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SLOWER GROWTH WILL NOT CONTAIN INFLATION
FSO ^ | July 21, 2006 | Peter Schiff

Posted on 07/21/2006 9:14:46 AM PDT by hubbubhubbub

When Ben Bernanke told Congress that moderating economic growth will likely contain inflationary pressures, Wall Street responded with its biggest one-day rally in nearly two years. Unfortunately for the Wall Street party boys, the Fed Chairman is likely wrong on both counts. In the first place the U.S. economy will not merely slow, but tumble, in the coming months/years, and rather than quelling inflation’s fire, the inevitable recession will actually stoke its flames.

Bernanke’s faulty logic assumes that inflation is somehow a by-product of economic growth. However, real economic growth emanates from increased productivity, which tends to hold prices down. Bernanke also dramatically underestimates the strength of the economic headwinds that will quash consumption and crush GDP growth. The rising costs of energy, adjustable rate mortgage payments, rents, insurance, food, and local taxes, combined with the reverse wealth effects associated with collapsing real estate prices will combine to produce a recession much worse than those seen in the last 30 years.

The argument that weaker growth will somehow cause consumer prices to rise more slowly focuses on the demand side of the price equation and ignores the supply side. Prices are a function of both supply and demand, and while slower growth, or an outright recessions, would certainly reduce demand, it would also work to reduce supply. The result could well be equilibrium prices that are higher during a recession than during an expansion.

As the U.S. economy contracts, the Federal budget deficit will grow and the perceived appeal of U.S. financial assets will be lost. As a result, foreign capital will flee at precisely the time it is needed the most. This will put additional upward pressure on interest rates, further increasing mortgage rates, suppressing real estate prices and consumer spending. More importantly, it will also cause the dollar to fall, making imports more expensive and pushing up raw material prices, thereby increasing production costs for domestic manufactures as well. As the dollar loses value relative to other currencies, foreigners will be able to outbid Americans for scarce consumer goods. As a result fewer products will be imported into the U.S. and more of America’s domestic production will be exported. Therefore, despite the fact that financially strapped Americans will be consuming much less, they will be paying much higher prices for the privilege of doing so.

Interestingly, in response to a direct question from Congressman Ron Paul, Bernanke actually admitted that growth was unrelated to inflation. Unfortunately, the Congressman missed the opportunity to press Bernanke to explain the inconsistency between that admission and the implication in his prepared remarks that the Fed might pause in its rate hikes based solely on the expectation that a slowing economy would contain inflation.

Another interesting admission was Bernanke's forecasts that oil prices will stay around $75 to $80 dollars per barrel for the next several years. This is tantamount to an admission that the Fed’s exclusion of energy prices from inflation measurements over the past several years was a mistake. Remember, the Fed's long held justification for favoring "core" inflation over "headline" was the belief that high oil prices were a temporary fluke.

Bernanke went on to say that he continues to favor the “core” because the futures markets were predicting stable oil prices. This makes no sense at all. Futures markets reflect forecasts, not facts, and have had a very poor track record predicting oil prices. However, if the futures markets are correct, then why not use the actual CPI, which will reflect the stable oil prices the futures markets are forecasting. If on the other hand the futures markets are wrong, and energy prices continue to rise, what is the justification for excluding them given the Fed’s new position that high oil prices are here to stay?

The bottom line is that the Fed’s perceived battle against inflation has already been lost, and the biggest casualty will be the American standard of living. Those who are hoping for an economic slowdown to contain inflation are in for a rude awakening. They will get a whole lot more than they bargained for when it comes to the former, and no relief whatsoever with respect to the latter.


TOPICS: Business/Economy
KEYWORDS: bahog; economy; goldbuggery; goldbugs; inflation

1 posted on 07/21/2006 9:14:48 AM PDT by hubbubhubbub
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To: hubbubhubbub

Oh know whatever shall I do? I will be eating cat food in a few months :-(


2 posted on 07/21/2006 9:17:22 AM PDT by Smogger (It's the WOT Stupid)
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To: hubbubhubbub
Why do most economic cystal ball gazers remind us of the local weatherman?
3 posted on 07/21/2006 9:18:20 AM PDT by bybybill (`IF THE RATS WIN, WE LOSE)
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To: hubbubhubbub
Aside from some curious assumptions he makes in this article, the author misses one very important point. High oil prices actually have a deflationary affect on many sectors of the U.S. economy, since demand for many products and services declines when consumers pay more for energy.

