Saturday, July 03, 2010

Invisible Inflation

Some prices seem to be declining, and others are increasing. So if one looks for inflation or deflation, it doesn’t take much searching to find an example to fit either argument. There are two different things happening here. One group of items that have been produced for retail sale, are also being resold by end consumers to raise cash. When you have consumers reselling into the market against retailers, prices will drop. The second group of items is pretty much just for consumption without a resale option. These prices are rising dramatically; food, beer, cigarettes, gasoline, drugs, and health care.

With prices rising the consumer has a choice, pay the higher price or switch to an off brand or generic. Blue Goose Vodka at $35 a liter doesn’t have quite the bang of a generic 1.75 liter bottle of the store brand at $10. Of course, then there is the nagging sleight of hand trick where the product size gets reduced and the price stays the same. The family size bag of potato chips now fits in a lunch box.

It’s not hard to notice the decreased consumption of optional goodies; cable, cell phones, internet, the second car, eating out at restaurants. This decreased consumption has a peculiar effect on public utilities. If everyone decreases their water consumption, water bills increase (this happened in our area). Why? Every company has fixed costs that don’t decrease when consumption decreases. With government services, the costs will increase or stay the same, even though they lay off police, firemen and teachers. You get less, so you’re really paying more for it.

What we are going to see from here in the coming year, is a concentration of thought, on how to enjoy our lifestyle by spending less. By shopping more carefully we get better prices from everyone. Some of us know how to do it, the rest of us will learn by going hungry now and then. The real question to ask is, are we able to buy more with our paycheck (deflation) or less (inflation)?

If you buy the premise that Bernanke and the Federal Reserve are saving us from deflation, then you’ve bought into the assumption that printing all these dollars is good for the economy. If you buy the premise that raising the national debt level passes these costs on to our kids, you have bought into the assumption that it’s free for now, and you’ll struggle with the morals of this despicable act of passing our debts onto future generations. If you reject both, you realize that we have a debt problem that will never make it to the grandkids. Our government has borrowed every penny in our banks and spent it.

One of my readers (Rob) commented that the candy bars he purchased had gotten smaller. My half gallons of ice cream are now 1.75 quarts and they take up more space in the freezer. The gallon bottles of ammonia for a dollar are now half gallons. If you have gotten on an airliner lately, there is a new seating section called “cattle class.” What is happening to us is almost invisible. It is a little like sawing a quarter inch off of Grandpa’s walking cane every week; sooner or later, he’s going to catch on. Old Ben Bernanke might convince Grandpa that he’s growing taller and sell him a new cane.


Sackerson said...

Points well made, Jim, esp. about counterintuitive effect on utility prices.

Watch the UK this week - there's a chance that the markets will call the new Prime Minister's bluff.

Rob said...


Interesting you mentioned utilities. The Electric Company here in Nova Scotia just received a raise this past January and now we get word that they plan on hiking rates again next january another 12 percent.


Tyrone said...

My half gallons of ice cream are now 1.75 quarts

Dreyers went down to 1.5 quarts. Ever notice cans of tuna? The standard can was above 7 oz and now it's 5oz.

One last statement:
FOA wrote back in April of 2001,
"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! Worthless dollars, of course, but no deflation in dollar terms!"

Jim in San Marcos said...

Hi Sack

I've been watching your new Prime Minister on PBS lately. Everyone seems to be blaming each other for the mess. It kind of looks like they need a good fist fight to settle it.

Thanks for the link.

Jim in San Marcos said...

Hi Rob

I wished I'd saved the letter from the water utility thanking us all for conserving water last year. The last paragraph was a notification that they had to raise our rates because of it.

With public services, you can't vote with your feet, you're stuck.

They ought to run the government the same way, everyone pays, no free ride.

Jim in San Marcos said...

Hi Tyrone

I agree with FOA. The trouble is, very few of us are marching to this drummer.

If enough people believe that something is true, then it is. The housing bubble comes to mind. My relatives refrained from discussing housing with me back in 2006. My thoughts were an absurd possibility that couldn't happen.

frakrak said...

Affirming that the same case is being made in Australia with regard to food Jim. Prices going up, package sizes reducing, huge hits with utility price increases. I am left wondering though (with this country) if it is a question of market forces re price hikes or market distortions, as we have only two substantive food chains here. Same with utilities, the local and state governments are the forces feeding the increases ...

We only have the thin veneer of a free market "down under":-)

Realestate prices are being sustained by local councils not releasing land (or developers), investors buying up five, ten, twenty proprties for rentals, giving the investor fairly healthy tax breaks re their investments. I don't see to much supply and demand happening here it's all a distortion, is it the same for you?

