Food Prices up 5.9% Since Debt Ceiling Raised

In a informal survey I performed of Sams and Wal Mart food prices this week, 8-7-11 to 8-13-11, increased 5.9%. It did not take retailers long to price in the inflation that adding $2.4 trillion to the debt will create. Was this directly related to the $2.4 trillion increase in the debt ceiling? No, but inflation is becoming a bigger part of the consumers budget with or without the official CPI number of 3.4%.

When everyone is watching the monetary base sometimes you have to produce billions of dollars the old fashion way, print it

A 5.9% inflation rate over one year is a cool $885 billion out of consumers pocket and into the Federal Reserve, Wall Street, Washington money pit. The annual rate of a monthly 5.9% inflation rate is 70.8%.

Officially the producer price index is up 13.7% annually from last September and our consumer price index is up 4.4% at a annual rate since last September. Officially inflation is not a problem at 3.4% but even at that understated rate it is a problem for our economy with interest rates held down to artificially low rates.

We know China has recorded food price increases of 14.6% recently and a overall inflation rate of 6.5%. Is the Chinese government just more accurate and honest in their data collection and analyzing efforts than their US counterparts?

In the last month the Money Zero Maturity, MZM represents all money in M2 less the time deposits, plus all money market funds, has increased at a annual rate of 15.7%. M2 has increased at a annual rate of 20.5% from July to August. M1 has increased the last month a astonishing 92.1% annual rate.

Ben Bernanke creating inflation the old fashion way, printing dollars

Meanwhile the monetary base, the one key indicator the press and bloggers look at for monetary expansion, has declined 9.2% annual rate this last month.

What does this mean?

If you were the Federal Reserve and there was plenty of liquidity, any more would be inflationary, and you wanted to “inject more liquidity” aka pay the guys off on Wall Street, how would you do it?

How do drug dealers hide transactions?

Cash, cash, and lots of cash. 101.2 billion in the last month. One sixth of the QE II stimulus in just the last month. Hmmmmm.

There is simply no way the United States will escape the inflation that we have exported to the rest of the world in the coming months. If the Federal Reserve fails to acknowledged the inflation officially our dollar will continue to plunge, we will continue to suffer a lack of savings due to the historic low interest rates, even possibly negative interest rates, and economic conditions for Americas will worsen.

One of the lessons that history has taught us is that when the United States was in a severe downturn the Federal Reserve Chairman’s during the Reagan Administration and Obama Administration reacted completely different in the face of adversity.

Former Federal Reserve Chairman (1979-87) Paul Volcker raised the Federal Funds rate to 19.10% in the early 1980s

In the early 80s when the inflation rate was 14.6% Federal Reserve Chairman Paul Volcker raised the Federal funds rate to 19.10%. Most people would think Reagan got a bum deal from the Chairman. Raising the rate 4.5% above the inflation rate would surly damage the economy, right?

No. Volcker was helping Reagan by making the cost of money so expensive that all the mis-allocated previous investments were liquidated and purged from the economy. Also by having a 4.5% spread, or real interest rate, Volcker increased the profitability of savings in America. This attracted investment from domestic savers as well as investors from around the globe.

Because money was so expensive only the best and most productive projects had any hope of being financed. As savings increased so did investment. Reagan, and the economy, went on to some good years and Reagan left office a economic success and with a 5.4% unemployment rate.

Contrast this with Bernanke’s approach to the economic slump. Bernanke cheapen money by printing it for QE I and QE II, increasing the monetary base to 18% of the GDP, and lowering the Federal Funds rate to essentially zero. The completely opposite approach of Volcker. Bernanke would argue the inflation rate was negative for 2009, and that is true, but this is 2011 and the “official” inflation rate is 3.4% and the Shadow Statistics guru claims the real inflation rate is 10.4% using 1980 statistical methods.

Any banker loaning out money at 4.5% knows that there is no margin for error, only the most credit worthy costumers will get a loan, and there is a very good possibility the loan will lose money in the long run due to inflation.

Obama does not have the education or knowledge to understand the person that will cost him the 2012 election is not Bachmann but Federal Reserve Chairman Ben Bernanke

Cheap money also means that it is easier to continue bad economic investments. A good example would be the absolute horrible waste of resources being spent on our federal government and their appetite for cheap money. If money was more expensive our federal government could not afford to waste billions of dollars on frivolous pursuits. As the portion of the federal budget devoted to interest payments increasing from 9% of the budget to 12%, 15% or 20%, federal agencies would develop a new found respect for money and not waste it. The alternative would be to lay off federal workers and cut budgets, every bureaucrats worst nightmare. Expensive money would discipline the wasteful federal bureaucracy.

Finally with a spread rate of only 1.1% versus the Volcker spread of 4.5% + there is no incentive to invest other than to protect money in the short run, and this is exactly how the markets are reacting. All the worlds capital is running from one short term T-Bill to the next 10-year bond, to gold, francs, and anything to protect investments. None of this solves the long term problem of savings. Raising the interest rate to allow bankers to loan funds at 6.4% or even 7.0% would increased the amount of savings and eventually investment into productive projects in the economy.

Bernanke is following the Keynesian playbook but he is destroying the economy. If he wanted to improve economic performance in the long run he would raise the FF rate to 3% overnight and continue to raise the rate until the government stopped wasting money and the silly malinvestments disappeared.

Obama blames Bush for his economic problems but once again his poor education he received at Harvard and Columbia is coming back to haunt him. He simply has no clue how the economy works other than the Keynesian one trick remedy of printing more money. The guy who has assured Obama’s defeat in 2012 is none other than Ben Bernanke.