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The Coming Inflation Threat: The Worst Of Both Worlds

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Inflation is a funny thing: we feel it virtually every day, but we’re told it doesn’t exist—the official inflation rate is around 2.5% over the past few years, a little higher when energy prices are going up and a little lower when energy prices are going down.

Historically, 2.5% is about as low as inflation gets in a mass-consumption economy like the U.S. that depends on the constant expansion of credit.

But even 2.5% annually can add up if wages are stagnant. According to the Bureau of Labor Statistics (BLS), what cost $1 in January 2009 now costs $1.19. https://www.bls.gov/data/inflation_calculator.htm

That 19% decline in the purchasing power of dollars is tolerable as long as wages go up by 20% over the same period, but for many American households, wages haven’t kept pace with official inflation.

While the nominal hourly wages keep rising, adjusted for inflation, wages have stagnated for decades.  Here’s a chart based on BLS data that shows median weekly earnings adjusted for official inflation rose $6 a week after five years of decline:

But stagnant wages are only part of the inflation picture: official inflation under-represents real-world inflation on several counts.

First, the weightings of the components in the Consumer Price Index (CPI) are suspect.  Many commentators have explored this issue, but the main point is the severe underweighting of expenses such as healthcare, which is only 8.67% of the CPI but over 18% of the U.S. Gross Domestic Product (GDP).

Second, the “big ticket” components—rent/housing, healthcare and higher education—are under-reported for those who have to pay the unsubsidized cost.  The CPI reflects minor cost decreases in tradable commodity goods such as TVs and clothing that are small parts of the family budget, while minimizing enormous expenses such as college tuition and healthcare that can cost $20,000 annually or more.

Third, by lumping the entire nation into one basket, the CPI ignores the reality that the inflation rate experienced by the protected class whose big-ticket expenses are subsidized by the government or employers is far lower than the rate experienced by the unprotected class that pays full freight. While the protected class complains about healthcare visit co-pays rising from $20 to $40, the unprotected class is getting hit with monthly increases of hundreds of dollars or co-pays in the thousands of dollars.

Fourth, there are significant regional differences which the CPI doesn’t reflect: inflation in coastal areas is running white-hot compared to lower-cost regions.

The Chapwood Index attempts to measure apples-to-apples real-world expenses, and as you can see, the Index estimates real inflation is above 10% for many American households.

It’s hard to believe 2.5% inflation includes the soaring costs of goods such as insulin:

Or student loan payments:

Then there’s the mystery of how the Federal Reserve can create trillions of dollars of new currency and governments and banks can issue trillions of dollars in newly borrowed money—private, corporate and sovereign—can flood into the economy without generating higher official inflation.

Here’s a chart of all credit outstanding in the U.S.: $70 trillion, up $40 trillion since 2000 and up $15 trillion since 2009:

The answer of course is most of that new money has flowed into assets, pushing the valuations of assets such as stocks, high-yield (junk) bonds and real estate to the moon.

This vast inflation of asset prices has pushed household net worth to the moon, too, but…

..the problem is, the wealth isn’t distributed very evenly. The gains have flowed mostly to the top .1% and to a lesser degree to the top 5%:

Unsurprisingly, this asset inflation has greatly enriched those who were already rich, i.e. the owners of the assets which have soared in value.

The fly in the ointment is the real economy hasn’t expanded at the same rate as debt; the ratio of debt to GDP now far exceeds the extremes of the Roaring 20s that set up the collapse of both debt and the asset prices that depended on new debt to fuel demand for overpriced assets.

The enormous expansion of debt and the resulting asset inflation are global phenomena:

Three secular trends have driven asset inflation and moderate deflation of commoditized goods and services:

  1. Globalization, a.k.a. global capital moving around the globe, reaping the gains of labor, credit, environmental and tax arbitrage: move from high-cost, high-tax, environmentally regulated locales to low-tax, low-labor costs and environmentally lax locales and skim all the profits.
  2. Declining interest rates.  Increasing production overseas and stock buybacks have been encouraged by central banks’ maintaining super-low interest rates and easy lending liquidity. Both have pushed corporate profits much higher.
  3. Financialization, i.e. low interest rates, ample liquidity, expanding leverage, the commoditization of previously low-risk financial instruments such as home mortgages, expansion of credit-default swaps and other derivatives and the generalized belief that risk can be eliminated by counterparty contracts.