Jim in San Marcos said...

Hi Frakrak

What I am finding here is that a price goes up and people gripe and then get used to it.

California has raised car registration fees by 20%, driver license fees have doubled, sales tax went up one percent, it's almost 10% now. Last week we had a 8 cent a gallon state tax increase on gasoline, that never even made it into the newspaper. Hey gas prices went up, what else is news?

Food costs are way up and are climbing. You buy food everyday so the increases seem small and gradual. We eat a lot more chicken than steak now--health-wise, that's not a bad thing.

On real estate, if you surrender the deed to the bank, they will rent the property back to you for a year (maybe two or three). This inventory is not hitting the market. If your house payment was $4,000 a month, you only have to pay current rental rates which range around $1,400 to $2,000.

Our discussing the problem kind of connects the dots. But on the other hand, a majority of the people out there haven't got a clue as to what is happening.

I think as it gets worse, more people will catch on. The family paycheck isn't going as far anymore (SHHH its a secret).

I do think that Australia is a year behind us; your housing bubble has yet to collapse. You still have time to get your ducks in a row.

Cheers! or "bottoms up!"

AIM said...

The USA is two hundred and thirty something old now. In his short time, Bernanke has created half of the existing total money supply of our country. That is shocking.

In an evil collusion, Congress, the Whitehouse and the Fed have socialized all of the losses of our financial system and some of our big business (auto, mortgages). Those who erred suffer nothing and are able to continue forward with their immoral or misguided ways... their losses go onto the tax payers back. That is an atrocity.

It is evident that our corruptible Congress is owned and run by big banks and big business. It is evident that the Fed has its own agenda (possibly in lockstep with the other foreign central banks towards some "global solution").

Government is so big and invasive now it is incredible. There are much too many government employees... state and federal. And they have too high of a salary, pension and other benefits.

The USA has been usurped and turned into a socialized entitlement nightmare with a corrupt government.

Intelligent Americans do have a threshold for tolerance... apparently it hasn't been reached yet (apathy?).

I can't wait for the guillotines to be rolled out onto the commons of the capital building (figuratively speaking).

AIM said...

The stimulus didn't work (oh yes, they'll try again). Why didn't it work? Because there is nothing to "recover" to (and artificial stimulus is an unreality and serves no purpose). The last "boom" was a fraud. After over 50 years the credit bubble has finally popped. We are in a void and nothing positive is going to happen until all of this debt is paid off, restructured or defaulted on. Nothing will happen until we mend our ways and start following sane policies based on Economics 101.
There will be loads of unintended and unanticipated consequences to come for decades due to this government intervention. The depression is being camouflaged by food stamps, unemployment insurance, banks holding back foreclosures, banks not having to mark to market, deceitful accounting methods, false statistics, etc. I believe we'll have depression, recession, inflation, stagflation back and forth, back and forth, for decades to come. We'll just be going through all of these phases in little cycles one after the other with no growth... until we finally restructure. It will probably take a major bottoming out to force a restructure of our economy and nation.

We are at a real pivotal point in the history of this nation. We have started the process of transforming into a completely different country.

The sooner the correction comes the better so that we can rebuild and get on with it.

They can't hold it off forever. Don't you agree?

Jim in San Marcos said...


I think we are on the same page. If you picture Bernanke strapping 2X4's to each of the camels legs to keep the knees from bending, it kind of works. They can increase the load. At some point we will experience "The straw that breaks the camels back."

It looks like a waiting game from here.

Rob said...

The breaking point will likely when people have to choose between'
their Blackberry's and food on the table.

Crashproofed said...

Hey Jim,
Love your analogies as always! "2x4s to the camels legs!" LOL!
I've learned soo much from your Blog and AIMs comments equally learned. Thank you both.

Speaking of manipulation/socialized of Land, Autos, Mortgages, etc....

Check out Dennigers u-Tube of Globex es futures market and price manipulation to execute "Other Peoples Orders" ...a new form of OPM ....we now have OPO! Disgusting what is happening!

Jim in San Marcos said...

Hi Crashproof

Glad you enjoy the analogies--I could be shot for over simplification, but humor is the objective.

Thank you for the link to Denninger. He's in my blog roll and as usual, a very good read. He must be retired, I can't post as much as he does. I have to go to work each day. So if you need more to read, he's there for you.

Take care

Jim in San Marcos said...

Hi Rob

I agree, the toys will have to go. The trouble is, we are no where near a bottom, so reality is not a factor yet. It will take some "real hard times" to make people cut back on consumption. But as you suggest, it will happen. The problem is, nobody is prepared for it.

