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Parabolic Inflation and “Deficit Hysteria”

One of the disturbing things about trying to understand the US economy is the sense that official statistics don’t match personal experience. They seem to be lying to us, in other words, and more blatantly all the time; hence the popularity of honest analysts like John Williams at ShadowStats.com.

Here’s another interesting alternative source, courtesy of Phil’s Stock World: the MIT Billion Price Project, which is an attempt to bring modern data mining to bear on consumer prices. As MIT explains its methodology:

Data collection: our data are collected every day from online retailers using a software that scans the underlying code in public webpages and stores the relevant price information in a database. The resulting dataset contains daily prices on the full array of products sold by these retailers. Our data include information on product descriptions, package sizes, brands, special characteristics (e.g. “organic”), and whether the item is on sale or price control.

The BPP index tracked the US CPI pretty closely at first. But lately the two lines have diverged, with the CPI staying well-behaved and the BPP spiking.

Which index is a better expression of reality? Time will tell, but based on recent experience it’s easy to believe that MIT is making the more honest effort to get it right.

Now for something different and more fun. The debate over the almost universally pathetic attempts to cut the federal deficit is generating heated words from all sides of the spectrum. Here’s an opinion from the depths of “don’t worry, keep spending” by MarketWatch’s Darrell Delamaide that hardly needs a response. It’s pretty much perfect as-is.

Deficit hysteria grips Washington

WASHINGTON (MarketWatch) – Deficit hysteria is rising to fever pitch in Washington as the political jockeying over the budget begins in earnest.

“Fiscal nightmare,” “buried under a mountain of debt,” “awash in red ink” – these are some of the colorful phrases being bandied about by politicians, pundits and even journalists ostensibly reporting facts. Most of them are winging it on a single undergraduate course in economics, if that, but they know they’re right because everybody agrees.

Yet, if you look out the window, you don’t see any red ink or mountains of debt. The only nightmare is unemployment continuing near 10% and ongoing waves of foreclosures – neither of which is attributable to the federal deficit and neither of which will be fixed by budget cuts.

President Barack Obama said that “just like every family in America,” the government has to live within its means while investing in the future. Obama said that’s what his budget accomplishes.

There is no visible harm from current deficits. Yields on U.S. Treasurys are up a tick but still near historic lows. Core inflation in the U.S. is still so far below the 2% annual rate deemed desirable by the Federal Reserve that deflation continues to be more worrying. There is no crowding out of private borrowers in the debt markets.

Just you wait, cry the deficit hawks, it will be a nightmare by 2016 or 2020 or 2050. Well, let’s wait and see. If we put those 15 million people back to work and get the economy growing at a steady clip, tax revenues will rise and cheat all those bloodthirsty hawks of their fiscal Armageddon.

Worried? Confused? Alarmed at the slow-motion train wreck in Washington?

There is cause for alarm. There is the possibility that the government, held under the sway of misguided and obsolete economic theories and driven by a not-so-hidden corporate agenda, will make genuinely harmful cuts in both discretionary spending and entitlement programs – cuts that will cause real and needless misery to millions.

The overwrought hysteria of the deficit hawks – one economist calls them deficit terrorists – has already sabotaged government stimulus that could have rebooted the economy much more quickly and alleviated unemployment to a greater extent.

It’s certainly useful to comb through the budget and reexamine programs for possible cuts. Military spending can certainly be cut back. Some recalibration of entitlements is also necessary.

But the helter-skelter axing of programs to meet a target pulled out of thin air – what’s so magic about $100 billion in spending cuts this year? – risks causing much unnecessary harm.

Before you succumb to the deficit hysteria, think about the disconnect between the dire language and the observable facts. Be careful about false comparisons – such as the U.S. going the way of Greece.

The U.S. is not Greece. The U.S. has full monetary sovereignty – that is, it has complete control over its own currency. Greece, as a member of the euro, does not, which is why it has constraints on its borrowing.

When the U.S. was bound by the gold standard, it also faced constraints. Most of the thinking and language about budgets and deficits actually goes back to this time, when the U.S. genuinely had to “finance” its deficit.

Since abandonment of the gold standard and the de facto adoption of a fiat currency, however, these constraints no longer apply. The U.S. is free to print as much money as it likes; the U.S. government is free to spend money without financing it.

How crazy, you say. What about inflation? Inflation occurs when there is more demand than supply and this simply isn’t going to happen when there is 8-10% unemployment. Treasury and the Fed have ample tools – selling debt securities and raising interest rates – to deal with inflation when it does threaten.

