Home » inflation » Inflation is Raging – If You Know Where to Look

Inflation is Raging – If You Know Where to Look

by John Rubino on November 25, 2013 · 40 comments

Most people – certainly most governments and economists – define inflation as a general rise in prices. But this is wrong. Inflation is an increase in the money supply, of which a rising general price level is just one possible result – and not the most common one.

More often, excessive money creation shows up as asset bubbles, where the new money, instead of flowing equally to all the products that are for sale at a given time, flows disproportionately into the ‘hottest’ asset classes. Readers who were paying attention in the 1990s might recall that the consumer price index was well-behaved while huge amounts of money flowed into financial assets, producing the dot-com bubble.

The same thing happened in the 2000s, when excess currency flowed into housing and equities. In each case, mainstream economists and government officials pointed to modest consumer price inflation as a sign that things were fine. And in each case they were simply looking in the wrong place and completely missing the destabilizing effects of an inflating money supply.

Now we’re at it again, with economists, legislators and central bankers using low consumer price inflation as a rationale for even easier money, while ignoring epic bubbles in sovereign bonds, equities, high-end real estate and collectibles around the world. These bubbles are the true evidence of inflation, and since they’re growing progressively larger, it’s accurate to say that inflation is high and accelerating. Let’s take some exotic examples, first from the art world:

Art prices painting a disturbing picture of inflation

The Francis Bacon painting “Three Studies of Lucian Freud” was sold for a whopping $142.4 million as part of a $691.6 million Christie’s sale on Tuesday night, making it the most expensive work of art ever sold at auction.

Some argue that the sale is giving us a message about inflation that investors aren’t getting from the action in gold, the Dollar Index, or the government’s official consumer price index data.

“Asset inflation took another leg higher last night,” wrote Peter Boockvar in a Wednesday morning note. “Thank you Federal Reserve, and thank you Bureau of Labor Statistics for not including art in the consumer price index.”

And this from…would you call it the jewelry world?:

Most expensive diamond ever sold goes for $83.2M

Sotheby’s just dropped the hammer on the most expensive diamond ever sold. The stone, a 59.6-carat flawless pink diamond called the “Pink Star,” was auctioned for $83.2 million, according to Sotheby’s. That made it the most expensive jewel or diamond ever sold at auction.

The previous record for a diamond sold at auction was $46 million, for a 24.68-carat pink diamond bought by Laurence Graff in 2010. The auction follows yesterday’s Christie’s sale of the largest fancy-vivid orange diamond known to exist, a 14.82-carat stone that sold for $36 million—the highest price-per-carat ever paid at auction.

Now, if the super-rich are going to covert their paper currency into tangible things – at a time when governments around the world are contemplating wealth taxes – they need safe, confidential storage. And the market is responding:

Über-warehouses for the ultra-rich

PASSENGERS at Findel airport in Luxembourg may have noticed a cluster of cranes a few hundred yards from the runway. The structure being erected looks fairly unremarkable (though it will eventually be topped with striking hexagonal skylights). Along its side is a line of loading bays, suggesting it could be intended as a spillover site for the brimming cargo terminal nearby. This new addition to one of Europe’s busiest air-freight hubs will not hold any old goods, however. It will soon be home to billions of dollars’ worth of fine art and other treasures, much of which will have been whisked straight from collectors’ private jets along a dedicated road linking the runway to the warehouse.

The world’s rich are increasingly investing in expensive stuff, and “freeports” such as Luxembourg’s are becoming their repositories of choice. Their attractions are similar to those offered by offshore financial centres: security and confidentiality, not much scrutiny, the ability for owners to hide behind nominees, and an array of tax advantages. This special treatment is possible because goods in freeports are technically in transit, even if in reality the ports are used more and more as permanent homes for accumulated wealth. If anyone knows how to game the rules, it is the super-rich and their advisers.

Because of the confidentiality, the value of goods stashed in freeports is unknowable. It is thought to be in the hundreds of billions of dollars, and rising. Though much of what lies within is perfectly legitimate, the protection offered from prying eyes ensures that they appeal to kleptocrats and tax-dodgers as well as plutocrats. Freeports have been among the beneficiaries as undeclared money has fled offshore bank accounts as a result of tax-evasion crackdowns in America and Europe.

Parallel fiscal universe
Freeports are something of a fiscal no-man’s-land. The “free” refers to the suspension of customs duties and taxes. This benefit may have been originally intended as temporary, while goods were in transit, but for much of the stored wealth it is, in effect, permanent, as there is no time limit: a painting can be flown in from another country and stored for decades without attracting a levy. Better still, sales of goods in freeports generally incur no value-added or capital-gains taxes. These are (technically) payable in the destination country when an item leaves this parallel fiscal universe, but by then it may have changed hands several times.

