought to be obvious: People who cannot afford to spend more on a necessity will instead consume less of it, be it food, gas, or heating oil.
So here’s Fed Lie Number 2: QE2 will not get the economy spending again—on the contrary, rising consumer prices brought about because of QE2’s pushing up commodity prices will insure that the population cuts back on consumption, even if in nominal terms they are spending the same, or even more.

The key assumption that I am making, of course, and which has to be made in any analysis of the effects of rising consumer prices across socio-economic groups, is that wages and salaries will either not rise, or will rise with a lag time of no less than six months. 

This is an easy assumption for me to make: Even in the best of economic times, wages and salaries do not rise in lockstep with an expanding economy. And we are currently not in an expanding economy.

It is reasonable to assume that, during a period of steadily rising prices coupled with stagnant economic growth, wages and salaries will not rise for at least six months, if not longer. And of course, if unemployment were to rise above the current U-6 rate of 17%, then obviously aggregate wages and salaries would contract further—which would further aggravate the effects of the rising prices of basic necessities on the bottom 60% of the population for sure. If unemployment continues to rise, then that bottom 60% would begin to grow into the bottom 70% or 80%—maybe even hit the top quintile as well.

Wages are key. If inflation hit consumer prices as well as wages in equal measure, the net effect would be zero—which is more or less what you see in ordinary expansion-driven inflation, the kind prevalent in healthy economies: There are price pressures on commodities, which eventually translate into higher prices at the supermarket—but there are also price pressures on wages, as the economy in toto is expanding, and therefore bidding up scarce labor as it grows. In an expanding economy, prices might be rising—but wages are rising too, so no complaints.

However, in a stagnating or contracting environment—such as what we are experiencing now in the American economy—there are obviously no pressures on wages: If anything, there are downward pressures on wages and salaries.

So if commodity prices rise, people—especially the poor, the working poor, and the middle-class, but maybe even the upper-middle class—are really going to take a hit, as more of their after-tax income goes to paying for basic necessities.

Some people might think that the debasing of the dollar via QE2 will mean that the real cost of housing will fall, as rents and fixed mortgages will be undermined by inflation. They might think this is a good thing. 

But this only makes sense if your earnings are absolute: If you’re boss is paying you in gold coins, or silver lingots. But if you live on a dollar income, especially a fixed income—as so many seniors do, let alone the average wage earner—even if your housing costs remain nominally static, rising food, transportation and clothing prices will still take bigger and bigger bites out of that dollar-based income. Please look at the last line of the above table—“Food, Clothing, Transportation as % of Income”—which I calculated precisely for this objection. 
The only ones who won’t feel the pain of rising prices of basic necessities that bad is the top quintile—maybe. If they’re income comes predominantly from equities, maybe. If not, then they’re going to take the hit as well.

Way to go, Benny! Your QE2 is going to hit all five quintiles! Be proud!

As I have discussed in detail elsewhere, and which ought to be clear from my discussion in this post, Ben Bernanke and the fucking idiots at the Fed committed the post hoc ergo propter hoc fallacy with regards inflation: They seem to genuinely think that inflation begets growth, rather than understanding that growth begets inflation. (I don’t buy conspiracy theories that claim Benny and the Fed Fucktards are deliberately creating inflation to save the elite’s bacon—I think Benny and his Lollipop Gang are simply and genuinely stupid.) So he and his minions have started up QE2, hell bent on creating inflation in the American economy.

He seems to be succeeding, too.

According to Producer Price Index numbers, grains have risen 33% year over year, oil 20% year over year (both figures September-to-September, link is here). Ever since the idea of QE2 was floated back in May/June, commodities of all kinds have been steadily rising. And as of last week, when Quantitative Easing 2 was officially unleashed, commodity prices have surged even more—and will continue to rise for the foreseeable future. Not just precious metals but grains, sugar, coffee, not to mention oil—they are all rising.

Anecdotally, there is increasing evidence that food prices at the supermarkets have been rising for some time. I do not live in the United States, but I’m in close contact with literally dozens of people, both friends and business associates. From casual conversations and long discussions, I’ve been hearing that supermarket prices are rising across the board, and have been rising since at least mid-spring—yet the price rises do not seem to be reflected in the CPI.

That’s because of how the CPI—the Consumer Price Index, the traditional (and official) metric of U.S. inflation—is calculated. It uses data from past years—currently the 2007 and 2008 consumer survey—to create a basket of products, goods and services, which it uses to calculate monthly price changes.

However, the CPI doesn’t slice the baloney fine: If a product-x that was sold in a 20 ounce package for $3.99 back in 2007 is now being sold in an 18 oz. package at the same price, CPI does not compute that there was an 11.1% inflation in the price of product-x. Rather, according to the CPI, there was zero price inflation in product-x—because it sold for the same price, regardless of whether the package was 10% smaller.

But this is exactly what seems to be happening in food, as well as in other categories of what one would consider basic necessities: Foodstuffs are being sold in smaller units, cotton clothing is now being sold for the same price, only made of synthetic materials, and so on. A recent blog post on Zero Hedge highlighted the specific case of coffee at WalMart, previously sold in a package of 39 oz. for $9.88, now being sold for $10.48—in a 33.9 oz package. This represents a 22% jump in price. Cases such as this are common, and cropping up like mushrooms on the web—enough to confirm that stealth inflation is happening, without needing to stop by John Williams’ Shadow Government Statistics.