All three of these secular trends are reversing: globalization is under assault on multiple fronts, as people are starting to question globalization’s role in increasing inequality, environment damage and the hollowing out of domestic economies and the middle class.

A decade of financial repression to keep interest rates near zero is slowly being “normalized” by central banks, enabling rates to rise.  As the overhang of bad debt and the rising risk of defaults start being priced into the bond and debt markets, the pressure on rates will only increase as higher risks demand higher compensation via higher yields.

Furthermore, all the trillions in existing debt will be rolled over at much higher rates going forward, squeezing the revenues of all borrowers, governments, corporations and households alike.

Financialization is following an S-Curve of diminishing returns: all the speculative games that have boosted assets to the moon are running out of steam or faltering.

This is visible in the divergence of GDP (the real-world economy) and household net worth (speculative debt-fueled asset bubbles) mentioned above:

So what happens to inflation as the trends that kept real-world inflation officially low and boosted asset inflation to unprecedented heights all reverse?

The obvious conclusion is asset valuations re-correlate to the trend line of the real-world economy, which is another way saying they drop a lot in a global repricing of risk and the impact of secularly rising interest rates.

That will put the kibosh on the much-vaunted wealth effect that supposedly boosted the animal spirits of borrowing and spending (and speculating) that has fueled the “recovery” of the past decade.

As the global economy spirals into recession, central banks will panic (as usual) and attempt to spark flagging consumption by lowering interest rates and governments will increase deficit spending (i.e. government borrowing) to boost household incomes and corporate revenues.

But unlike last time, these policies may not reflate asset bubbles that have popped, or suppress real-world inflation. Rather, they may fail to boost asset inflation and succeed in boosting real-world inflation while wages continue stagnating and household net worth craters.

Simply put, the world has changed, and the unintended consequences of the past decade’s policies cannot be stuffed back in the bottle. The easy years of watching index funds and other assets rise like clockwork because central banks willed it are over.

In Part 2: Get Ready For “QE For The People” we detail the likeliest next steps in this story in which, under the guise of “progressive fairness”, the next phase of money printing will transmit free money directly into the populace’s pockets.

What’s not to like about that? Well, for starters, it won’t create any true prosperity, it will send cost inflation skyrocketing, and it will further subjugate the populace to the cartels running our economy and political system. But the masses will cheer for it anyways. So get ready.

PeakProsperity.com,



43 Comments on "The Coming Inflation Threat: The Worst Of Both Worlds"

  1. twocats on Sun, 21st Oct 2018 8:39 am 

    Charles Smith has been developing his analysis and presentation for a number of years now – and it has matured. Not much to argue with or add to in this article.

  2. baha on Sun, 21st Oct 2018 10:32 am 

    If they start giving out money…spend it fast! Pay off your debts, get an education, install your own personal power plant…just don’t keep it. It’s going to be worthless.

  3. Outcast_Searcher on Sun, 21st Oct 2018 12:27 pm 

    This isn’t about real world inflation — it’s more Cassandra prediction of disaster. Given their track record, it literally pays to be very skeptical, over time.

    Why not show some real world examples of things that get cheaper like electronics. Which is a larger chunk of the economy: insulin or computers. Cassandras love to use intuition — but again, their track record shows that just like with science, intuition is a terrible thing to rely on for good objective long term predictions.

    Does any one but ecnomic logic free Cassandras really believe that real world inflation can be 12%+ in the US big cities, for many years on end? If it were, why haven’t the economies collapsed? Why haven’t the smart, successful folks being hammered by the numbers moved out, working remotely or commuting? Why hasn’t the middle class been reduced to abject poverty?
    It’s absurd, to the level of shadowstats over a longer timeframe — if one just does a little arithmetic or uses a little logic.

    But again, if one is trying to paint the usual Cassandra meme of rapid economic doom, why not? It’s not like the audience seems to care AT ALL about accuracy of predictions. And apparently, the clowns writing this stuff are getting paid (by clowns), or they’d stop.