AIM said...

Think about it Jim, and all of you readers...

For many decades our government utilized policies to make housing affordable so that every American could achieve The American. What did they achieve (thanks to Greenspan's low rates, Fannie and Freddie, FHA, etc.)? The unintended consequence of making housing more expensive than ever! And now prices are coming down and the government is trying to prevent that!?

The tax system is skewed in a way that favors moving capital and labor overseas. The small businesses that can't do so really suffer. And now Obama is going to tax the rich... those who run small and large businesses and have the ability to create jobs.

If government cut government employee wages and gave big tax cuts to corporations on profits they generated and kept in the US, companies would be willing to hire, now wouldn't they?

The stimulus didn't work and these idiots will continue to do more of it despite that fact. Government is borrowing so much money that it is keeping capital from the private sector.

Government will continue its nonsensical wars in Iraq and Afghanistan and keep all of its global military bases going... all costing billions and billions annually... money down the toilet.

I'd say this is a recipe for depression. Yet the pretense is that they are trying to get the economy back on its feet. The level of stupidity that exists in Congress and our leaders is awesome.

Ding ding ding here comes the wagon. Put Uncle Sam in a straight jacket and take him away!

Anonymous said...

As always, learn to live like a poor man and you will survive any economic calamity. A financial crash does not have to mean financial ruin for you family if you take some basic steps.

1) Obtain affordable shelter
2) Learn to do the work yourself
3) Don't buy anything new except condoms and underwear.
4) Build a network of friends to socialize with

frakrak said...

Transnationals have "skewed" their country of origin stupid for decades, and it is left up to the middle class or other corporations (lets just say those paying taxes) to meet this short fall.

I think every market in the West is "skewed" to a point where it is impossible to even associate "free" with any aspect of its operation.

When you think of anarchy you may think of the unemployed resorting to mob rule .... but the real anarchists are the bankers, transnationals, governments they operate in a realm where they just do what they want when they want and leave a trail of destruction for the tax payers to right.

This is now so pervassive and our once free(ish) market is reacting to this mess in ways that one day scream deflation, but because of all the intervention/dishonesty in the system we end up with what may eventually be a Hyper inflationary whatzit??

Ohio Loan Officer said...

My brother figured out how to live BELOW HIS MEANS and is now retired at age 49:

After graduating from college with a degree in Engineering and a 2nd degree in Education he realized employers dictated when you had to be at work, when you could go home, and if you could take a vacation day or not. He didn't like that. So he started offering his services as a handyman in 1997. He worked for cash payments only. He became in demand by quite a few of the rich folks who then referred him to other rich friends.

He bought a home on a canal in Florida with Gulf access. He found an individual to do private financing. The home has two master suites. He rented the 2nd suite to a guy and used that rent money to rapidly pay down the loan to the investor. So he bought the house in 1997 (just before prices went nuts) and paid it off in 2009.

He owns 3 cars. The newest is a 1995 GMC Jimmy. Yes they all are old but they all look nice and run great. If one breaks down he sidelines it and drives another until it's fixed. In the last 28 years he has spent less than $3,000 buying cars and he estimates another $2,000 in maintenance. Most people spend that in car payments in one year.

He has never spent a dime on health insurance. Call it luck or call it smart, but he has never needed it.

He cancelled the insurance on his house when it was appraised for $100,000 more than what he owed--- IF THE HOUSE WAS TORN DOWN---LOT ONLY. Why insure it when he'd make money if a hurricane blew it away.

He now has converted his garage into another master suite that he is renting to a tenant that lost their house to foreclosure. Between the two rentals he can pay his few bills, food, and still has $500 to $600 a month extra.

Jim in San Marcos said...

Hi Ohio Loan Officer

Sounds like your brother has a recipe for success.

Back in the 1970's when jobs were scarce and I was unemployed, I bought a lawn mower on my Master Card and started up a lawn cutting business in Colorado that was quite successful. Cutting the same lawn week in and week out drove me nuts. I only worked 6 days a week in the summer time and skied the other half of the year. I couldn't handle the boredom so I sold the business and got a 9 to 5 job.

I think that the thing most people don't understand is the fact that it doesn't matter how much money you make (if you know how to hustle), it's how much you get to keep.

People tend to buy lots of toys like new cars. I'm like your brother, I drive mine until the doors fall off. You don't get rich spending money.

Success is not something that just happens, it's something you grow into gradually.

dearieme said...

If you persevere past the headline in this link, you'll find a comment on US inflation that might interest you.