Modern monetary theory – which is espoused by a growing number of economists and investment managers because it explains the observable facts better than the obsolete theories driving most of the public discussion – deals with the world as it is without a gold standard.

A better comparison for the U.S. than Greece is Japan, which also enjoys full monetary sovereignty. Japan has a public debt approaching 200% of GDP. This compares to the U.S. at 60% in 2010 and on its way up.

Deficit terrorists have decided arbitrarily that 60% is the maximum limit. They have been predicting the imminent collapse of Japan – for the past 20 years. And yet Japan continues to finance its deficit with rock-bottom interest rates.

The federal government is also not comparable to a household. It does not have a checkbook to balance or a credit card to max out, even though our folksy politicians like to use these metaphors. It does not have to “live within its means” like a family or individual. Our grandchildren will never have to repay all that debt. No one will, ever. It will continue to grow as our economy grows.

All this flies in the face of all the groupthink going on in Congress, in the press and on cable TV. So if you want to reject modern monetary theory as hogwash and cling to theories that worked a century ago, you’re in good company. But think about it, look around you, and decide for yourself what best describes the world you live in.

38 thoughts on "Parabolic Inflation and “Deficit Hysteria”"

  1. We are fast approaching the end game. Oil price is already past the point that cause pain in every sector – you and me if we are driving, power, transportation, materials for manufacturing, etc. If Fed had increase interest rate or at least not carry out QE, then oil price may not have gone up to more than US$100. Now, instead of Fed being able to control the situation, the economy is at the mercy of market forces. If Fed continues to QE, then oil price will continue to surge and bring down the world economy. The next crash will certainly happen and nothing will bring the world economy back to normal again. Whether stress test of banks is actually allowing them to do accounting tricks or something of the same effect, we will know when the tide goes out. The next crash will be ugly and the national guards should be rounding up the bankers and regulators. They cannot claim innocence again. If they moved overseas, they should be hunted down and put behind bars.

  2. “The Federal Reserve prints the money…then charges us (the taxpayers) INTEREST on it while the printing press churns away endlessly through QE1, 2, 3…making a KILLING in profits and making our children and future generations of Americans debt slaves.”

    The Fed turns It’s profits over to Treasury in case you didn’t know that.

    All the critics I’ve read about this article so far has been nothing but ignorance.
    Our children cannot possibly have any burden associated with deficit spending today. It’s the other way around. If we don’t invest in our future and keep the resources idle today there is going to be less for our children.

    I suggest debt hawks start educating themselves about monetary sovereignity. Otherwise they are to economics like creationists are to biology.


  3. This article was a complete waste of my time to read and obvious propaganda. Basically, it states that we can rack up debt forever because “we” print our own money, but of course that is a load of crap. The Federal Reserve prints the money…then charges us (the taxpayers) INTEREST on it while the printing press churns away endlessly through QE1, 2, 3…making a KILLING in profits and making our children and future generations of Americans debt slaves. But that’s cool as long as we can have a new i-phone every year made by some poor Chinese peasant, right?

  4. Drivel, pure and simple, Drivel.
    Please excuse my analogy but this guy brought the attack on the twin towers to mind with his drivel. The first tower could represent the US economy prior to 9/11. The plane impact equates to BEAR STEARS, LEHMAN, and TARP. The people inside the tower represent American families, workers and savers. The firemen, police and emergency teams, i.e. the government, works to rescue the people trapped inside. All the while, Darrell, the TV reporter on scene, tells his viewers that the building, being modern, was built to withstand plane crashes. “Just forget about all that smoke and fire.”

  5. I meant to write something helpful or wise, but all I can do is simply say the above is a crock of BS, and must have been written by one of Obama’s Goldman Sachs cronies or Turbo Tax Geithner

  6. demand-pull inflation has everything to do with demand and supply. It only occurs when demand exceeds supply. that is the only risk associated with deficit spending. Monetarily sovereign government is not financially constrained. US federal government is currency issuer and very different from Greek government. US government can pay any bill and solvency is not an issue. Real resources are. If the real resources are available(10% unemployment) than there is absolutely no reason not to use those resources to create wealth. I repeat: US government is currency issuer(consolidated government since fed is government department really) and faces no solvency issues, It can never go broke. US money is government’s IOUs. Every time government spends It credits bank accounts and every time It taxes the bank accounts get debited. So every time government spends It creates money and every time It taxes It destroys money. Private sector has to pay taxes in this money, the only place It can get It from is the US government(when government spends). US government spending is not revenue constrained. US government doesn’t need to tax you to spend. US government doesn’t need to borrow before It spends. In fact issuing treasuries happens after. Government spend first and if there is a difference between spending and tax revenues then treasury issues securities. This is self imposed, operationally government doesn’t need to to that. Just think about It, I write you an IOU, do I need to borrow these IOUs from you? No, I can write them as many as I please.
    Taxes don’t fund government spending, so why does government tax at all? To regulate aggregate demand. Without taxing there would be excess aggregate demand and that would cause inflation. Right now there is now excess aggregate demand, there is excess capacity in economy(unemployment is total waste to the economy). Why are treasuries necessary at all since operationally government doesn’t have to issue them at all? They are necessary to drain excess reserves from the banking system. Otherwise the interest rates will drop to zero and fed cannot conduct open market operations any more.