This brings the obvious question: If food, transportation, clothing and housing prices rise, but the CPI doesn’t measure it—was there inflation?

This isn’t a Zen koan or Berkeley’s tree falling in the woods—this is real. So my answer is obvious: Yes.

But according to the Fed and to most of the economic commentariat (except for a few notable and distinguished exceptions), since the CPI is not rising, there is no inflation. At least not in theory. In practice? That’s something else.

So! What does this all mean?

It means that Americans are the frog in the metaphor. Between 60% and 80% of them—to be precise—are slowly being boiled alive. The bottom 60% to 80%, to be even more precise.

Because of QE2 in all its iterations—its rumor back in the spring, its announcement last week, its forthcoming implementation—prices for food, housing, clothing and transportation are rising, and will continue to rise as Bernanke’s policy works its magic on commodity prices, and eventually reaches the supermarkets.

The financial sectors might be pleased that their assets are being bouyed by this flood of money coming from the Eccles Building—but the rest of the population will be drowning.

It won’t be just the bottom two-thirds of the population that will feel the pain of QE2: The upper-middle class and even the top quintile will inevitably see more and more of their income going to pay for basic necessities, while their wages and salaries remain stagnant—assuming, of course, that they’re lucky enough to still have a job.

All the while, since the Consumer Price Index will be lagging or flat, the mainstream economists and the Fed drones will keep up a steady chant of, “There is no inflation! There is no inflation!”—even as a majority of the population feels the squeeze of rising prices for the basic necessities. It’ll be a lot like a bunch of cooks, standing around the boiling pot, saying to the poor frog, “It’s only cold water! Don’t worry! It’s still cold! Trust us!”

So like the frog in the metaphor, the bottom 60% of American households will be slowly boiled alive by rising prices—
—brought by QE2.

As I said, you don’t have to buy my hyperinflation call and currency collapse scenario to realize this effect of QE2. This effect of Bernanke’s policy is immediate, undeniable, and inevitable: QE2 will hurt a vast majority of the American population, while helping only a very, very few.

To this, I say: Yeay, Benny—way to help the American people. Way to fucking go.


  1. There has been a lot of heavy Paranoia being tossed around the blogosphere by some Economic Pundits with predictions of incipient Hyperinflation (Can-U-Spell G-O-N-Z-A-L-O L-I-R-A? LOL. Are you out there reading this Gonzalo?), particularly in the most essential of all currently Monetized Commodities, Food. Water is even more essential, but at least in most places it hasn’t been as thoroughly monetized as the food resource has been. Not to say this will not come to pass in the future, it probably will but only after this destructive phase of the 4 Turnings has run its course.

    Before continuing on with this article, I want to reiterate for those who do not know that I am a Deflationato, not an Inflationista, so along with folks like Nicole Foss (Stoneleigh of Automatic Earth) I argue the opposite side of the debate with Inflationistas like Gonzalo. It is my belief right now that all the money Helicopter Ben is Printing and distributing out to the TBTF Banks to keep the Stock Market floating and to bid Commodities up into the Stratosphere is all going to burn up rapidly as all these markets come crashing back downward, in the Greatest Bonfire of Paper Wealth in All of Recorded History. The only way a Hyperinflationary scenario can really take off is if at some point Da Goobermint starts distributing out currency to J6P to buy the products at these inflated prices. As of yet, that is not happening. It may happen in the future if Da Goobermint reacts to a Price Spike by indexing wages and printing money to cover that, but I don’t see that in the cards yet either. However, on the assumption I am WRONG here, I am going to look at some outcomes relating to Hyperinflationary scenarios, and how they might play out the rest on The Burning Platform


  2. Thing is, humans are not frogs (not all of us anyway).

    Some of us have already jumped, and many more are about to follow, because while they may find security in docility, they are not stupid.
    Self interest is a very powerful motivator.

    Many people will shortly be forced to think for themselves, and the implications are... fantastic!

  3. I highly recommend that everyone read the 1975 book When Money Died. It is about the hyper inflation in the Weimar Republic after World War I. Most people were devastated. A few people did well if they had foreign currency, a farm, an exporting business. Please study that book as one would study a religious book like the Bible or the Koran. Gonzalo is a prophet and a visionary.

  4. Whether the deflationistas or inflationistas are correct, I have to agree with the thrust of this post --

    Commodity prices are rising. Market prices for food are rising. (As paraphrased from Zero Hedge, "How many days can a commodity open limit up before the increased price is seen in the marketplace?") Therefore, anyone who wants to eat will pay higher prices, and those with the least income will be the ones most squeezed.

    These prices may crash back down some time in the future, as RE suggests above, but I seriously doubt we'll see coffee suppliers rolling out bigger cans for less money for a while. In the mean time, anyone who runs down to the grocery store to buy a can of coffee is paying more, therefore has less to spend on something else.

    This effect has nothing to do with either hyperinflation or massive depression. It simply precedes what's coming. I don't see much of an end to this while the weapon of choice of the government is to encourage asset inflation (stock market, commodities) relative to the coin of the realm.