Some thoughts
Clearly, inflation is raging. But because so much of society’s wealth is flowing to the top 1% — who after all can only drive one car at a time and tend to eat no more than the rest of us – inflation isn’t showing up in food, suburban houses or other mass-market products. Instead, trillions of disposable dollars are pouring into real assets that are then hoarded in mansions and high-end storage facilities. This is a truly startling asset grab when you think about it.

The one unique thing about this episode is that past migrations of capital from financial to tangible assets have included precious metals, which tend to be in demand when paper currencies are being mismanaged. That gold and silver aren’t participating is the strongest proof yet that they’re being manipulated to hide the impact of rising debt and excessive currency creation. After all, if you’re going to spend $100 million on art, your financial adviser will almost certainly tell you to diversify into farmland, oil wells and gold bars.

That this hasn’t happened doesn’t mean it won’t. Picture a chart tracking the tangible asset classes of the super-rich: art, jewelry, high-end London and Manhattan apartments, beachfront property, gold bullion, etc., things that exist in limited supply and will be prized no matter what the S&P 500 or 10-year Treasuries are doing. Virtually all the lines on that chart would would be looking parabolic right about now – except precious metals. A billionaire, trying to figure out where to move his next hundred mil would look at this chart and see one outlier, one thing that hasn’t yet gone through the roof, and make the obvious choice. That day is coming.

But looked at another way – in terms of the amount of paper currency being used to buy them – you could say that gold and silver are by far the most popular tangible assets in the world. China, India, and Russia between them have snapped up about 4,000 tons of gold this year, worth about $153 billion at the current price. That’s a lot more than was spent on art. It’s just that these purchases, massive though they are, aren’t moving the price.

But they are moving something: the gold reserves of the Western central banks that are sending their gold eastward. Those reserves are falling, at an unsustainable rate. So Western central banks face a tough choice: keep sending their gold to Asia until it’s gone, or let the super-rich bid it into the stratosphere in line with art and diamonds. Sooner or later, the central banks will have to choose door number two.

  • Willy1964

    Wrong. Inflation is an increase of credit and it counterpart debt.

  • Keepitsimple

    Brian .Moucka

    • retro22

      Potatoes for us peons will become unavailable at any price once all of this funny business destroys our economy!

      • pipefit9

        After not doing any gardening for about 20 years, I decided to take the hobby back up when I moved to a place that would accommodate it. I was surprised that it took me about three years to get fully back up to speed.

        So there will be potatoes, if you know how to grow potatoes. But $250 of food stamps might not buy very many potatoes at the store after the coming reset.

        What is not announced on the news very often is that, in addition to US Treasury Bonds held by foreigners, the same foreign people hold USA currency, Fannie Mae Bonds, and other liquid dollar instruments to the tune of over $11 trillion.

        I have a gut feeling that we have passed ‘peak foreign dollar holding’ and are beginning the start of the great worldwide dollar repatriation. At first it will be barely noticeable, then quicker paced, then a crisis of some sort will cause a flood. It would be wise to own a bicycle on that day, and to have some gardening skills as well.

      • terry1956

        potatoes are easy to grow.

        • pipefit9

          “potatoes are easy to grow”

          Of the houses in my city that have space for a vegetable garden, I estimate that less than 1 in a hundred have one. This is somewhat difficult to measure, since vegetable gardens tend to be in back yards.

          Of the 47 million Americans on food stamps, how many supplement their snap cards with home grown produce? Not many, I’d guess. And these are people who, by definition, cannot afford to feed themselves.

          I’m in an area where apples grow very well. There are many apple trees growing along public streets and in parks. Apparently, growing conditions for apples were near perfect this year. Many hundreds of trees were heavy with fruit this Fall. But people are so conditioned to believe that food comes from the store, the fruit remains untouched, rotting on the ground. Good for the deer, though.

  • Keepitsimple

    What does this have to do with the price of potatoes for the average person?

    • tom thumb

      Eating Potato’s is like eating a candy bar not good for the sugar/insulin in your body…..Go for the High protein nuts, your body will thank you for it, and you will live longer as well.

      • rockflyer

        The starch in the potato breaks down to glucose, which the mitochondria in every cell can use for energy, just add some body movement and you’re good. The candy bar is fructose and sucrose which are poisons that, like booze, are broken down in the liver to heart choking fat. Not equal at all.

