Inflation, US State Bankruptcies and the Return of the Bailout

You are forgiven if thinking current price inflation is running rather high. Your feeble commoner brain just doesn’t get it. Those rising prices at the pump and the grocery store must be a figment of your silly, prole imagination. Aren’t the Oscar’s on, go watch that and stop thinking about things.

You see, core CPI (consumer price index, the governments measurement that some say is fraudulent) is only running at an annualised 1.6% through January. No need to worry. It doesn’t matter that this measure of price inflation leaves out food and energy prices. We don’t eat food anyway and our homes and cars run on happiness.

If anything, according to many self-described really smart people in the mainstream, we have to be more concerned with deflation than with inflation. That’s right, you must be afraid of goods becoming more affordable. Goods becoming cheaper would be terrible. Can you imagine what kind of awful world would exist if the poor in society could afford to live slightly better lives? If regular people could afford education and health care? Just thinking about it makes me want to regurgitate my Beluga caviar into my servant’s face.

Somehow, inexplicably, when things become cheaper it is a bad thing. That is the kind of logic peddled in the mainstream. I don’t know about you, but the falling cost of technology goods (tv’s, computers, iPads) keeps me awake at night. More people enjoying the bounty of human progress sends shivers up my spine. All joking aside, in a little place I call reality, falling prices are a good thing and indicate a healthy economy that more and more people benefit from.

We know better than what the mainstream says. First off, we know that price inflation is different than true inflation. True inflation is when the money supply is expanded (more currency is printed, or digitally added to bank balance sheets, etc), price inflation is merely one of the consequences. In other words, rising prices are not true inflation, but a consequence of creating money out of thin air (perhaps the only thing Federal Reserve is good at).

Here’s a nifty chart courtesy of the Mises Institute regarding the money supply:

Now bear with me if you think this looks like math class all of a sudden. It really is quite simple. The various lines indicate various measures of the money supply. Without getting into the nitty gritty, the reason for measuring money supply is to determine how much of the stuff is sloshing around in the economy. So determining which measure is the best is very important to nerds like me. For the purposes of this post though, just notice that the lines are undoubtedly trending upwards (although not so high in the M1). In other words, there is more money in the economy. Where did this new money come from? The Federal Reserve. A lot of this new money has found its way into the stock market and commodities, which has driven up the price. It has papered over (quite literally) the problems of the last few years. The economy is still dealing with vast amounts of bad debt. The market is trying to work it out, but the sustained inflationism and easy-money policies peddled by many central banks is hindering it, for now.

Anyway, back to the original topic of the post, inflation (got a little side tracked with the graph). Oh, one more won’t hurt! (hat tip: Cobden Centre)

Ok, that is the last one I promise. This graph is more than just pretty colours. The blue line (Austrian Money Supply) is a measure of the money supply, the pink one (securities) represents the result of all those wonderful bailouts; when the Fed bought bad assets from well-connected banks and corporations because they were “too big to fail.” That happy little greenish one (IMF CMD Rescaled), is the increasing price of commodities. You know, those things that everything else in the world is made up of and that we eventually buy? In short, they indicate the future price of all the things we enjoy buying (like food, gas, clothes, etc). The UK Telegraph’s Liam Halligan got it right about oil in a recent article saying:

So the “secular” growth story, driven by the emerging markets, has been driving up oil demand. At the same time, Western governments, not least in the US and UK, have been adding fuel to the fire by massively expanding their base money supplies under the guise of “quantitative easing”

…Commodities and other assets governments can’t print more of are now being widely used to hedge against Western inflation and currency depreciation. Just as they are starting to recover from the credit crunch, consumers and businesses in Europe and the US will now suffer badly from a spiralling oil price. Well, to some extent, sky-high crude is a direct result of the grotesquely irresponsible monetary policies pursued by their own governments – which, along with the growing energy needs of the East, have stoked oil demand.

Back to the graph. If  you noticed that all of these lines seem to be correlated, congratulations, you are smarter than the majority of pundits and “economists” working in the mainstream. Your reward is the knowledge that the future is looking grim and that prices will increase, and probably pretty nastily. But you will also understand it is a consequence of creating money out of thin air and if you are into investing, you can adjust accordingly (by selling your increasingly worthless paper money for actual things, like gold or silver, for example).

Quantitative Easing I and II (QE) were also indicated on that graph. I believe QEIII is coming down the pipe as well. As suggested by the title, many individual states in America are bankrupt (and have been for some time really). The whole hoopla in Wisconsin will likely be repeated in states across the country. States have run up relatively large deficits (although their debt is nothing compared to the Federal government) financing their welfare and union-vote buying schemes. They can no longer pay for them under current tax rates. Bureaucrats (of all political parties) have also shown over and over that they are completely unable to make any sort of meaningful cuts. And, unlike Washington DC, they cannot print up fresh money to pay their bills.

Luckily for US states,  the Federal Government will ride to the rescue like a modern day bureaucratic Lone Ranger. Their weapon is not the trusty six-shooter, but the magical printing press (or its digital generation equivalent). They will create more money out of thin air to solve all of the world’s problems! And we will all live happily ever after (please note: definitions of happiness may differ).

Once the Federal Reserve bails out the states, they will most likely impose some sort of faux austerity programme on us, err, I mean on the state bureaucrats. This will come in the form of token spending cuts coupled with drastic tax increases.

This is all speculation of course. Perhaps all of the politicians will come to their senses and realise that they can’t spend money they don’t have. Maybe they will reign in their profligate ways. Maybe they will grow a spine and stand up to the special interests in state capitals from Augusta to Sacremento. In America’s darkest hours, I trust them to stand up for the taxpaying citizen and say enough is enough…

Huh? Where am I? I think I blacked out for a second. No, like DC, it will be business as usual in state capitals all across the nation. They will continue to do what they do best, steal and spend other people’s money. While many Americans further tighten their belts and try to prepare for further economic turmoil, our overlords continue on as if nothing is wrong. The world they inhabit is not one based in reality, but a fanciful world of ceaseless taxation and spending. A world that will eventually come crashing down as the market reasserts itself.

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