    There is absolutely no reason to cut deficits when the demand is depressed.

  7. We are worse off economically today than ever. The results of the monetary policy of the past decades speak for themselves.

  8. I don’t know about you guys but he lost me at “Inflation is caused by supply and demand”. You have to be kidding me… a market watch reporter doesn’t even know the definition of inflation. Inflation has nothing to do with supply and demand.
    Here is the actual definition for you Darrell Delamaide. Just in case you missed that seminar in your economics class:
    Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

    Just so you know Darrell, I am applying for around 20 credit cards today, since it doesn’t really matter how much debit I take on, plus my kids will not have to worry about it so lets go nutz!! VEGAS anyone? I am buying since we don’t have to worry about debt anymore!! WOWOWO

    Is anyone actually educating themselves anymore? We cannot keep printing money. In the long run we will all suffer.

  9. We are on the gold standard, you cannot leave the gold standard, it will follow you everywhere. Last time I checked, all currancies were valued in gold. Print all you want Ben, you will not be able to escape.

  10. It seems to me that common sense economics would supersede any theories, regardless of whether the economy is based on the gold standard or the country’s own currency.
    Everything rides on the full faith and credit of the U.S. Government.
    Faith and credit are definitely related, they are 2 components that must be met, in order for the dollar to mean something tangible.
    If credit is infinite, that’s asking a lot for the faith component to cooperate.
    It’s hard enough for many of us who believe in an infinite God to give God our full credit and faith.
    How much less will we be able to give an out of control economy, whose very leaders earn so little of our faith?
    Don Levit

  11. Delemaide, the author of the second article, leaves out so many important aspects to the issue that it leads me to believe that it’s true intent is to obsfucate and confuse, unless Delamaide himself is “winging it on a single undergraduate course in economics”.

    Let’s take them one at a time. He says that if you “look out the window, you don’t see any red ink or mountains of debt.” That’s so ridiculous. “Red ink” is bookeeping speak for “liabilities” or for this discussion, deficit spending. I have never read or heard from any one, until this article, that the US is not running annual deficits well over $ 1 T per year. Similarly, I have never heard or read that the US national debt is anything less than about $8.5 T (depending upon how it’s calculated), and most agree that it’s almost $14.3 T which is why there is such a fight over raising the “debt ceiling”. Amazing. Is Delamaide suggesting that we’re all using broken calculators or something? (Now, whether or not one wants to call a $14-plus T debt “a mountain” is debatable, but also irrelevant.)

    His next point is more interesting, yet confusing. Treasury rates ARE near historic lows and so is the core-CPI. Yet here, Delamaide uses his own argument against his own. First he implies (and conflates) two things at once: That last month’s “low” inflation rate is both the reason that Treasury rates are low AND that it is a proxy for national debt and deficit levels (i.e., that little or no debt or deficit spending implies low inflation.) (Actually what he writes is even more convoluted than that because he confuses interest rates for yields. Rates have gone “up a tick” but yields have fallen. Anyway, I digress…) Ironically, his first implication uses the allegedly sophomoric decades-old economic thinking of the vocal majority to support his clarion call for “modern monetary theory”. His second implication (that low inflation implies low debt and deficits) is, evidently, something we all need to learn.

    When analysis fails to even mention all or most of the relevant facts I tend to discount the conclusions reached. Treasury rates are low for many, and often contradictory, reasons. Geopolictal strife generally lowers Treasury rates as allegedly “modern-monetary-theory”ignorant investors flock to the least ugly “safe haven”. Furthermore, the fact that interest rates started to rise at the advent of QE2 suggests that they would have risen even further had the Fed not started buying about $100 B Treasuries per month. If QE2 ends (and I don’t think it will) Treasury rates will rise again. And, to say that “there is no crowding out of private borrowers in the debt markets” is totally backwards. The only reason open market auctions have floundered is because private investors (although probably because they’re smitten with modern monetary theory ignorance) don’t want the shit because the yields are too low! What an A-hole.