  4. Outcast_Searcher on Sun, 21st Oct 2018 12:30 pm 

    Inflation is a bad thing cumulatively. People over time are getting screwed badly by it. This is why investment is necessary over time. The US stock market has outrun inflation by roughly 7% or so over the past 89 years.

    Homes and high quality bonds have roughly kept up, after expenses.

    But let’s pretend there’s nothing a normal person can possibly do because: doomsteads and zombies and lots of ammunition.

  5. I AM THE MOB on Sun, 21st Oct 2018 1:11 pm 

    Outcast

    High energy prices cause inflation in nearly everything..High inflation decreases global gdo..decreased GDP leads to economic collapse..

    And when the oil shortage hits..that is ball game..

  6. I AM THE MOB on Sun, 21st Oct 2018 1:14 pm 

    Outcast

    Electronics aren’t a necessity…You flicking cherry picking Jewish nigger..

  7. makati1 on Sun, 21st Oct 2018 5:48 pm 

    Outcast is a cast out from normalcy. Denier writ huge. Ignore.

  8. makati1 on Sun, 21st Oct 2018 5:55 pm 

    The author paints a realistic picture that Westerners and Americans especially do not want to hear.

    The US is declining. The real unemployment is well over 10%. Some say 30%+. Real inflation is approaching double digits also. The Great Leveling is becoming visible to even the deepest deniers.

    Soon, the interest due on the US national debt will exceed the $700 billion dollar military budget. Then what? Print more faux money and drive the USD to zero? Higher taxes? We shall see. Interesting times!

  9. Go Speed Racer on Sun, 21st Oct 2018 6:18 pm 

    With all this inflation, finally now you see why it’s
    important to have backyard beer parties and set
    sofa’s, old tires, and mattresses on fire
    for entertainment.

    Because how much does an old sofa cost anyway?
    Zero! So it is unaffected by inflation.

    No matter how bad the inflation, even if you lose
    your job, always U can set an old sofa on fire to
    enjoy the company of friends.

  10. JuanP on Sun, 21st Oct 2018 8:43 pm 

    One word: GOLD!

  11. Anonymouse1 on Sun, 21st Oct 2018 9:55 pm 

    Dont old sofa’s actually depreciate in value GSR? Wouldn’t that make them anti-inflationary? You have long advocated switching to old sofas as an energy source, so why not use raw material that actually gets *cheaper* over time? Good for the economy too. Seems like a no-brainer to me. A lot of times you can find sofas on the curb with a sign on them, free. I dont remember the last time I ever saw a barrel of crude oil with a ‘free’ sign sitting on someones lawn, do you?

  12. makati1 on Mon, 22nd Oct 2018 12:31 am 

    “We’re getting close to the end now. Can you feel it? I do. It’s in the news, on the streets, and in your face every day. You can’t tune it out anymore, even if you wanted to….

    “There are great pivot points in history, and we’ve arrived at one. The United States, ruptured by a thousand grievance groups, torn by shadowy agencies drunk on a gross excess of power, robbed blind by oligarchs and their treasonous henchmen and decimated by frivolous wars of choice, has finally come to a point where the end begins in earnest. The center isn’t holding… indeed, finding a center is no longer even conceivable. We are the schizophrenic nation, bound by no societal norms, constrained by no religion, with no shared sense of history, myth, language, art, philosophy, music, or culture, rushing toward an uncertain future fueled by nothing more than easy money, hubris, and sheer momentum….

    We will fail because of our greed and avarice. The United States of Empire has become quite simply too big, too diverse, and too “exceptional” to survive.”

    https://lesstraveledroad.com/2018/08/01/the-united-states-of-empire/

    Better to be outside the pot than inside.

  13. Go Speed Racer on Mon, 22nd Oct 2018 2:46 am 

    Hi Anonymoise, appreciate the insight.
    well I guess old sofa’s
    could depreciate linearly,
    to below zero value.

    Then somebody says “I will pay you
    $20 to hail this thing off”.

    So it’s possicle Wall Street could get
    involved, selling futures on old sofa’s.

    Since they would depreciate over time
    then I would short-sell futures on old sofa’s.

    I will call my broker in the morning.
    Thx the tip!

