The following excerpt appeared in the April18, 2011 issue of the Wellington Letter, an investment and economic analysis newsletter targeted at serious investors, as well as individuals striving to understand the implications of financial, economic, social and political trends around the world. This excerpt has been republished for your reading pleasure with permission from Bert Dohmen, President of the economic analysis and investment firm Dohmen Capital Research, and author of the new book Financial Apocalypse: Predicting the Unpredictable.
Global Underreported Inflation Disguises Weakness
China’s official inflation rate (CPI) just came in at 5.4%, higher “than expected by analysts.” Well, it’s not less than we expected. In fact, this is a fairy tale. Actual inflation is mid-teens. Official food inflation year-over-year is 11%.
All the “hot” international markets have an accelerating inflation problem. Russia is running at 9.5%, India at 9%, Brazil 6.3%. What always happens in such an environment is that the central bank hikes interest rates, but always too little, too late. The added cost of money raises the cost of business and is passed on as price increases, causing even higher inflation. And that’s how these countries will see double-digit inflation this year. Write that down as our forecast.
When that happens, they will become more forceful in tightening money, availability of credit, etc. And that eventually produces a recession and a financial crisis.
There is another aspect to this under-reporting of inflation: the GDP growth numbers of these countries are fictitious. Yet, money managers apparently believe them and are sending billions of dollars overseas into stocks in those countries. Ex: let’s assume a country’s nominal GDP growth is 15%. Official inflation is 5%, which is deducted from the 15% to give headline GDP growth of 10%. But what if actual inflation is 10% instead of the “official” version of 5%? Then actual GDP growth is 5%. That certainly reduces the great growth stories of these emerging markets.
In the U.S., inflation is also far underreported. John William’s www.shadowstats.com calculates the CPI before the “fudge factors” were introduced by Bush Senior and Clinton. Here is a chart showing official CPI and the one from Shadowstats.
Note that they have the CPI at 10%. If we use that to convert nominal GDP to actual GDP, then we get big negative economic growth. In other words, the reported GDP growth is just price increases. Here is the chart from Shadowstats:
There you have it: the US economy has been shrinking since 2001 if you factor out price increases, according to shadowstats.com. Even the huge credit bubble from 2003-2007 was insufficient to give positive, “real” growth if you correct the inflation numbers. Of course, the average governmental economist would vigorously debate this.
However, please consider that “real” wages (inflation adjusted) have been declining for 30 years or more. The labor unions tell us this while making the point that the rich have prospered at the same time. That the only thing we agree on with them. However, their insinuation is that the rich have taken the money from the laborers. The truth is that the inflationary policies of the Fed have made many people poorer, while the smarter people have learned to protect themselves and even profit from the inflation. Yes, inflation is the great, silent tax.
The Fed continues to shovel liquidity into the financial system but it is doing little to fuel growth, except in the way of prices for consumer necessities. They just hope that eventually some of that money will be used to grow businesses and jobs.
In the meantime, there are no inflation concerns at the Fed. Federal Reserve Vice Chairman Janet Yellen said the increase in food and fuel costs will have only a temporary impact on inflation and don’t require an adjustment in monetary policy.
Bloomberg quotes Yellen: “The surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view; warrant any substantial shift in the stance of monetary policy.”
That’s an amazing statement. So, she admits we have rising demand and diminishing supply. What is causing the rising demand? Is it possibly excessive money growth from the major central banks of the world?
Learn more about the Wellington Letter by visiting Dohmen Capital Research.
SHTF Plan Editor’s Note: Over time, regardless of short-term and intermediate-term movements in stocks, commodities and precious metals, prices for essential goods will continue to rise. It’s basic mathematics and it simply cannot be ignored. While Ben Bernanke may have held a press conference on Wednesday suggesting that the second round of quantitative easing will end in June, he also indicated that the Fed will continue engaging in other “aid programs.” It sounds like the Fed is working on coming up with another term to describe their QE activities, because QE is just so 2010.
Clearly, the Fed has two choices. Either stop printing and pull liquidity out of the system, which will likely collapse the stock markets and completely destabilize our supposably stable housing market and economy, or, keep printing and watch price increases continue to accelerate, possibly leading to a hyperinflationary Armageddon. Our view is that the Fed will continue to infuse the financial system with money until the very end – they’ve committed well over $20 Trillion already and there’s no turning back now.
All the while, the Fed, Treasury, US government leaders and global central bank officials will create boogeymen of everyone and everything except themselves. Recently, President Obama announced that the Justice Department will open investigations into market manipulation involving traders and speculators who may be attempting to profit from the economic malaise affecting the average Joe on Main Street.
Look in the mirror and around your conference table. The speculators and manipulators are right before your eyes.