    Yeah, we’ll see, “If we put those 15 million people back to work and get the economy growing at a steady clip, tax revenues will rise …” Hypothetically true, and probably by just enough to pay the additional interest cost on our non-existent debt, because – though this may be contrary to modern monetary theory – rates will increase as the economy improves.

    “Worried? Confused? Alarmed at the slow-motion train wreck in Washington?”

    Delamaide asks yet another perceptive question: “what’s so magic about $100 billion in spending cuts this year?” Here, I have to agree with him. $100 B is not nearly enough. Why? Because the only way to reduce the non-existent debt is to eliminate the non-existent deficit spending. Let’s do the math (without using our broken calculators). This year’s (non-existent) deficit of, say, 1.43 T divided by our current (non-existent) debt of $14.3 T is 10%. Now, 10% of the annual federal budget of $3.8 T is $380 B. Let’s see… $380 B is greater than $100 B, so that’s why. That is also why I am calling for an a-political across-the-board reduction in ALL federal spending of 10% per year starting immediately. Every salary, stipend, subsidy, department budget, “investment”, agency, SS check, Medicare payment, military allotment, pension contributions, pension payments, etc. No exceptions. No deals, “earmarks”, or “horse-trading”. No blame or accusations polictically either, unless your one of the modern monetarists union members in Wisconsin.

    Lastly, although I could go on and on with this guy, even low interest rates on Trillions of dollars worth of non-existent debt is hundreds of billions of tax dollars that must be extorted from the private sector which reduces productive investment, besides being criminal, etc.

    Gotta go….

    1. Well said! Thank you for taking the time to clarify what this troll clearly didn’t bother to cover in this piece of trash article.

  12. “What about inflation? Inflation occurs when there is more demand than supply and this simply isn’t going to happen when there is 8-10% unemployment. ”

    Oh, that’s right, unemployed people don’t need to eat, or drive cars, or pay their utility bills, doctor bills, etc.. They don’t have to pay educators for retraining and retooling their careers. In fact, they don’t participate in the economy at all. What an arrogant ass.

  13. Poor fella substitutes “Modern Economic Theory” for Laws of Economics. Maybe someone should explain the difference to him.

  14. Printing money will make savers, pensioners and would be pensioners big losers. The winners are the CEOs, highly paid high flyers and the finance industries.

  15. Nice read. At least one factual error in each paragraph. I can’t wait until these morons lose everything they have when the USD collapses. Thanks, John.:)

  16. What an idiot! The current deficit and money printing does not negatively affect anyone yet? What about the 20% decrease in the value of my savings acount – huh??? This guy obviously does not understand inflation and it’s impact on the populace!

  17. Typical Keynsian claptrap. I would suggest if “printing” our way out of our current mess is such a great solution, why not just get it over with. Pay off all of our current public debt….no wait, all of our public AND private debt using the magical press of Dr Ben. Problem solved…prosperity for all! Unreal that the author (of the marketwatch piece) cannot muster even a small sliver of logic to see how unrealistic his solution is.

    Fail. Epic fail.

    Thankfully there are individuals that actually endeavor to provide legitimate statistics. Thank you MIT BPP and Shadowstats…..

  18. G’day All,

    A couple of anecdotes, on inflation and budget cuts.

    We bought strawberries last weekend. When I opened the plastic container I was amazed to find that someone had taken the time to arrange the package such that the green unripe portion of each strawberry, 1/4 to 1/3 of the berry, was hidden. I cut away and tossed 1/3 to 1/4 of my purchase.

    The President’s budget contains a 12% cut to the U.S. Courts. Here in California state court budgets have been slashed resulting in longer waits for the guaranteed right to a day in court. So what do you think happens when people aren’t afforded peaceable means of resolving conflict?

    The market will work it all out you say? I will continue to pay more for less and refer disputes to Smith & Wesson? Is this really the best solution our alleged grownups in the room can offer?

    All the best,

  19. Japan is able to keep its interest rates low due to no inflation. Hence interest payments on 200% public debt in minimal. The US will be unable to keep rates low much longer as inflation continues to bite. Debt payments in the US now make up the biggest share of govmnt costs. (over and above military) Japan has minimal military expense and fights no wars. We can not compare the US situation to Japan’s. I suspect the US will default.

  20. I suppose the push for the SDR and the Bancor will not effect the dollar.? So, if one of the forementioned does happen to take place what will happen with all the dollars printed or inputted? No hyperinflation at all…lol. This guy should be fired for such ignorance. Claim 15 for your house hold b/c soon, the government will not send it back. Use local banks and credit unions….problem solved.