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  • JohnnyB

    Hmmm…. well, I don’t think this article is logical. You are assuming that it is newly printed money that is being spent on luxury/collectible items. That’s the only way you can say that these higher prices are a result of “inflation”. But there is simply no proof of this. In fact, it is highly unlikely that the “rich” are spending “newly printed money” on luxury and collectible goods. The more obvious explanation is that with the demise of the housing and stock markets in 2008, coupled with extremely low interest rates, people are looking for alternative investments in which to park their cash. It is well documented that after the 2008 crash, collectibles like rum, whiskey, art, coins, guns, and many others went up in price because there was an influx of new collectors/speculators looking for alternative ways to protect their investment capital. This was WAY before the Fed started inflating the money supply. So it seems much more realistic to say that these high prices are not due to new easy money, but rather due to existing investment capital moving away from housing, bonds, and low interest bank accounts. Although SOME of this new easy money will invariably end up being spent on luxury items, not enough of it will be spent in order to drastically raise prices.

    • PaperIsPoverty

      The rich have benefited from the increasing financialization of the economy, which has only been able to continue for so long because the financial world is propped up and bailed out by new money from the Fed. To name one method, Wall St buys Treasuries & sells them back to the Fed a week later and charges transaction fees. Or it borrows money at 0% interest and buys sovereign debt, getting free money via this privileged interest rate arbitrage. Meanwhile the Fed manipulates stocks higher now as well (a third mandate). None of these paper profits have any relation to economic productivity in the real world. This financial bubble, which has been extended beyond all logic or sense, is why the 1% are now so rich their greatest problem is figuring out what to do with their oodles of cash.

      • JohnnyB

        And this proves what exactly? I never said that the rich weren’t potentially getting richer. But do you have any proof that they are specifically using newly printed money to buy art and other high priced items? This is the proof that is necessary to support what the article purports. The article claims that the increase in the money supply must be causing inflation because the price of art has gone up. Please show me how this can be proven at all. The price of art can easily go up without inflating the money supply. And there is no proof that the price of art went up BECAUSE the money supply increased. After all, the price of many things went up WAY before the Fed started increasing the money supply. This whole article is just complete speculation and not even reasonable speculation. He is trying to justify his world view that increasing the money supply ALWAYS causing inflation. He can’t point to any normal inflation indicators so he sees some other unrelated price go up and decides to blame the price increase on increased money supply. All the while he conveniently ignores the fact that there is absolutely no known correlation between the two events.

        • PaperIsPoverty

          The argument (as I see it) is two-fold: First of all, the rich distrust the financial bubble and fear currency debasement, so they’re motivated to convert cash into hard assets. And yes, in that instance art and diamond prices could still go up, but the rich would need to be pulling hundreds of millions in cash from the banking system, or else abandoning some other category of asset purchases, to fund these astronomical art & rare gem prices. Is there any evidence of that? Are hedge funds shutting down left and right because of withdrawals of funds? Are the rich suddenly no longer buying any yachts or small islands? All I can say is that I haven’t read any such thing. More super-yachts have been sold so far in 2013 than were sold last year, and swathes of real estate are being bought for cash. Anything the rich buy is being bought up. So that brings us to the second part: if the money’s not being pulled from the financial sector, nor coming from deferred purchases in other areas, then it’s coming from increased income, which right now means financial profits, artificially increased by central bank money printing. The price rise is coming from new paper wealth due to monetary ease. That’s a reasonable argument in my book.

        • Bruce C

          I agree with “PaperisPoverty”. The “rich” are probably selling Treasuries which have (probably) maxed out in price mostly due to Fed QE, and are selling stocks to late comers after a 5-year bull run, and putting some of that cash into “hard assets” like art and diamonds (and probably gold too, especially since it is one of the few assets that has actually dropped in price.)

          Money is fungible so it is impossible – but also basically meaningless – to say that money spent for such-and-such is or isn’t “new”. The point is that QE does create new money which adds to the total stock and one of the Fed’s stated intentions is to create at least 2% annual price inflation within a “zero” interest rate environment. That’s 2% according to the Fed’s chosen and controversial inflation indicators which have indicated a DIS-inflation rate for the last 5 years despite other inflation indicators such as the CPI formulas used during the 80‘s, or the price of basic necessities (e.g., food, energy, insurance, housing, medical care, etc.), or the price of “hard assets” such as farm land, real estate, and – yes – fine art and diamonds.