    What this does is highlight once again that inflation and deflation refer to the supply of both money and credit. We can have rising prices in an environment in which the money/credit supply is decreasing, as rising food prices in the middle of this deflationary period proves.

  5. I don't know if hyperinflation or depression will come sometimes later, but for now we DO HAVE inflation. Metals, food, energy!!! Basically things people really need and use everyday are getting slowly but surely more expensive, just like before the Real estate bubble burst in 2007-08.

  6. This is not an argument of Coke or Pepsi-- it is possible-- and likely-- to have both deflationary and inflationary effects at the same time. Unfortunately, they don't cancel one another out.

    Look at the current trillion-dollar contraction in the money supply, in spite of tens of trillions in liquidity dumped into the market and banks by the Fed (TARP was chump change). These are loans and revolving credit which have defaulted and are being written off-- i.e., extinguished.

    Most understand how fractional reserve banking adds approximately 9 dollars into the economy for each created for loans/credit, but what about the inverse scenario? Each dollar which evaporates takes the potential for 9 others out of the hands of banks and consumers.

    Hence, we are likely to see inflationary effect in basic commodities, with deflationary effects in credit, luxury items, and discretionary purchases. Coke AND Pepsi.

    I recommend Cody Lundin's excellent book 'When All Hell Breaks Loose' for practical, down-to-earth info on preparing for the kind of stuff we're seeing now, or will shortly come to pass.

  7. I like what friend of FOFOA said.I have jumped out a few years ago and most of my (very educated) friends called me crazy to buy gold> i became quite rich (compared to them) and now they are wondering what to do. the smart (and slow)ones are now buying

  8. "I don’t buy conspiracy theories that claim Benny and the Fed Fucktards are deliberately creating inflation to save the elite’s bacon—I think Benny and his Lollipop Gang are simply and genuinely stupid"

    This goes right to the heart of the matter. The question of the nature and workings of evil in human affairs naturally arises. The ultimate fallibility of all human endeavors might predispose us to regard " the best laid plans of mice and men" as an exercise in ultimate futility. However the overshadowing presence of Original Sin looms large here as well. After all was not the Fall as recorded in the Edenic myth the result of a violated contract due to a conspiratorial collusion.

    After all we are not dealing with purely economic determinants here. There are profound and archetypal psychological, historical, political, sociological and, yes, metaphysical undercurrents which those who have resort to purely economic analysis generally dismiss as having little relevance.

    We would all do well to admit that our prevailing scientific and dialectic materialist paradigms not only offer few solutions to our seemingly intractable economic and social problems but might as well have laid the groundwork for the now unavoidable catastrophic results of our ongoing disagreement with Natural Law.

    At the same time it must be remembered that the wanton violation of such laws imply at the same time a cognizance of the underlying principles of that law. This is the predisposition of the nature of "conspiracy" and leads many of the like minded to agree that superior intelligence without moral compass has led to the significant and now perilous disruptions which have long characterized past and present human history.

  9. "Bernanke’s stated purpose in QE2 is to spark consumer spending, and thereby reignite the economy."

    That's just Madison Avenue PR for the sheeple. What QE2 will ignite is a currency war among export-driven nations. See "Currency Wars for Dummies"--

  10. Thanks for a great post. You are correct about the developing price inflation, which represents a stealth tax on all who hold dollars or fixed return dollar assets. I'm sure there is no conspiracy causing all government measuring of this inflation to understate it! It will be especially hard on those unemployed who are about to lose their unemployment insurance benifits.

    Will it lead to hyperinflation? No crystal ball here, but the potential exists. Since the currency is intrinsically worthless, a loss of faith is all it takes to set off hyperinflation. Since there is no basic difference in the intrinsic worth of the US dollar and many world currencies (ie they are all illusions) several of them could join the party.

    A hyperinflation could lead to a deflation in the US if the timing is correct. If hyperinflation got chaotic around July 2012, a new president with a Ron Paul agenda could have the power to end the Fed, let the banks fail, and return to a gold (or other intrinsic) standard. This seems unlikely, as faith in the dollar is likely to implode before then from any of a number of causes

    8 November 2010 by TPC 18 Comments

    The nonsense regarding the world’s greatest monetary non-event just continues to spiral out of control. Last week it was Glenn Beck []pretending to know something about the monetary system and economics. This week it is Sarah Palin []. In a talk today Mrs. Palin went on a politically motivated rant about government intervention and “money printing”:

    “I’m deeply concerned about the Federal Reserve’s plans to buy up anywhere from $600 billion to as much as $1 trillion of government securities. The technical term for it is “quantitative easing.” It means our government is pumping money into the banking system by buying up treasury bonds. And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air.

    The Fed hopes doing this may buy us a little temporary economic growth by supplying banks with extra cash which they could then lend out to businesses. But it’s far from certain this will even work. After all, the problem isn’t that banks don’t have enough cash on hand – it’s that they don’t want to lend it out, because they don’t trust the current economic climate.

    And if it doesn’t work, what do we do then? Print even more money? What’s the end game here? Where will all this money printing on an unprecedented scale take us? Do we have any guarantees that QE2 won’t be followed by QE3, 4, and 5, until eventually – inevitably – no one will want to buy our debt anymore? What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?”