  21. These 10 charts are based largely on grossly underestimated data or data that doesn’t reflect the off balance sheet cr@p. You don’t have to be a pessimist to look at these charts and glean the realistic understanding that this isn’t going to end well.


  22. Regardless of the Pundits & people Whistling past the Grave Yard. It is wise for any Government to NOT run up deficits that cannot be paid for by projected tax revenues to be collected over a reasonable length of time. This applies to State and Municiple Governments particularly. My concern is that when they do start taxing to pay for it, the money is going to come out of some working persons pocket that would have spent that money for something their family needed, wanted or valued. The Goverment pays for too much that it should not. But I agree, some of these so called “Cuts” that are being served up are pretty mindless right now. Spending that invests in a country’s useful infrastructure and the majority of its Citizens individual well being and opportunity is really an investment–but something spent for the welfare of Corporations, some of which operate predominantly overseas and the narrow few is a Subsidy and should not be allowed in the Federal Budget.You decide, folks.

  23. Madoff started small. It was alright. Then his fund grew bigger. It was still alright. His fund could pay investors the returns. Then his Fund grew Bigger. It was alright although some people were complaining that it was dodgy. Then his FUND grew BIGGER and increasing exponentially. Hedge funds were getting in and leveraging. Then it blew up. Madoff’s remark after his fund went bust was that he wished he had been caught cheating earlier. He knew his ponzi scheme is unstainable. Are deficits that are rising exponentially sustainable? Perpetual machines have not been invented yet.

  24. “Here’s an opinion from the depths of “don’t worry, keep spending” by MarketWatch’s Darrell Delamaide that hardly needs a response. It’s pretty much perfect as-is.”

    Glad to hear you’ve still got your sense of humor and thanks for sharing that MIT BPP info.

  25. Come on, spend ever more as fast as you can. Because printing money actually creates wealth, without having to work! “Modern monetary theory” says so and it’s all the rage! Actually producing stuff is so . . . 19th century!

    At this point I want them to spend and print as fast as they can, so the system will crash and the insanity will end. Then we can begin rebuilding.

  26. As the cup of arrogance fills, so do the stakes. And the stakes today are fairly high-risk. The gentleman’s comments are commonplace – and for good reason. Like he says, ‘the world we live in’.

    The wildcard that Mr. Delamaide discounts, is the extremely fragile moorings upon which this facade of an ‘economy’ is anchored. As it stands here & now, he’s somewhat correct. However, the likelihood of a protracted ‘slog’ – in either direction, save for housing prices, diminishes almost by the day, as the stakes get higher with each passing month of debt-interest payments in the face of even more debt accrual.

    And of course, all of this ‘domestic’ stuff does not include anything unforeseen that might happen on the geopolitical stage – but no worries there, right?

    Mr. Rubino is correct, a piece like this doesn’t need anything added. It’s got all the right ingredients from the start.

  27. Forever growth….I almost forgot. I feel so much better now. It’s also good to know that energy inputs into an economy don’t matter either….. He mentioned that right? Did I miss that?

  28. Whew, that MarketWatch article is a piece of work. Mr. Delamaide seems to think we had a scientific breakthrough in 1971 — presumably the advent of his “modern monetary theory” — and discovered what no one else had ever thought of before: that you can just print the money! Whee! How can it not occur to him that there has to be a catch?

    According to Phil’s Stock World we’ve had 2% inflation over just the past 6 weeks, which annualizes to about a 19% inflation rate. This in spite of the declining quality and size of many products, and the unsustainable margin compression in companies trying to keep prices down. Most people aren’t going to know who is to blame but the middle and working classes are going to start getting angry.

    1. Paper… You are correct! You ALWAYS have to look and see who signs the author’s paycheck, or where their interests lay. Too many are simply pushing the company line of B.S. and they add a long list of titles or supposed experience for their claim to being expert in something. (Remember the old def of “expert”? A drip under pressure. ) I wonder what Darrell’s smoking? Or, maybe he lives in some alternate universe?

  29. So this article says we can rack up debt forever because we print our own money? How does that explain the Weimar republic or Argentina, Zimbabwe or the other 26 hyperinflations since the 19th century? The author might respond that they printedl, whereas we can borrow. But wait a minute, we’re already being warned by China and other countries about our debt at its current level. In fact, QE was enacted because China wouldn’t increase its US treasury holdings by 68%. I know that, because its stated purpose was to bring down long-term interest rates, and they went UP upon the announcement. If the stated intent were true, QE2 would have been abandoned. Bottom line, there is no such thing as an “unlimited” amount of debt we can rack up!

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