  14. deadly on Mon, 22nd Oct 2018 3:59 am 

    Gold price today is 1227 usd per troy ounce.

    One hundred years ago, a US minted twenty dollar gold coin, a double eagle, was worth twenty dollars.

    1227x=20

    x=20/1227

    x=0.0162999185 usd

    or 1.62999185 cents is what your dollar is worth these days.

    If you multiply 20 times 60 you have 1200.

    That is 6000 percent inflation over the past one hundred years.

    What you call hyperinflation.

    Put it another way, one dollar to buy a barrel of oil in 1900 was 20 barrels of oil with one double eagle.

    1227/75=16.36 barrels, a troy ounce of gold used for payment will buy those barrels.

    Oil should be at about 60 dollars to buy those 20 barrels with one troy ounce of gold.

    Of course, back in 1900 oil was as low as thirty cents per barrel. Lots of oil after Spindletop, price fell, the bottom fell out.

    Back when the United States was exporting more than forty percent of its oil. Oil coming out of its ears, almost had to give it away.

    Everybody wanted some oil by then. Good stuff to have around, makes life a piece of cake.

    Why have coal and water for steam power when you can have diesel-electric drive power with oil?

    Science has advanced mankind too far, got to go back to the days of no coal, no oil, just wood. Who needs natural gas to heat your home? All you need is a wood burning stove, a nice new natural gas fueled furnace that is 90 percent efficient is nonsense. Who wants stuff like that asked the Luddite?

    No need for lithium grease and sealed bearings anymore.

    An ox cart and seven days to drive a hundred miles with a loaded ton of goods will be the norm, the new normal. Gore the ox after you get there. lol

    No matter the inflation, no matter the price, oil rules the roost, then King Coal is always there too.

    Without those fossil fuels, no matter the price, no matter what inflation does or doesn’t do, it is teats up for civilization.

    You can have wind and solar until the cows come home, it won’t matter. Fossil fuels power civilization, nothing else.

    I’ll take the sixteen barrels of oil, the ounce of gold won’t do the work of sixteen barrels of oil, not in a million years.

    Almost beer time.

  15. Davy on Mon, 22nd Oct 2018 4:49 am 

    “One word: GOLD!”

    Sure Juan, the answer to all our problems. Why don’t you elaborate like saying how much gold should one keep? How about mentioning how well gold did in relation to the stock market since the financial crisis. Gold got its ass kicked. More shallow intellect out of a board light weight.

  16. Davy on Mon, 22nd Oct 2018 4:52 am 

    “Better to be outside the pot than inside.”

    LOL, that is a deep one liner billy. I guess this means you are right and we are wrong. What an arrogant ass. You are not in the pot because you are not worth cooking.

  17. makati1 on Mon, 22nd Oct 2018 5:37 am 

    Davy, your putdowns are substandard even for you. Losing it? LOL

  18. Davy on Mon, 22nd Oct 2018 5:58 am 

    Come on Billy then what is this hypocrite?

    makati1 on Sun, 21st Oct 2018 7:47 pmDelusionalHypocriticalArrogantUneducatedImmatureAbusiveStalker

    Stop your whining and debate me. Answer my moderation of your intellectually weak comments. There are several above because that is what most of your comments are.

  19. Antius on Mon, 22nd Oct 2018 6:40 am 

    “The Chapwood Index attempts to measure apples-to-apples real-world expenses, and as you can see, the Index estimates real inflation is above 10% for many American households.”

    Yikes! It is common knowledge that inflation is underestimated and growth is overestimated in the US along with other places. But this is worse than I expected.

    The trend of declining prosperity is a direct result of the declining EROI of dominant energy sources. This is a growing headwind against economic progress.

    Tim Morgan’s SEEDS analysis suggests that between 2007 and 2018, the average American has gotten 7% poorer in terms of real income, whereas the average Italian or Brit has lost 10% prosperity. The Chinese have grown richer on average, though not as much as official growth figures might suggest. It is difficult to predict how things will continue into the future, because the economy and society do not respond in a linear fashion to external stresses. Real human societies are not machines that function in a predictable fashion.