Anyone who doubts that should simply go back over the last few years and understand that the post-Katrina fuel price hikes represented the best time to buy a new car -- because producers were slashing their prices to levels that would have been unheard of just a few months earlier.

4 posted on 07/21/2006 9:24:32 AM PDT by Alberta's Child (Can money pay for all the days I lived awake but half asleep?)
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To: hubbubhubbub
The increase in oil price is caused by insufficient supply and increased demand from other countries, especially China. That price increase is not inflation. Inflation is a devaluation of the currency.

There is nothing the Fed can to improve the price situation of oil and the Fed's confusion between a supply shock and currency devaluation is what caused most of the economic problems in the mid to late 70s and early 80s. Please, Chairman Bernanke, do not repeat the mistakes from 30 years ago.

5 posted on 07/21/2006 9:26:47 AM PDT by KarlInOhio (Loose lips sink ships - and the New York Times really doesn't have a problem with sinking ships.)
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To: hubbubhubbub
As a result fewer products will be imported into the U.S. and more of America’s domestic production will be exported.

Baloney. It doesn't work both ways. If one of the primary factors in the loss of U.S. manufacturing jobs over the last 30 years has been the strength of the U.S. dollar (and it has been), then a declining dollar would tend to attract production back to the U.S.

6 posted on 07/21/2006 9:28:32 AM PDT by Alberta's Child (Can money pay for all the days I lived awake but half asleep?)
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To: Alberta's Child

Your point is totally frivolous. Katrina DID NOT lower the demand for energy! To believe your assertion on automobiles, one would have to believe that Katrina was good for GM and Ford. If so, we need more Katrinas.
Where you really miss the point is that new automobiles are discretionary expenditures, energy is not.


7 posted on 07/21/2006 9:37:53 AM PDT by hubbubhubbub
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To: KarlInOhio

"The increase in oil price is caused by insufficient supply and increased demand from other countries, especially China. That price increase is not inflation. Inflation is a devaluation of the currency."

TRUE. But that squirel brain Bernanke thinks it is. Or at least he wants us to believe it is when in fact he and his banker buddies are the cause of inflation.


8 posted on 07/21/2006 9:40:05 AM PDT by hubbubhubbub
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To: All

This article comes close to being total gibberish. The author obviously has no understanding of monetary economics. What a waste of bandwidth!


9 posted on 07/21/2006 9:42:54 AM PDT by Hawthorn
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To: hubbubhubbub
Katrina DID NOT lower the demand for energy!

No, it didn't. But it DID lower demand for a whole bunch of other products and services.

To believe your assertion on automobiles, one would have to believe that Katrina was good for GM and Ford.

That does not logically follow at all, and was absolutely not implied in my post. Slashing prices could not possibly have been good for Ford, GM, or anyone else.

Where you really miss the point is that new automobiles are discretionary expenditures, energy is not.

I didn't miss that point at all. In fact, that WAS my point . . . that price inflation in energy actually has a deflationary influence on the prices for many other products or services. And despite what we might think, the simple truth is that most of our purchases involve products or services that are "discretionary" to some degree.

10 posted on 07/21/2006 9:43:40 AM PDT by Alberta's Child (Can money pay for all the days I lived awake but half asleep?)
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To: Alberta's Child

"In fact, that WAS my point . . . that price inflation in energy actually has a deflationary influence on the prices for many other products or services."

Bear with me, I am really trying to follow your logic. Tell me what products and services go down in price when energy prices rise.


11 posted on 07/21/2006 9:51:04 AM PDT by hubbubhubbub
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To: hubbubhubbub
About the only think I agree with in this article is if economic growth slows it might tumble, other than that he sounds like Chicken Little. Energy prices have doubled and the economy has been chugging along, I don't know when enough is enough, but I think the fed raising rates is what is going to slow things down and I think they have probably already raised too far. I also think until wage inflation begins the "inflationary cycle" of run away prices can't get rolling because no has more money than they had. The only really high wage report I can recall was May '06. I believe the Fed with Greenspan and now Brenacke (?sp) have been fighting a mostly nonexistent inflation monster and I think they are going to fight it right into another recession. I of course also believe the last 2 recessions Bush in '92 and Clinton in '00 were if not caused, were greatly helped along by Mr. Greenspan's inflation paranoia. That's my opinion and it's worth what it cost you.
12 posted on 07/21/2006 9:53:42 AM PDT by thinkthenpost
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To: hubbubhubbub
I already pointed out the severe price deflation in automobiles.

If you shopped for electronics after Katrina, you would have noticed a similar price-slashing trend (though to a lesser extent).

