How Much is that Dollar in the Window?

Some more wizardry by those who flunked Econ 101. There is a sense of panic out in the vast, snow-covered American hinterland (yes, I am including New Yawk, Warshington, and Lost Angels in hick country) with regard to what "money" is currently able to buy. This Reuters article is an interesting read, just for the nit-picking possibilities : Inflation slows to half-century low in 2008

"WASHINGTON (Reuters) - Inflation slowed to a half-century low this past year and industrial output fell for the first time since 2002, data showed on Friday, as the recession deepened toward year-end, raising the specter of deflation." ...

"Weakening activity worldwide has depressed commodity prices, pulling headline inflation down sharply. However, core U.S. inflation, which strips out volatile food and energy costs, is also slowing increasing the risk of deflation." ...

[Notice the blurb about food and energy costs? Are we talking industrial commodities, like steel? Today, on the Chicago Exchange, July 2011 wheat is up 19% over March 2009 wheat. December 2011 corn is up 21% over March 2009 corn. December 2009 lean hogs are up 13% over March 2009 lean hogs.]

"'Deflation is just around the corner,' said Meny Grauman, an economist at CIBC World Markets in Toronto. 'With the U.S. economy roughly one full year into a deep recession, the prospect of deflation is a concern for another time, especially on a day when the U.S. government has decided to inject billions more into the U.S. banking system.'" ...

[Huh? Run that past Barney Frank again...]

"Deflation is usually described as a dangerous spiral of falling prices causing economic contraction as consumers hold off purchases in the hopes of even lower prices. Mounting job losses, falling household wealth and tight credit conditions have forced consumers to hold back on spending, limiting businesses' ability to raise prices and encouraging some to offer heavy discounts to lure customers." ...

[ummm -- whose description? A politician's or an economist's?...]

"Analysts said the data illustrated the urgent need for a massive fiscal injection to turnaround the economy. President-elect Barack Obama and Congress are working on a package of spending and tax-cut measures to stimulate demand." ...

[Analysts? Banking analysts?...]

"'There is little hope of a near-term revival in manufacturing without a huge fiscal stimulus program implemented with a sense of urgency,' said Roger Kubarych, an economist at Unicredit Markets and Investment Banking in New York." ...

[Ah. Question answered.]

"The Fed has dropped benchmark interest rates virtually to zero and with little firepower left on that front, is concentrating on pumping money into troubled credit markets to try to restore lending, hoping to spur activity and beat back incipient deflation risks." ...

[Yes. We must borrow until we are back on a sound economic footing. Just trust them, don't think about it.]

"Core prices, which exclude food and energy items, were flat for the second month in a row in December. On a year-over-year basis, core inflation rose 1.8 percent, the smallest increase since December 2003 and still within a range Fed officials would be comfortable with." ...

[Lets see : spending is down, prices are still rising (but not as slowly), and we are ignoring the rapidly increasing cost of (food commodities) what people are still buying. Makes sense to reporters, I guess.]

I have a question. Is there anyone in these "think tanks" that is not politically motivated? We have a period in time in which the Federal Reserve, at the urging of the government, has gone berserk printing money backed only by the 'full faith and credit of the United States'. This is a Wizard of Oz moment in time, or maybe the emperor's parade is passing and I'm the little kid. (Do fairy tales have a basis in reality?)

Congress, please stop the nonsensical pretense at solving the current economic woes. The explanation for the problem is simple : if you eat too many plums, you get diarrhea. If you are sitting on the toilet, suffering from diarrhea, and feeding yourself plums as a means of curing yourself... do I paint an understandable picture?

Tim Harford (of Undercover Economist fame) has written an interesting post : The $10,000 Light Bulb … ; he states, "The official inflation rate tries to compare the price of a typical bundle of goods today with that of a typical bundle of goods in the past. But we do not consume the same goods today as we did in the past. How many Walkmans in an iPod? The question has no sensible answer, but an answer, nevertheless, is codified in the official inflation rate."

The sad truth is that measures of inflation or deflation [note measures!] may have no real impact on people other than the political necessity to tie increases in entitlement programs to some fictional explanation; the need to exclude food and energy costs arose when the need to limit the costs of government handouts became apparent. That is why you have an "official inflation rate", and why it is important to politicians and the bankers who pull their strings.

Actual inflation or deflation has an impact on real people, but mostly when it affects precisely the items excluded from the most prominent measures -- staple items like food and energy. The new $100 trillion Zimbabwe note (released today) is a case in point; in a country where a loaf of bread cost $30 billion (last week, anyway), and $10 billion, $20 billion, and $50 billion notes (released last week) are no longer enough, you have to make the bill bigger to sucker somebody into accepting it. Would you spend $22 million for a single sheet of toilet paper? (Oops -- last week's price, more expensive this week. Actually, if I were a Zimbabwean with Internet access and a Swiss bank account, I would try selling some of that money on e-Bay -- accepting payment only in Swiss francs -- to collectors in other countries!!!)

I will reiterate. Inflation of currency is the deflation of its value caused by printing more of it without any material backing. Declining prices of goods is not deflation; it is the refusal of buyers to spend inflated money on items for which they have no perceived need. As a result of the criminally profligate printing activities of the Federal Reserve as abetted by the government, we should begin to see, within a 3-6 month period, astronomical increases in the costs of food and other staple goods. Buy your garden seeds early. The only deflation 'real Americans' have to worry about is in the purchasing power of their dollars.

Now for our story problem. Senator Boozhwa has economic diarrhea from eating too many political plums. If poo-paper is $22 million per sheet (last week), how much will it cost the Senator to flush America down the toilet before the next election? [Hint : $800 billion will not be the final number.]