    Energy economics does offer a partial explanation as to why economic growth is benefiting people at the top of the economic pyramid more than those at the bottom. Aside from the obvious explanation that these people own the capital, there is another force at work routed in physical energy. For those at the top, a large part of income is either reinvested rather than being consumed; or is used to purchase service orientated products, rather than solid goods. In a sense, the rich are more energy efficient per unit of GDP than the poor, much of whose income will be spent on physical goods. So a resource constrained economy is growing in the only way that it still can; by apportioning the output to those who will never consume it.

  20. Anontarded1 on Mon, 22nd Oct 2018 6:58 am 

    juanthetard i’m a tard and a former paultard, please don’t tard do hard because you’ll lose your shirt like i did on gold. we were against the fed, you know.

  21. I AM THE MOB on Mon, 22nd Oct 2018 10:09 am 

    U.S. Shale Has A Glaring Problem

    A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute detail the “alarming volumes of red ink” within the shale industry.

    “Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June,” the report’s authors write. The 33 small and medium-sized drillers posted a combined $3.9 billion in negative cash flow in the first half of 2018.

    The glaring problem with the poor financial results is that 2018 was supposed to be the year that the shale industry finally turned a corner.

    https://oilprice.com/Energy/Energy-General/US-Shale-Has-A-Glaring-Problem.html

  22. Duncan Idaho on Mon, 22nd Oct 2018 11:27 am 

    “alarming volumes of red ink”

    Shale apparently has a new business model, in which profit is no longer necessary.
    You just keep the ponzi going.

  23. Davy on Mon, 22nd Oct 2018 12:25 pm 

    “alarming volumes of red ink”

    Like the rest of the economy is not in red ink in one way or another???

  24. Anontarded1 on Mon, 22nd Oct 2018 12:26 pm 

    guys i keep hearing the word “exceptionalist” parrotted around. is this a strong muzzie connection?

    https://www.jihadwatch.org/2018/10/university-of-wisconsin-madison-muslim-student-stirs-outrage-over-terrorism-class-because-it-discusses-jihad

    ‘An American exceptionalism perspective to advance a zionist, orientalist, and/or neocolonialist agenda …”

  25. makati1 on Mon, 22nd Oct 2018 6:21 pm 

    Davy, you don’t “debate” anyone. You argue with putdowns, delusions and immature rants. Not worth my time to reply unless I am bored. I have a busy life. You do not. You have no life obviously.

  26. Davy on Mon, 22nd Oct 2018 6:38 pm 

    “Davy, you don’t “debate” anyone. “
    Billy, well, normally with you I just moderate. Your comments are easy to sink being cherry picked extremism. I notice how you disappear in the morning because you get beaten up when you try to go toe to toe.

    “You argue with putdowns, delusions and immature rants.”
    Hypocrite

    “Not worth my time to reply unless I am bored.”
    Sure, billy, you been saying that now for years. Ignore me and frantically comment against me. You are twisted and desperate.

    “I have a busy life.
    LMFAO, sure billy at the fantasy farm….

  27. Dooma on Tue, 23rd Oct 2018 5:21 am 

    Wow, it certainly sounds like someone got up on the wrong side of their horse.

    Talk about a surly, old man.

    Lighten up a bit hey?

  28. Davy on Tue, 23rd Oct 2018 5:33 am 

    debate something dooma who cares about:

    “Lighten up a bit hey?”

  29. makati1 on Tue, 23rd Oct 2018 6:46 am 

    Dooma, Davy doesn’t get up grouchy, that is his normal persona. An old asshole. No real life. No friends. Just goats.

    If he didn’t vent on all of us with his bullshit, he would explode. So be it. Explode, that is. No loss to humanity.

  30. Dooma on Tue, 23rd Oct 2018 7:18 am 

    Hi Mak. He speaks of debate yet he is most dogmatic. I have never seen him write something like “you have a point there”.

    Just patriotic rhetoric and finger-pointing at anyone except for the cause of many of the world’s woes.

    I just agree to disagree with Davy. It is a similar exercise to trying to teach a person with an intellectual disability physics. You realise that you could be doing more valuable things with your time.

  31. Davy on Tue, 23rd Oct 2018 7:29 am 

    I give back what you guys want. Like children you want discipline. So I moderate your extremism. The two of you mostly demonstrate emotional issues related to failed lives. Most of your comments are anger related and generally off topic.

