The Cynical Economist

From Reuters
by Emily Kaiser

One day after the Federal Reserve got investors thinking about uncomfortably low inflation, Starbucks announced it was raising prices on some of its coffee drinks.

Anheuser-Busch is planning price hikes on some of its Budweiser beers later this year (although it’s also going to give away free samples to 500,000 people at bars and restaurants in the coming weeks).

So is inflation dangerously low or is it creeping higher?

It depends where you look.

The Fed said last week that inflation was below its comfort level and likely to stay that way for some time. The central bank said it was prepared to step in if necessary to ensure that this doesn’t morph into something serious like deflation.

The Fed’s favorite inflation gauge — the ineloquently named core PCE price index — is due on Friday and is likely to show a slight uptick for September, according to a Reuters poll. On a year-over-year basis, the index is expected to hold steady at 1.4 percent, below the Fed’s comfort zone of 1.7 percent to 2 percent.

The measure excludes food and energy prices, which the Fed considers too volatile to provide a reliable signal on future price direction. But food, energy and other major commodity groups have soared in the past couple of months, which explains why companies like Starbucks are raising prices.

The Reuters-Jefferies CRB Index .CRB, which tracks commodity prices, hit an 8-month high last week. Gold prices hit a record level and other commodities, including soybeans and cotton, notched multi-year peaks.

This is causing trouble for commodity-sensitive emerging markets such asRussia. Its central bank meets on Tuesday and is widely expected to hold rates steady. But it may express growing concern about inflationary pressures after a summer drought devastated the country’s wheat crop.

It is less clear what these rising commodity prices will mean for the U.S. economic recovery and the Fed’s next policy move. High unemployment and sluggish consumer spending mean many companies cannot follow Starbucks’ lead and pass higher raw material costs along to consumers.

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From Business Insider
by Joe Weisenthal

Deutsche Bank’s US Economics/Strategy Weekly spells out a picture of the US economy that, um, looks a lot like what you would call stagflation, a word we haven’t heard in awhile.

What’s going on? The US economy (especially the job-creation part) is sputtering, while prices on various commodities, and food is going up.

That sounds like stagflation to us.

[View with PicLens]

Now, haven’t I told you that hyper stagflation (hyperinflation combined with very high unemployment)  is the most probable outcome from all that money printing and government meddling with the free market….

I have seen it first hand in Eastern Europe when the Soviet Union collapsed. Unemployment was over 20% and hyperinflation was so bad, that some of the workers got paid by taking home certain quantity of the products, they were making instead of getting their salaries paid  with cash (in Communist countries no one was writing checks, all transactions were done with cash, just business deals were done electronically by the banks).  I remember I needed a jacket for the winter, but I did not have work back then, so my mother “loaned” me money to buy one. Later I found It took her entire monthly salary to do so. And I assure you I did not purchase some fancy jacket…

Think about it! She worked a whole month and at the end of that month the money, that she earned were as valuable as one jacket…

Of course we do not see the inflation here (yet), but I think it is in our future.

Bernanke and the Feds think they can control things much better than the rest of the central banks around the world, because you see, the dollar is the worlds reserve currency, you know…

Not for long, not for long…

From The Telegraph

Bank of England Governor Mervyn King has warned that high inflation will continue to erode earnings power through next year as the economy faces the threat of ‘stagflation’.

Prices rises have consistently defied the Bank’s expectations of a slowdown, adding to pressure on households as wage growth remains weak and the Government introduces a strict austerity package.

The Bank’s rate-setters are charged with keeping inflation at 2% but the Consumer Prices Index benchmark has been above 3% throughout the year.

However, addressing a committee of MPs, Mr King suggested that they will be reluctant to try to curb the problem by raising borrowing costs from 0.5 per cent any time soon because of the weakness of the economy.

“There will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels,” Mr King told MPs today.

“I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word ‘normal.’”

The Bank of England’s Monetary Policy Committee (MPC), which slashed interest rates to a record low of 0.5pc during the depths of the recession, faces an acute dilemma on when to begin raising them. Not everyone on the MPC agrees with the Governor that the threats to the recovery present a greater danger than that of rising prices.

And despite “encouraging” 1.1% growth for the economy in the second quarter, the governor warned that we “cannot be confident” the recovery will be sustained, raising the spectre of ‘stagflation’ – high inflation and stuttering growth.

“We must be careful not to read too much into one number,” King said. “And the wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the U.K. will be sustained.”

Howard Archer, an economist at Global Insight, said “one thing that does look clear is that interest rates are likely to remain very low for a considerable time to come.

“Monetary policy will need to remain loose for an extended period to offset the impact of the major, sustained fiscal squeeze,” said Mr Archer.

Mr King also suggested the US has been wrong to prioritise growth over cutting debt levels.

“All countries need to have a credible medium term plan within which they can demonstrate that they will get back to a position in which structural deficits are eliminated and there is a sustainable path for the long-term public finances,” he said.

“Not spelling it out is, I think, a problem.”

The Bank said austerity measures were part of a painful rebalancing of economies towards the private sector.

“I think we are are in for a long haul,” said Mr King.

Remember the 80′s? Oh yeah, some of  you possibly cannot, because you weren’t born yet.

I do not remember them either, cause I was about 5 years old and back then I had other priorities, but I read history and I know, that right now what happens in America is going to be even worst than what happened back in the 1980′s…. stagflation, double digit interest rates, high unemployment, high rate of bank failures, energy and oil crisis, political corruption, S&L crisis, deficit spending and debt (notice what happens around 1980 – exponential growth) ….

We will soon have all this again, but this time, in 2010, it will be on steroids.

Congratulate the people in Washington, that “represent” us and give bow to our current Lair and Chief – Obama for the superb job they are doing for us.