Jim in San Marcos said...

Hi Dearieme

Thanks for the link. I think we can conclude that governments can hide the obvious to short change the retirees' COLA increases.

It irks me, when they claim that core inflation (excluding food and energy) is 3.5 percent. Why exclude food and energy? That's kind of like tallying up the number of deaths in a country and excluding those that die on the weekends.

Take care.

Jim in San Marcos said...


I think your right. The dream that everyone should have a shot at the American Dream is nothing more than a pipe dream.

I don't really agree with two wars in the Near East, we are not going to give them democracy, it's an abstract idea that you can't point to. But the war materials are produced here, and that keeps people employed. Military spending stimulates the economy and the war gets rid of old weaponry

The real stupidity lies in the fact that all citizens can vote. If they just made it taxpayers, you get rid of the welfare voters. Their vote counts just like any taxpayers. Congress can't be accused of not listening to the voters. It reminds me of Alexis Tocqueville's quote "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

As you suggest, the depression is-a-coming. We, as a nation wanted everything now, we got it, and now, we figured out we don't have the money to pay for it.

Hard times lie ahead for all of us.

Jim in San Marcos said...

Hi Frakrak

Your right in assuming that the taxpayer is the one who usually ends up paying the bills.

But with hyperinflation, it is the savers with money in the bank that end up paying the bill.

The way I figure it, in the next 6 years, all of the retirement plans go belly up. From there we start over again.

The trouble is, if you are 65 and retired with money in the bank, you'll lose it all. Which kind of sucks to say the least.

Anonymous said...

" food, beer, cigarettes, gasoline, drugs, and health care. "

I suggest, food excepted, the rest of these things could drop dramatically if the government stopped taxing them.

Tobacco and gasoline (in the UK anyway ) have excise duty of several hundred percent.

Anonymous said...

And ... Sterling and the US$ buys today a fraction of what it did this time the last century. So maybe we already have had the massive inflation.

Denninger, [sorry I like the man] said something quite interesting about the inflation / deflation debate. Actual coin and notes in circulation (US$) represent 2-3% of actual money, the rest is credit of one sort or another. We have experienced a massive credit expansion since the end of the ninteen sixties.

If we are on the verge of credit contraction, aka deflation. Can we really expect significant inflation?

To introduce inflation the government will have to print 53 times[or thereabouts] the amount of cash in circulation to make up for the potential deflation of credit.

Jim in San Marcos said...

Hi Anon 1:27

Denninger is on my blog roll.We are both in agreement that the financial system is in a mess.

I didn't catch what he was talking about, but the country having 2 to 3 percent of our money in currency sounds about right. The rest is in the bank not stuffed in a mattress. As our society uses credit and debit cards, cash is not really necessary anymore.

As for credit contraction, it is there. However people are producing less and there is a lot less consumption. There is no oversupply of needed items.

I would expect deflation if everyone's savings were wiped out and this hasn't happened. I would guess that there is three times the cash in savings avalable for purchase as there is product to buy at prices we are accustomed to.

When prices are low for high demand items, there are shortages. If there is plenty of money in the system, prices will rise. When there is an actual shortage of real savings to spend, you end up with low consumption and a surplus of product and that leaves you with deflation.

Inflation is not really visible right now, because people consider the drop in housing as deflationary and it isn't. We produced too many and nobody is in the market for a second one.

Anonymous said...

Jim: "I would expect deflation if everyone's savings were wiped out and this hasn't happened."

Again in the US the government insurance body (sorry can't remember its name) is supposed to take 'prompt corrective action' again, according to Denninger, that has not been happening.

In an ideal situation, when a bank gets into trouble the bank should be taken over BEFORE its liabilities exceed its assets, clearly that has not been happening and each bank that goes under represents a liability to the US deposit protection scheme - headed up, I think by Shela Blair.

In consequence, the whole system is bathed in red ink, those people who have savings in the bank - actually have no savings. The whole financial system is broke, when the realization dawns, it will be a matter of the first person will get his money as everyone tries to cram through the door.

It's just a matter of time. I have no doubt the same applies in the UK. We just don't have anyone with the depth and breadth of knowledge blogging about it.

Anonymous said...

Jim: 2There is no oversupply of needed items."

Not sure how to interpret that. There are two ways to invoke deflation:

1. oversupply and competition in the market.

2. increasing value of your currency. through undersupply and scarcity.

No. two drives the value of the currency up against goods - the same, I suggest as deflation.

In a system where Credit is 97% of the currency, a contraction in credit would drive the value of the remaining 3% of the currency up, in proportion to the contraction in credit.