Check out the price of a book at Barnes & Noble these days. Best-sellers have a 20% discount right off the top (which is odd, because the term "best-seller" implies that the demand is for these books is HIGH).

Internet shopping is even more curious, since many retailers offer free shipping on these purchases even though shipping costs ought to be substantially higher when fuel costs are higher.

13 posted on 07/21/2006 10:00:41 AM PDT by Alberta's Child (Can money pay for all the days I lived awake but half asleep?)
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To: thinkthenpost

An important thing to remember here is that higher energy prices have largely been absorbed by producers rather than passed along to their customers. I suspect the reason for this is that most producers have had the ability to make up for these higher energy prices elsewhere in their production and distribution process.


14 posted on 07/21/2006 10:03:10 AM PDT by Alberta's Child (Can money pay for all the days I lived awake but half asleep?)
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To: Alberta's Child

"I already pointed out the severe price deflation in automobiles."

You wrote it. You didn't point it out. You provided no proof just an opinion. You site everyday sales on discretionary items as evidence of deflation. Please site some examples of deflation on necessities (food, energy, health care, taxes, etc.) Otherwise fly away, don't waste our time.


15 posted on 07/21/2006 10:52:17 AM PDT by hubbubhubbub
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To: Alberta's Child

"If one of the primary factors in the loss of U.S. manufacturing jobs over the last 30 years has been the strength of the U.S. dollar (and it has been), then a declining dollar would tend to attract production back to the U.S."

No, it's been our astronomical labor costs, taxes and regulations. No amount of $US devaluation will bring back manufaturing.


16 posted on 07/25/2006 7:35:22 AM PDT by hubbubhubbub
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To: Hawthorn

You, Hawthorn are a waste of bandwidth


17 posted on 07/25/2006 7:36:46 AM PDT by hubbubhubbub
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To: thinkthenpost

"About the only think I agree with in this article is if economic growth slows it might tumble, other than that he sounds like Chicken Little."

LOL. A common tactic of leftists is to call someone they don't agree with a name (e.g. chicken little) without refuting any of their points nor making any substantive points yourself. Are you from DU?


18 posted on 07/25/2006 7:39:54 AM PDT by hubbubhubbub
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To: hubbubhubbub
Well, Mr. hubbubhubbub had you read past the Chicken Little you would have read my thoughts about about energy prices and the Fed's tactics.
I even stated that they were my opinions, it was only a six line post which basically stated that the Fed was IMO largely responsible for the last 2 recessions and may be herding us to the next. The author presented what he thinks will cause a recession, I stated what I think might lead the economy to one, I think my points were substantive albeit my opinion only, as for refuting his everything he wrote about has been present in varying degrees for the last decade, with the exception of the very high energy prices. He does not present energy prices as the trigger to the downturn but one of several. I merely think he's overstating his case and state if things go down what might cause it. Please explain to me how this is a straw-man's argument, how am I trolling? At least I didn't STOP with the sentence you quoted.
19 posted on 07/25/2006 9:12:06 AM PDT by thinkthenpost
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To: hubbubhubbub
Well, Mr. hubbubhubbub had you read past the Chicken Little you would have read my thoughts about about energy prices and the Fed's tactics.
I even stated that they were my opinions, it was only a six line post which basically stated that the Fed was IMO largely responsible for the last 2 recessions and may be herding us to the next. The author presented what he thinks will cause a recession, I stated what I think might lead the economy to one, I think my points were substantive albeit my opinion only, as for refuting his everything he wrote about has been present in varying degrees for the last decade, with the exception of the very high energy prices. He does not present energy prices as the trigger to the downturn but one of several. I merely think he's overstating his case and state if things go down what might cause it. Please explain to me how this is a straw-man's argument, how am I trolling? At least I didn't STOP with the sentence you quoted.
20 posted on 07/25/2006 9:12:08 AM PDT by thinkthenpost
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To: thinkthenpost
Hmmm, don't know why the double post, Sorry.
21 posted on 07/25/2006 9:12:58 AM PDT by thinkthenpost
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To: hubbubhubbub

hubbubhubbub wrote:

> You, Hawthorn are a waste of bandwidth <

And you sir obviously have no significant understanding of the issues involved -- as witnessed by your childish resort to personal attack.


22 posted on 07/25/2006 11:14:16 AM PDT by Hawthorn
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To: Hawthorn

LOL, I was just mimicking your empty-headed analysis.


23 posted on 07/26/2006 6:48:19 PM PDT by hubbubhubbub
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