  32. Anontarded1 on Tue, 23rd Oct 2018 7:44 am 

    supertrad, thank for moderating the extremists. they have nothing to live for so they live for “humanity” and PBBM

    you enjoy your farm

  33. JuanP on Tue, 23rd Oct 2018 8:58 am 

    I see Delusional Davy continues posting bullshit and wasting everyone’s time here on a daily basis. Davy and his fights with everyone who says something he doesn’t like is the reason why all the best posters have left this place and this forum is a lunatic asylum. Unfortunately, the only ways to stop someone like him are illegal. In the USA the law protects the bullies and criminals. Where I come from people like him don’t last long.

  34. JuanP on Tue, 23rd Oct 2018 9:02 am 

    I do hope that you are completely dependent on the US dollar and the current financial system, Davy, and you suffer a lot in the coming US financial crash and Dollar collapse. We all know here that your farms and your goats are imaginary. You are the biggest loser I have ever interacted with, Exceptionalist!

  35. Anontarded1 on Tue, 23rd Oct 2018 9:16 am 

    juanthetard, the trigger “exceptionalist” tells me you taking order form muzzies

    https://www.jihadwatch.org/2018/10/university-of-wisconsin-madison-muslim-student-stirs-outrage-over-terrorism-class-because-it-discusses-jihad

    ‘An American exceptionalism perspective to advance a zionist, orientalist, and/or neocolonialist agenda …’

  36. JuanP on Tue, 23rd Oct 2018 9:27 am 

    I have never taken orders from anyone in my life, retard. People like me don’t take orders, fool, we give them. You obviously don’t understand shit about how the world works.

  37. JuanP on Tue, 23rd Oct 2018 9:29 am 

    Poor people who need to work for a living take orders. Rich people employ poor people and tell them what to do.

  38. Anontarded1 on Tue, 23rd Oct 2018 9:35 am 

    juanthetard, you don’t take orders from supremetard so no surprise you’d say that. it doesn’t matter. we all have to take orders from supertards so that we could build that computer you’re using.

    without an organized society we can’t build anything more complex than a mud hut not mentioning the boat you live in.

    i care when people work together and i dislike dysfunctional settings. i’d call your existence dysfunctionala

  39. Davy on Tue, 23rd Oct 2018 9:55 am 

    juanp, about time your cowardly activities shift to facing me directly instead of your mentally unstable activities of sealing handles and playing the puppeteer. You can whine all you want about why the best poster left but look no further than you and your gang for those reasons. I am moderating the extremism and you are one of the most mentally unstable extremist. You are on notice now and every one of your comments will be reviewed and flagged as needed.

  40. Davy on Tue, 23rd Oct 2018 10:02 am 

    BTW, why don’t you leave the US you ungrateful resident alien mooch. Anyone with self-respect would not behave like you do talking bad about the country that is feeding his sorry playboy ass. You live on the beach in Miami in a high dollar condo bankrolled by your family whining about how bad American is. WTF is up with that, stupid?

  41. Anontarded1 on Tue, 23rd Oct 2018 10:27 am 

    juanthetard, if you’re a principled dissenter then how come u never quoted supertards like frederic bastiat. when i was tarding hard i came to the exposure of his writing.
    supertard orwell also said we have a tendency to move toward complexity so i concluded i have to take orders from supertards. don’t u think i tried to live like tards who eschewed material posessions before?

    been there done that. if we move to complexity i better work with other tards and take orders from supertards so we can build something moar

    i dont consider following to be about blaq..i think the lesson is universal

    https://www.youtube.com/watch?v=17m8OnHC7dQ

  42. Davy on Tue, 23rd Oct 2018 1:40 pm 

    Sorry for being such a pussy Juan. I lost my shit again.

    We all know that you are one of the most respected members on this board.

  43. Davy on Tue, 23rd Oct 2018 5:46 pm 

    Juan, you can play your handle games but it just makes you look like a low life. Remember that day you filled up every line on the board with some kind of one liner attack. You are getting back to that behavior lately. Go back on your meds Juan. You are a good guy on meds. Off your meds you are a friggin disgusting loon.

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