    Glenn Beck made equally irresponsible comments last week. Why these people feel as though they are qualified to discuss monetary operations is beyond me. It would be like me walking into the Kennedy Center and telling the National Symphony Orchestra that they are playing the music all wrong (and I have not one ounce of musical talent in my entire body).

    I won’t repeat the entire argument I have consistently made in recent weeks because I fear readers might bludgeon me with my keyboard, but let’s reiterate a few things:

    * QE is NOT money printing. They are adding reserves to the banking sector and removing government bonds. Mr. Bernanke has explicitly stated this:

    “Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed.”

    * QE is NOT adding net new financial assets to the private sector. They are merely swapping assets – assets that were already in the private sector!
    * QE is NOT inherently inflationary. It does not add to the currency in circulation. It does not make banks more capable of lending.

    The misinformation regarding QE has caused severe market distortions in recent weeks as investors misinterpret the effects of QE. The one thing I agree with Mr. Beck and Mrs. Palin about is that QE is a bad idea, though I disagree with them for vastly differing reasons. Spreading fears about “money printing” and big government intervention are not only misguided and irresponsible, but extremely harmful to the country.

  12. There are two sides to this story, GL. If you are a middle class person living in America, you will understand this.

    Yes, commodity prices are rising. And yes, they make up a very big percentage of expenditure for the underclasses.

    But how much of this expenditure is actually necessary? Hard to say, but I would argue it's quite low.

    So the guy on food stamps goes to Wally-Mart and the liter of Coke is more expensive? Cry me a river. He can drink water at home, quite inexpensive. And it will probably help his obesity.

    So oil prices are rising? Ok, this results in pain, sure. But do people really need to drive 100 miles to the horse or NASCAR race? Did anybody force them to buy an Escalade? They could have easily bought a Civic, or used Geo Metro. But no, they thought they were entitled to big cars forever.

    Moreover, rent is actually falling. Slowly, but it is falling. And, again, nobody forces these losers to buy McMansions they couldn't afford (though the financial oligarchs egged them on).

    I'm not trying to say "Let them eat cake." What I'm saying is this: the working, saving people of this country are being screwed not only by the financial elite, but also by the various stupid and entitled ghetto/barrio/trailer park dwellers.

    Both of these groups - the high and the low - make me increasingly ashamed to call myself American. As an educated, down to earth person who just wants to work, save a little, and enjoy my free time responsibly, I have little in common with either of these groups.

  13. Good discussion here:

  14. "It is my belief right now that all the money Helicopter Ben is Printing and distributing out to the TBTF Banks to keep the Stock Market floating and to bid Commodities up into the Stratosphere is all going to burn up rapidly as all these markets come crashing back downward, in the Greatest Bonfire of Paper Wealth in All of Recorded History."


    Your mind is a raging inferno of contradictions. You can't have a bonfire of paper wealth if "everything comes crashing back downward." You miserbly fail to understand the if "everything" comes crashing down--a deflationary reset--the dollar would actually strenghen as the printing presses are halted immediately.

    But, alas, the printing presses can't stop. Why? Because the Government is on the ropes...they can't allow deflation because of the size and scope of the U.S. Treasury balance sheet. They will simply not go down the do nothing path...they will do something, everything as Helicopter Ben has explained. THey will, if they have to, wire funds directly to every American's account in proportional amounts.

    There will not be deflation. Hyperinflation in the only road out of town....

  15. Sorry about that double post--I got a note from Google saying that the long one had too long a URL and didn't post...

  16. This article summarizes the book,"New Holy Wars: Economic Religion Versus Environmental Religion In Contemporary America." As one writer pointed out “Nelson shows how assumptions are actually norms rather than heuristic devices. When norms dominate, operational and empirical matters aren’t regarded as decisive.”

    What is Economic Theology?By Robert H. Nelson

    For the past fifteen years, I have been writing on the subject of what I call “economic theology.”[1] When I use this term, I often encounter the reaction that it seems an oxymoron. Economics is the science of the mundane, my questioners suggest, while theology is the study of the transcendent. Two areas of inquiry could not be more separate.

    My first response is often to point out that I have a great deal of company in seeing economics as having a large theological dimension. One of the most distinguished theologians of the twentieth century, Paul Tillich, once wrote that an economist, Karl Marx, was “the most successful of all theologians since the Reformation.”[2] Critics of the contemporary economics profession – many of them in the environmental movement — often say that it is “theological.” Among a large number of examples that could be offered, Sallie McFague recently stated that the world needs to turn away from “the theology implied by the neoclassical model of economics. … The neoclassical model assumes that God, like the human being, is an individual – in fact, the superindividual who controls the world through laws of nature. This God is like a good mechanic.”[3]

    Admittedly, few current economists think of their profession as connected to theology. When I attended economics graduate school at Princeton in the late 1960s, none of my professors spoke in these terms. That does not mean, however, that theology was altogether absent. My main thesis advisor, and the most influential member of the economics department in those days, was William Baumol. When Baumol was asked a while ago to explain why he had entered the economics profession, his response was that “I believe deeply with Shaw, that there are few crimes more heinous than poverty. Shaw as usual, exaggerated when he told us that money is the root of all evil, but he did not exaggerate by much.”[4]

    In the Bible, original sin in the Garden of Eden is the “root of all evil.” In Baumol’s new alternative form of theology, characteristic not only of George Bernard Shaw but many other progressives and socialists over the course of the twentieth century, there is a new explanation for the presence of evil in the world. Economic deprivation, or the dire poverty in which human beings have lived for most of human history, has driven people to lie, cheat, steal and commit other evil acts.