          Other than asking the buyers of fine art and diamonds why they paid what they did there really is no way to prove their reasoning. But their reasoning is irrelevant to the fact that fine art and diamond prices are rising which constitutes price inflation by definition. The bottom line is that there is definitely out-sized price inflation with certain things (“if you know where to look”) despite the Fed’s claim that deflation is still a threat and thus the justification for further debasement of the US dollar.

  • Keepitsimple

    As far as I know the government doesn’t distinguish inflation/deflation by economic divisions. Inflation for the rich may be drastically different from the poor. A 30% rise on potatoes prices for the rich means nothing, while for a person on fixed income is devastating. Social Security benefits increase 1.5% in 2014. What does this have to do with paying a million more for a painting?

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  • Ric

    You missed the biggest inflation of all. Food packaging shrinking and prices going up or staying the same AT BEST! It is all around the middle class when they have to use debt actively to maintain a reasonable lifestyle that their income used to cover and then some.

    Dont you EVER forget John, the wealthy NEVER suffer inflation. Inflation pays them!

  • Bruce C

    Considering how reluctant I am to keep things in just a safe deposit box at a bank I’m surprised that a) people are so willing to store things at a “freeport” and b) that such information as this has even gotten out. How can they trust that desperate governments aren’t going to confiscate that stuff at some point? They have already proven to be lawless, and there are so many excuses that could be used, and “the masses” wouldn’t care and may even relish it. We shall see how that works out.

    Also, I think it’s interesting that some ultra-rich people are so willing to bid up the prices of some works of art and diamonds to double and triple the prices paid just a few years ago, and yet ordinary investors are reluctant to buy gold because they think they missed out on its bull market.

  • Agent P

    Potatoes are actually Very good for you. Make sure to leave the skins on. Now then… There’s a civilization across the pacific that’s been around for long about 5000 years. They sorta know how certain things work – despite the various dynasties and chairman Mao, you don’t hang around that long and not learn a few things about the way individuals – and societies, work. And think. And act.

    Given that, the Chinese seem to have a real penchant for gold these days. Mainstreamers and day-traders alike here in the West, tell us gold’s bubble burst in 2011 and it doesn’t pay anything anyway, so broom it… I sorta think it boils down to a test of two minds. Both smart. Both adept at sleight-of-hand, trickery and Tom-foolery, but one mind sees the folly of the other – specifically in its impatience and unwillingness to think ahead, for sake of short-term $benefits. And capitalizes on it. Which is what the Chinese are doing right now. There is no telling just how much gold the Chinese have at this point in time. It could be on the order of a couple thousand tons. There are whispers that it could in fact be Multiples of that amount.

    What we can digest from this hoarding however, is that the Chinese are once again, preparing for something that the round-eyes either have yet to comprehend, or are purposefully ignorant of, both. I think the real surprise however, comes not from the Chinese simply stacking away quietly, no. I think there is going to be a ‘grand opening’ of sorts – with world dignitaries and media invited to attend. The ‘event’? A viewing of China’s State gold vault/s. An open invitation for the global economy to do business with, and trust, a nation that backs its currency with the historic, time-honored monetary metal of value.

    And what might hasten this event? Oh I don’t know – perhaps attempts at trying to isolate the Chinese in their own backyard by way of military threats, Trans Pacific Partnership type agreements and the like – who knows…? One thing we do know however, is that keeping the world on a $USD standard for the majority of trade – most importantly oil, is of Paramount importance to literally, the life of the U.S.

  • Fred762

    What I thought as soon as I read it: WTH is going to keep some greedy pol(s) w a small army and lotsa weapons, from waltzing IN to the whse and walking OUT w the swag?? Yeah I know, there has always been a “kings X”(Switzerland, Caymans, etc) but someone has to watch it. Who do you trust? Interesting, huh?

  • agglebert

    no inflation in food prices???? please send the spliff you are smoking because I cannot cope with the increasing cost of food . thanks!

  • hookerslapper

    I would argue that it has hit precious metals too – it just hit them sooner because the markets for them are more liquid / easily accessible. Just 10 years ago gold was about $300 /oz and silver $7 /oz. That’s roughly a 300% / 200% increase, respectively.

  • DaveZiffer

    Good article, but you neglect to mention the very most obvious locations of price inflation, namely the prices of the assets that the Fed is buying directly with its new cash. Those would of course be Treasury bonds and mortgage-backed securities. What till the price of a T-bill be on the day when even the Fed, the only real current net buyer, disappears? What will the price of a house be when only private institutions are still buying mortgages and the prevailing mortgage rate is 10%? Treasurys, mortgage-backed securities, and all their derivatives (including houses) are vastly overpriced. All of this will be painfully evident on the day the house of cards collapses.

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