Inflation Is Already Here (You Just May Not Be Looking In The Right Place)

Today, we have two camps: those who believe inflation is never coming, and those who believe that inflation is coming soon but hasn't arrived yet.

They may both be wrong.

Both camps see inflation as the same thing, i.e. an increase in general prices. And actually, they say this for good reason because often throughout history an excess of money and credit has produced visible general price increases.

But I invite you to verify two hypotheses:

First: "Monetary inflating doesn't always translate exclusively into increased general prices."

Second: "We may already have general price inflation that is not obvious to the uninformed observer."

Here's my argument.

Observations supporting my hypotheses

Observation 1. During the 1920s before the 1929 crash, you would have thought that general prices would have been rising. We definitely saw generous credit and money causing bubbles like the Miami and New York real estate booms and the stock market craziness evidenced on those spiky charts. But in fact, commodity prices were not rising. (I have excerpted below two articles by economist Edward C. Harwood in 1928 and 1929 describing the phenomenon and his explanation for it.)

Observation 2. Today, monetary inflating appears to be doing exactly what it did in 1929, i.e. blowing huge asset bubbles while introducing only just enough credit into the general economy to maintain the CPI level as world commodity prices are falling.

Facts

The bubbles: Today, in our second round of bubbles since 2000, we can see record national deficits and public debt, returning private debt, exceptionally high corporate profits, an agricultural land price explosion, a bond boom (now ending), a real estate revival (now on hold?), and the various stock market upticks (soon to reverse?).

Commodity prices: Mining shares are way down in the dumps. Also, see this chart of the historical five-year prices for commodities in US dollars 2007-2013. The chart shows that commodity prices are falling, even in terms of US dollars that themselves are also falling in value relative to some other currencies.

The general price level: The crucial but often missed detail is that general price inflation is a relative thing. It's the often-heard difference between nominal prices and real prices, only this time instead of having an increasing nominal price vs. a stable real price, we have a "stable" nominal price vs. an increasingly "disinflated" (i.e. returning to reality) price. Does this make sense to you?

Or if you're a mathematician, try this:

Let's say that n = nominal price, r = real price, i = inflated portion of n. Therefore:

n = r + i

With our CPI index as it stands, each year we start with a new r and we end up with a new n after the addition of a new i. Every year it's the same calculation, and therefore it seems to be telling us that our real price r is evolving over time as each year's i is added. In other words, last year's n is this year's r. Period.

But this is an oversimplification. There are two problems with this formula. (1) Every year, r can and does vary for market supply-and-demand reasons having nothing to do with i. This means that part of n is actually a variation of r. (2) Also, every year we get a variable amount of i, which can be plus or minus. This amount equals the rate of CPI inflation. But to make sense in an ongoing world and to preserve the notion of r, the i from this year should be added to the i from last year.

So if we want to be accurate, the formula should read:

n_x = [r₁ + r₂ … + r_x] + [i₁ + i₂ … + i_x]

where x = current year, and 1, 2, et al. = starting years of calculations.

This means that during deflationary times, n can remain constant over a period of time even while r is falling, as long as the new i is sufficiently positive.

These facts, observations, and analysis would tend to support Harwood's theory that one can have monetary inflating without general price increases. This may be due simply to the possibilities (1) that in post-peak deflationary environments, markets sometimes divert excess monetary credit to bubbles rather than feeding them 100 percent into capital expansion; and (2) that any excess credit that leaks into the general economy may only be sufficient to hold general US prices steady as corporations reduce capital expansion, increase their profits, and take advantage of declining world commodity prices (and perhaps add a little speculating fun to their business plan since, after all, it's less risky).

Likewise, if you've followed me so far, it would make sense that under different conditions, i.e. without the explosive monetary infusion of credit we have today in the US, general prices should be falling along with the prices of commodities (which could be a good thing for consumers, I might add, since it might not be a violent event). I hypothesize that this would be the case but for the fact that, with the help of our worldwide fiat monetary system, the Fed has been able to:

• keep the country living under the illusion that prices are stable;


• prevent us all, especially the poor, from taking advantage of reduced prices;


• artificially stimulate the bond, stock, and real estate markets and the taking of risk;


• increase profits of corporations, bankers, house- and land-flippers, and Wall Street;


• keep employment and wages on hold;


• maintain the national deficit and re-inflate some private debt; and


• steal billions of savings from the wiser among us without most of us even feeling the pain.

Inflation? Now you see it, now you don't!

Debt? Now you see it, now you don't!

Crisis? Now you see it, now you don't!

Your savings account? Now you see it, now you don't!

A marvelous trick, as long as it works. I say, "Get out'a Dodge and hold onto your gold."

_________

Notes

Passage from "Inflation is Here: Reasons for This Conclusion", published in The New York Times subsidiary weekly, The Annalist, January 20, 1928:

"One of the most important of business indices is the commodity price level. It is common opinion that prices rise during a period of inflation; and that if commodity prices are not rising there is no inflation. This theory is not without its foundation, but one very important point is overlooked in its application. All things are relative, and it is especially important to keep this fact in mind when considering commodity prices. Since the long-term trend of world commodity prices is downward, stabilization of prices in any one country would be, in effect, [equivalent to] rising prices. Or if prices in one country declined less slowly than world prices, the commodity price level in that country is rising, relatively speaking…. Prices haven't risen in dollars, but they have in relation to the long-term trend of world prices."

Passage from "Current Inflation: Why Commodity Prices Remain Relatively Stable", unpublished article, March 1929:

"Now it is realized that the first question of the skeptic will be, 'If there is inflation, why is it not reflected in the course of commodity prices?' This introduces one of the major fallacies concerning the phenomenon. Apparently, because inflation has usually had a marked effect on commodity prices, the universally accepted test for inflation has become the course of these prices. But this is an assumption of the same order as that made by the man who met the train on a grade crossing. Since he had heard no warning whistle, he had assumed that no train was near. He overlooked that fact that, while the whistle never blows unless the train is there, it does not follow that the train is not there when the engineer forgets to blow the whistle. In a similar manner, inflation may or may not affect commodity prices depending on whether or not the individuals who control excess purchasing power elect to speculate in commodities or confine their attention to other fields.

"For example, much of the purchasing power created by the banks which has been used in the acquirement of securities has remained on duty in the stock market. It has been and is continually passing from hand to hand and, except for such portions as are withdrawn by holders to spend for goods, has no effect on commodity prices....

"But there are two factors not previously mentioned which enter into the status of commodity prices. It must be remembered that these prices are relative as well as absolute. That is to say, in considering them, their relation to world commodity prices should not be overlooked. Now it is quite possible that world prices have been declining while those in this country have remained relatively stable. If such has been the case, prices here have been, in effect, rising. The writer believes this to be the case, but the instability, until recently, of many European currencies, has so befogged the issue that conclusive data is very difficult to obtain.

"The other factor, and it is a most unusual one, is that there has been a deflationary force in operation coincident with growing inflation. This force has been the retirement of the public debt, amounting to about six billion in the past six years [early 1929]. That public debt retirement has deflationary tendencies is another point about which there is some disagreement. The detailed demonstration of this effect could be easily made. However, for the time being, it will suffice to point out that the process of incurring this debt was highly inflationary and that retirement, which is the opposite act, must therefore be deflationary in its effect."

Source: Inflation Is Already Here (You Just May Not Be Looking In The Right Place)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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