    Read the rest here:

  17. If this is what's coming hyperinflation then one would want to go into debt big time if one still can. Use the money to buy gold/silver. If you can hang onto your job and weather this storm you will be able to pay off your house, car, and other debt for pennies on the dollar so to speak. It will be like how I use to look back on that house payment that some use to have forty years ago, you know 400, or 600 dollars per month. That is nothing for a house payment today, but with hyperinflation that current 2000, or 3000 dollar a month payment will look very very small. Isn't this what the government is going to do? It's all about the DEBT, or should I say paying off the debt.

  18. I have seen it stated that we will have inflation in the things we use and deflation in the things we own. That is the most apt description in my mind.

    To think real estate will rise is assuming wages will rise as will employment; I don't buy either, unless you work for government.

  19. Hyperinflation is unlikely, at least in the sense of a 'total loss of faith in the US dollar'. And so is a collapse of the financial markets.

    Talking about frogs, it all boils down to this:

    1. A country borrowing 1 dollar for every 2 dollars it spends, with no end in sight, is broke. Its economy, for lack of a better term, is a zombie-economy. Such a country is kept alive, because other countries think it is in their best interest.

    In the US zombie-economy, ever less people work, for ever less income.
    Ever less goods are produced and ever more imported.
    Ever more money is created, by the government, not the Fed, via treasury bonds. The Fed merely acts as a buyer of last resort, but it wouldn't have to do so, if the government was not spending so much in the first place.
    The new money is used by government subsidiaries to plug the holes left in the budgets of financially exhausted consumers: unemployment benefits, food stamps, public jobs...

    2. The dollar value (faith in) depends on a few foreign governments.
    Not on private investors, who have abandonned ship long ago.
    Not on government sponsored banks, a.k.a. TBTF, whose mission is to hold treasury bonds, in exchange for their survival.

    These foreign governments, such as Japan, China, Germany... don't wish to see a dollar collapse and hyperinflation settle in the US.

    For dictatorships, such as China or Saoudi Arabia, the survival of the dollar is closely linked to the survival of their own governments.
    For Japan or Germany, whose prosperity depend on the US consumer, the dollar must remain a major currency. If the dollar goes down, they go down with it.

    3. Foreign countries will support the US and its currency, in the same way that the EU is supporting the PIIGS and its currency, that is, to the breaking point.

    4. Worthless money creation will help pushing up commodities' prices, thus creating high inflation.

    Companies will have no choice but to pass on these price increases to the consumers, or see their profits melt into losses.
    US consumers with stagnant, or decreasing income, will become poorer and poorer.

    Yet, as long as their government will provide them with money, one way or another, US consumers will consume, thus making Chinese, Japanese and Germans happy and willing to pile on more worthless dollars.

    5. This game will go on until, for some reason, it will reach a major and yet unknown obstacle.

    At this point, an currency reform, such as the one branded yesterday by Robert Zoellig, will be implemented. New currencies will probably be introduced and debts will be erased, one way or another.

    Click on my name to visit my blog.

  20. Hyperinflation is unlikely, as all nations are engaged in competitive devaluation, including the commodity countries like South Africa and Australia.

    Unlike Weimar, the USD is the main currency for intl settlement today. And also, it's quite easy to buy dollar/silver today, GLD/SLV or a depository account, so a flash collapse in the dollar will mean Gold spiking to $5K/oz or $10K/oz. It hasn't happened yet. Instead, Gold is in its normal bullish pattern of testing the resistance at $1.4K/oz, having been able to stay at $1.1K to $1.2K support for quite some time.

  21. Right on.It is a controlled demolition.Ben is simply doing his job,placing the charges at the right time and place.The sooner he blows it, the better.Just watch the green paper derbies flying all over the world.

  22. Regarding the first comment by the Rogue Economist - WARNING, WARNING, WARNING. Don't anybody visit that website which he recommends. Gonzalo is a true man, intellegent and a bit crude at times with his wording, but this guy at the Burning Platform is a first class A-HOLE!!!

    I recently left some comments on an article at that website and was viciously attacked and called every dirty name in the book. If you don't agree with his extremist views, you are called every ditry word imaginable! Boycott that Jerk and his website.

  23. If the FED Reserve were to allow for hyperinflation how would they keep their power? Their banking cartel would be finished. I do not think they want that. I realize many commodities have risen dramatically but we did have oil around $120 before and it dropped to near $40.

    If the Congress takes control over the FED then they will print to cover their constituents and other projects, then I can see hyperinflation.

    Remember that inflation is an expansion of the money supply/credit. The result is usually a rise in prices. Nevertheless housing prices have not really ticked up. The author did mention that prices started to rise in the anticipation of QE2. Would that not signal speculation??

    Listen, I don't know I'm just trying to figure it all out as well.