These people did  a great bi partisan work and  attached rocket engines to the debt curve! Now we are going straight vertical…

Too bad they haven’t given us  parachutes to soften the impact when all this goes down crashing…

Ah…The 80′s…. I miss them! As much as I remember it was a happy time for me …

LOL.  See what happens when the 80′s game characters meet todays New York….very well done video!

From Washington Examiner

When White House Chief of Staff Rahm Emanuel last year advised “never waste a good crisis,” he likely was thinking ahead to President Obama’s economic stimulus program and health care plan. After swelling the federal deficit by passing the stimulus at a cost of nearly $1 trillion, Democrats in Congress signed off on Obamacare, with a price tag, according to Rep. Paul Ryan, R-Wis., of $2.3 trillion in its first decade alone. With federal spending exploding at such a rate, it’s no wonder that Moody’s Investor Service recently warned that it would downgrade the U.S. government’s credit rating if it concludes “the government was unable and/or unwilling to quickly reverse the deterioration it has incurred.”

What the United States government will do in the future may be in question, but we need not look far to find past examples of countries unwilling to get their finances in order. Consider Argentina. In 1914, it was one of the wealthiest countries in the world, and its living standard exceeded that of Western Europe until the late 1950s. Then President Juan Peron squandered his nation’s prosperity by introducing a host of redistributionist economic and regulatory policies, nationalizing utilities and foreign investments, and pumping up the national debt. What followed was three decades of political instability, growing dependency, and economic stagnation.

There was a brief period of privatization and booming foreign investment in what the American Enterprise Institute’s Mark Falcoff called Argentina’s “go go” 1990s. But that was negated by the return of political leaders espousing Peronist principles who created a downward economic spiral by breaking contracts with foreign utility companies that had invested heavily in Argentina. Today, the country has lost its international credit standing and an estimated 10 percent of the population has moved abroad to escape the stifling taxes, regulation and inefficiency. To make matters worse, President Cristina Kirchner recently attracted attention for firing the president of the country’s central bank. His sin was refusing to go along with her inflationary spending policies (Argentina’s inflation is 17 percent) and challenging her demand that he hand over $6.6 billion in bank reserves.

Besides sending federal spending skyrocketing, Obama has, like so many of the politicians who ruined Argentina, dramatically increased government regulation of business, nationalized major sectors of the economy, and imposed a lengthy list of tax increases. America today is no more exempt from economic reality than Argentina was in years past. Make no mistake, these actions will eventually drain the life from this nation’s economic vitality, just as they did in Argentina.

The regular readers of The Cynical Economist know that I was warning about the coming  stagflation or hyper stagflation many months ago…. Here is a part of a post of mine –  Nov 1st, 2009…Trying to Reinflate… But – Stagflation is Emerging as a Threat

Why stagflation? Stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets.Together, these factors can cause stagflation; equally, either can, if taken to such an extreme that it must be reversed.

And what we have today in USA? Reckless macroeconomic policy and negligent and  incompetent government.

Today a blog I respect very much – the Financial Armageddon, had a post…Stagflation Ahead?

Repeating a familiar pattern, U.S. nonfarm productivity surged in the fourth quarter as unit labor costs fell, indicating that businesses are making the most of a weak jobs market and squeezing more profit out of each worker.

Not surprisingly, many economists viewed the report as a positive sign. If companies keep earning more money, the logic goes, then the economy’s return to growth won’t be far behind.

But is that the most likely outcome? Isn’t it also possible that if hiring remains soft, a critical mass of those who are still employed — especially those with a union standing behind them — will say “that’s enough!” and demand more money and benefits from their employers?

If so, that could set the stage for a period when wages and prices rise despite weakness in the overall economy.

Interestingly enough, if you look back at the history of the relationship between productivity and labor costs, the last time we saw a gap between the two as wide as it is now was — you guessed it — in the 1970s, before the Great Stagflation.

Although it is too soon to say whether this aspect of our economic history is about to repeat itself, today’s allegedly good news from the Labor Department may not be all that it seems.

From Reuters

The delinquency rate for loans underlying commercial mortgage-backed securities (CMBS) ballooned 500 percent in 2009, surpassing 6 percent in December for the first time, underscoring the rapid collapse of the U.S. commercial property market, according to real estate data provider Trepp.

The delinquency rate — the percentage of loans 30 or more days delinquent — among CMBS loans rose 0.42 percentage point in December to 6.07 percent. They began 2009 at 1.21 percent and the decade, before the U.S. commercial real estate boom, at 0.50 percent.

The casualties reached all types of commercial property. The delinquency rate among hotel mortgages mushroomed over 900 percent in the past 12 months to 13.87 percent, according to Trepp.

The office delinquency rate ballooned more than 560 percent to 3.42 percent in December, up 0.49 percentage point for the month. The delinquency rate for retail real estate loans in CMBS was up nearly 475 percent to 5.50 percent, up 0.72 percentage point in December.

The industrial delinquency rate rose more than 410 percent to 3.98 percent, up 0.65 percentage point in December. Multifamily was up 325 percent to 9.27 percent, up 0.28 percentage point for the month.

Still, the price of the bonds was stronger as the credit markets strengthened and the panic immediately following the collapse of Lehman Brothers abated. Spreads on recent vintage benchmark 10-year super seniors in December tightened by 0.65 percentage point on acreage above swaps.

For the year, the benchmark bonds finished on average at 480 percentage points over swaps, down 311 percentage points from their 2009 start of 811.

Tracking them to treasuries, the benchmark CMBS bonds ended the year at 353 percentage points over treasuries, down 493 percentage points from the 846 percentage point spread at the state of the year. (Reporting by Ilaina Jonas, editing by Matthew Lewis)