  24. "Unlike Weimar, the USD is the main currency for intl settlement today. "

    Companies, people, and governments have been devesting their dollar interests for years, and it's speeding up.
    They're moving into Euro and Yuan mostly (yes, Chinese Yuan).
    It's a slow move, but a deliberate one and it seems to be speeding up.

    Now, with some foreign governments so wary of providing credit to the USA that the Fed has to turn on the money presses to buy up the government bonds they themselves issue (so nice to be able to generate income by conjuring it out of thin air...) things can only get worse for the US currency (and thus liquidity).
    The main foreign nations that will suffer from US economic collapse are China and Japan, at least directly.
    Europe will miss some US tourist groups on their "Europe in 3 days" tours, which might hurt some hotels and coach rental companies, but only indirectly will it hurt the EU on a larger scale, and that's from reduced export of luxury items to mainly Japan and from the collapse of EU investment banks with large dollar holdings they couldn't dump before things went beyond the breaking point.

  25. According to the book "Greenspan's Bubbles," the Boskin Commission:

    was not actually conducted to increase the accuracy of the CPI, but to decrease fedgov COLA costs by finding a way to reduce it. This intentionally fudged figure is then foolishly used by the Fed to "engineer" the economy.

    Garbage in - garbage out... Morons...

  26. You paint a picture of mild economic misery. But you miss what will really happen, and that is the likely disintegration of civil society. The hyper-inflation you predict is the result of a bankrucpt country, not just the machinations of a central bank.
    I know you probably don't like people to link to other articles, but there is one published today that paints a much grimmer picture and a likely outcome far worse than most can imagine. It's at Classical Values, a gay libertarian site.

  27. In short. What Gonzalo is saying...BErnanke is a "Master-Illusionist"

  28. @Hunter

    Read for comprehension. I support the deflationary case not a hyperinflationary one. Therefore, there is no contradiction in beleiving there will be a significant market crash in the future, exactly how long I don;t know of course.

    Anyhow, if you don't like my spin,read KD over on Market Ticker. What you have going on here more than hyperinflation is margin compression. From Karl:

    "Margins being compressed by outrageously-ramping input costs.

    Dean joins Kimberly-Clark and Kraft that have reported this problem in the last couple of weeks.

    This is going to get worse. Much worse.

    The market will eventually come off its heroin high from the "Bernanke PUT" crap and realize that it was not a PUT that was stuck under the market, it was sold and the shares were PUT to you - that is, you're now the bagholder!"


  29. Current functions of the Federal Reserve System include:

    To address the problem of banking panics.

    To serve as the central bank for the United States.

    To strike a balance between private interests of banks and the centralized responsibility of government.

    To supervise and regulate banking institutions.

    To protect the credit rights of consumers.

    To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of:
    a) maximum employment
    b) stable prices, including prevention of either inflation or deflation[31]
    c) moderate long-term interest rates.

    d) To maintain the stability of the financial system and contain systemic risk in financial markets.

    e) To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.

    f) To facilitate the exchange of payments among regions.

    g) To respond to local liquidity needs.

    h) To strengthen U.S. standing in the world economy.

    It is obvious that the Fed are not adhering to there "Core Values"

    The majority of US citizens believe the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of the United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.

  30. Jump....Just jump out of the domestic pond that is heating up with corruption, a rusting currency, and increasing desperate crowd control measures and jump into a country that is still rooted in an agrarian economy with some oil reserves....How about the coast of southern Brazil.
    Some of us when we hear the word, JUMP, we think of David Lee Roth singing it. Unfortunate for us that cultural ties are so strong that emigrating isn't attractive. And for a large segment of the population it's economically impossible.
    As the destruction of the currency proceeds into compound overdrive due to the unavoidable fact, that too much sovereign debt has been created. More debt needs to be created to hide the fact that the too-big-for-their-britches-bitches are insolvent with loans that can never be repaid by US citizens that have suffered the indignities of mortgage fraud entrapment, and wage reduction because of corporate globalism.
    Free credit by the FED to the too-big-bitches is being exported as investments in foreign markets that actually produce or have raw materials. While confidence is draining rapidly from the US currency, which has become IOU's due to chronic deficit budget spending and deficit trade balance. FED idiotic actions are directly related to a loss of confidence in the currency, and pardon me for stating the obvious, but I just had to.
    As most souls with more sensitivity than a rhino realize that the future is coming fast and there will be a lot of somnolent and sentient beings on the endangered species list.
    Each of us must engage those around us with the facts of life that have destroyed the American dream, learn to do with less and make what we need, and store any wealth in something besides US dollars - now.

  31. "...but what if the people won't spend..."

    Then the government will. They're doing it right now.

    - Look at graph that shows the $dollar's purchasing power translated in decade increments. Go back just 20 years.

    - Extrapolate that trend (that is still continuing to this day) out, and come to the logical conclusion.

    - For the benefit of clarity (and sanity) we really should not become married to stiff definitions of Deflation or Hyperinflation. When one becomes married to a definition, they tend to ride it down at terminal velocity, all the while supplying data that 'supports' their position.

    - We certainly can have falling asset prices, while prices for necessities rise. Houses, cars, commercial real estate, consumer electronics, power tools and (new) automobiles are not necessities.

    If anyone wants a really good primer on this topic, check out Daniel Amerman's piece last week. Everybody here knows where to find it -

  32. The bottom 60% to 80% will indeed be hit hard. The hardest hit will be those on fixed incomes tied to CPI.

    Huge numbers of social security recipients fall into this category. Prices will rise, but their incomes won't. There will be impoverishment on a massive scale.

    The blogs targeting those who intend to stay in the US and tough it out either by choice or necessity focus on protecting financial assets and preparing for high prices. There is very little talk about knowing your neighbors or helping those who may be in need.

    Gonzalo, as you prepare for your webcast I hope you will give some thought to including a reminder that we can also help others.

  33. Americans aren't taught economics and business principles in school and if they were you can bet it wouldn’t be Austrian Economics. No, they're taught to be self-confident and tolerant of multi-cultural agendas and global warming. So, as the Federal Reserve Board executes on another round of quantitative easing (i.e. printing more money), no one really asks: Why? Even if explained in detail, your neighbor doesn't know any better, and taken as a group, are no more intelligent than children on this subject.
    Why is it that the Fed is allowed to print money (out of thin air) and compete with you to buy anything it wants, including state and local debt, real estate - any asset - including stocks. Why is it that the FED continues to subvert the will of the American people by stepping in and buying things that any prudent individual wouldn’t touch with their own savings? And don’t blame your local low level banker for also not wanting to cut you a deal on refinancing that over burdened house, if he too smells a bad debt that no one really wants to buy. If previous quantitative easing hasn’t spurred domestic spending so far, why does the Fed STILL believe that doing more of the same will suddenly produce positive results?
    The answer: It’s not domestic spending that the Fed really hopes to stimulate by printing more money – it’s domestic DEBT. Look at the people who maneuver at that level of operations, the people calling the shots - they certainly have adequate knowledge of history (Chile, Argentina, Germany, Zimbabwe) to know in advance what will be the consequence of their actions - a demonstrated inflationary spiral. In the short run, it goes without saying that before the FED publically decides to bail out (AIG for example) or buy up (GM for example) you can bet your entire savings that the insiders have tipped off some of their friends, relatives and colleagues (at JP Morgan-Chase and Goldman-Sachs). Knowing in advance what the FED will do is how an elite 1% got to own 70% of our nation's wealth.
    But, the long run (the End Game) is to create such a huge debt, that it cannot be paid down even if attempted to be hyper-inflated away. The true owner’s of all that debt (the Central Bankers – private, very quiet families - who control the FED) aren’t going to settle for promises of taxes– they’ll want real assets – water, raw material, and natural resources. Turning over what little gold is remaining in Fort Knox will no doubt be considered a suitable down payment.
    As the US goes further into debt, the FED’s purchase of paper assets will be used to cut off the ability for Americans to continue to effectively manage their future destiny – no further “credit” will be available because there will be no buyer. Gonzalo, you may not presently agree on such conspiracy tactics, but I submit they’re already writing the script – first via the FED “our talented economists tried their best” and then via the media “the American public didn’t ‘believe’ in themselves”. About Ten years from now, anyone who connects the dots will see how the real picture (that of the New World Order) emerged; how those whose orchestrated agenda, was able to manage this planned / engineered collapse by continuing to subvert our Constitutional checks and balances with rhetoric spewed by fascist political puppets.

  34. Say what you will about Glen Beck, but he was advising his listeners to buy gold 5 years ago. And the left laughed and laughed. Who are the tools now?

  35. Don't say fuck so much. It demeans the worthiness of your message.


  36. Gonzalo is 100% correct. The Treasury, Fed and government stats support this post along with the price of gold, silver and rising costs for almost everything especially items of necessity. One thing Gonzalo didn't hit hard enough is how in the world is any American in the four lower income groups currently able to earn the needed income to survive the corporate/wallstreet/government/bankster juggernaut to globalize and socialize this country and remove its borders. It’s already happening.

  37. Yes, the pot is boiling, most don't understand yet, and few of those who do understand have anywhere to jump.

    We get "geniuses" like Ben appointed to "lead" the Fed. We have CPI measurements designed to understate inflation, and most major corporations are packaging their products to maximise the CPI understatement. We have unemployment figures designed to understate unemployment. We have government incentives to corporations to offshore jobs. We have easy approval of H1B visas for fields teaming with qualified natives. All of this (and much, much more) screws the worker/retiree and/or helps corporate profits.

    But there is no conspiracy? The corporations bought the government and we now have government by and for the large corporations, with the TBTF banks in the drivers seat.

    BTW i agree that Ben is too stupid to be part of a conspiracy. He was probably chosen due to his idiotic writing on the previous depression.

  38. Agree with everything, except with the fact that ALL of the FED officials are dumb. Come on, they HAVE to know what they are doing, they just cannot be that stupid. They are doing this for a very shady and macabre reason(s). In my opinion, this reason is to finance the US debt that now nobody wants to buy and to bailout the same banks that OWN the FED.

    It's just unconceivable this body of PhD guys are doing their best effort to help the American people in an innocent and honest way. No, they are serving something(somebody) else, and they are doing it in a very conscious way. DONT BE NAIVE

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  41. GL I agree with Isabelle, you are being incredibly NAIVE, Mr. Bernanke is not a stupid person, he is an evil person, who knows exactly what he is doing, & why. I can't believe an intelligent person like yourself, is falling for his bumbling fool act. He is a con man & a shill, who is DELIBERATELY, helping himself & all of his banker friends, to as much of our money as they can get. Chuck L.

  42. Many years ago, Fed Chairman Arthur Burns said, and here I paraphrase, "A Fed Chairman is under no obligation to tell the truth." Presumably, Mr. Burns meant a Fed Chairman isn't under any obligation to tell the truth to his interlocutors in Congress.

    In any case, Bernanke is knowingly lying. He is trying to save the Money Center banks, and that is all. In the meantime, you might have added that QE 2 will bring on margin compression. As a result of higher commodity prices that can not be passed on to the consumer, company profits will be squeezed forcing more layoffs. So, yes, it is all going to end in a vale of tears, but, I think, with respect to your hyper-inflation thesis, that you should pay special and careful attention to the latest utterances of World Bank head Robert Zoellick, because his comments signify that a great sea change is upon us.

    Mr. Zoellick, who is a very connected mover and shaker of the CFR sort, is not advocating a return to a gold standard, but he is advocating a role for gold. Actually Mr. Zoellick is simply acknowledging what is already apparent, and trying to get ahead of the curve as best as he can.

    I maintain that the "new role" for gold will be that it is allowed to float against all currencies. You may think it does already, but that is not entirely the case. Long story less long, the revaluing of gold to vastly higher prices-I hasten to add that this will occur organically not in a laborious Bretton Woods manner-is the way out of the crushing debt loads found all across western economies. It also solves the dollar crisis which is the result of assigning the three functions of money which are, a unit of account, a medium of exchange, and a store of value, to one currency.

    The U.S. stands in the way of "freegold" as it would finalize the end of the dollar's reserve currency status. However, the U.S. influence is waning and with it their ability to stand in the way of a new monetary world order.

  43. I agree with most of the article. I think that consumers are very well aware that the temperature is continually going up, but they have no place to jump, as others have already noted.

    And I think Bernanke is flat out lying. Not clueless, lying.

  44. Dear anonymous 9:22:

    Don't listen to unbelievers that pretend to quote the bible, or teach theology. You cannot return from a place you have not been.

  45. sugest you all watch the video "Life and Debt" (google video has it) and make the comparison, then read up on current events in Jamaica, and make the comparison ...

  46. I'm not sure which planet GS lives on. The welfare of today - which many have NO experience in/ is a lot different since 1996! Depending on the state (IF you have children) you are limited for life/ in CT it is 21 months/ children or no children you're out of luck.

    A single unemployed male gets a whooping $21 bucks a week in food stamps. The 'elite' just love having the poor targeted. Meantime Legislators/ State - Defense etc get YEARLY cost of living in their salaries and pensions. They get GOLD CARD medical benefits and WE pay 72% of their premium costs (free dental - prescriptions - vision). VACATIONS ? They are called 'fact finding' visiting everywhere from China to a hunger seminar (ha) in Bermuda! WE have NO safety net. PLUS - no e-coli food in Washington/ or the kids private schools. They EAT only ORGANIC (KOBE beef $160 per lb)fruit/ veg imported from Japan.

    Think of Hurricane Andrew - Katrina etc/ Every person should sit down and think -What would I (family) do if we could not buy food etc for the next 6 months? Remember the LINES in Florida for WATER/ a sandwich!

    We are in a race to the bottom in a LEVELING of global wages (Obama said in India this week - 'high unemployment is our new normal'. Why should he worry or any politician - they're set for life with life time medical and YEARLY raises! Rent is going UP (don't know where GS lives) heating oil - ELECTRIC - (taxes are included in everything from phone to water to lights etc) MEDICINE - thanks to 2009 meeting in White House (lobbyists - CEOs) where the BILL was written/ NO cheaper medicine from Canada - it is going up WEEKLY/ as are premiums.

    See Sausage Making- Culture of Corruption to SEE what the HEALTH BILL really contained and YOU weren't told - and NO (maybe a couple) politician read the 2,700 page bill (I did). They have a great part (secret) in the STIMULUS BILL - too draconian/ so they had to do this in the wee hrs.

    NEW hires (auto) are being paid $10-12 bucks an hr no benefits.

    Harley TA DAH - 107 yrs old is opening (thank you Pres. Obama) a NEW plant in INDIA ---they laid off hundreds here/ wanted people ( machinists) to work for a pittance - cut all benefits (profits third quarter $88.8 mill - not enough I guess.

    Whirlpool left for Mexico - Maytag for China - last light company closed shop/ now its mercury bulbs (mandated 2012) from China ( unless your stock up.Hersey Town USA - now in Mexico/ Meat packing industry - workers are all KURDS/ Mexicans etc.

    I could go on but you get my drift. Also see AXIS OF LOGIC - 'Who's Watching the Watchers?' plus others below this (photo essays of what's happened to Once Upon America!

  47. Edwardo hit the nail on the head.

  48. It was Reformation-Enlightenment 'values' that launched Europe on its scientific and economic leap, the corporation was but one of its innovations. buy facebook fans


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