Fed Claims Disappear in Light of Math

[Blower]

Fed Claims Disappear in Light of Math
- But Congress Won’t Ask
By Dan Spillane
The Liberty Whistle
(SEATTLE) 02/13/05 - How is it possible for bonds, stocks, homes, commodity prices, and the trade deficit to be breaking out to all-time new highs, all at the same time?

Recent claims by the Federal Reserve that “inflation isn’t a problem” can be shown to be patently false, when math is applied.

Consider what is said about costs; specifically that labor accounts for 2/3 of production costs, with materials the other 1/3. Yet when that 1/3 doubles in price—as is the case now, for many materials as supply agreements run out—the resultant increase far outstrips other costs. A net doubling of costs for this 1/3 leaves an overall price increase of 100 times 1/3 or 33 percent—trouncing “tiny” increases in costs due to labor or health care. In fact, car makers the world over are reporting plans for 2005 vehicle price rises due to overwhelming price pressure. As further confirmation of intense inflation, a recent Federal Reserve poll of US companies suggests that price rises are so extreme, over half of the respondents said higher input prices would have “some” or “substantial” negative effect on business (Phil. Fed, 12/2004).

A 33 percent jump in overall costs is unprecedented--the closest scenario to such in the US is the 1970s, or possibly 1987.

More vexing still, is US home price appreciation, in light of high inflation, and relatively low US wage growth. The situation in the US is unlike other countries with high home price growth, such as England, where wage growth has been strong. Moreover, in the US, home price rises have been turned into an alternate to wages, leaving a long-term net deficit.

Which brings up the same question…how is it possible for bonds, stocks, homes, commodity prices, and the trade deficit to be breaking out to all-time new highs, all at the same time?

You’ve got me! Where does this all go? I’m not sure. But I am sure these thorny questions won’t be asked of Mr. Greenspan in front of Congress this week.

www.libertywhistle.us

[applegrove]

1. Think of all the jobs lost in the last 7 years. That and wages

for industrial workers, IT workers all falling.

Only a few areas in the economy are hot. Not everything. And there was almost deflation at the start of Bush's Presidency. But the War took care of that.

[Blower]

4. I read once that without real estate bubbling in California

There would be NO net job growth in California since Bush got in.

I also read that companies in California can't hire in places "due to high prices of housing." (that story is on my web site, scroll down).

These are awful catch-22s!

[applegrove]

6. I wonder about housing too. For sure baby-boomers are at

''time of life' where they may get a second home. Also the rich these days seem to have a home for summer, a home for skiing, a home for every day.

I think all of these things push up the cost of buying a house. Kind of like the rich over-bidding so that the less well off have to pay those huge house prices. Now - as to why there would not be housing being built in California I do not know. And then the housing market will go caput (for demographic reasons) in 30 years or less. So that sort of makes it scary to buy a home too - if you cannot count on it to keep its wealth, let alone appreciate.

[AndyTiedye]

2. They Drive Wages Down While Prices Go Up

That way they can claim there's no inflation.

[Blower]

3. So where does this situation lead?

The Fed has a math model they run on how wages have to catch up with house prices in order for the economy not to fall apart.

[AndyTiedye]

8. At This Point, That Would Require An Interest Rate

of about -2%

[Blower]

5. Yes, you are right. n/t

[applegrove]

7. But think how nice it is for the Oil Industry. They can raise oil prices

But think how nice it is for the Oil Industry. They can raise oil prices and not worry about hyper-inflation. Now the rich lost much in the way of money during hyper-inflation of the late 1970s. Think how nice for them that the price of oil and 'arms' can go up but that it doesn't affect the economy to such an extent that hyperinflation starts. Thus preserving all of their wealth.

In high inflation the real value of the dollar declines. That doesn't affect people who have nothing in the way of cash. But it affects the middle class and rich a great deal.

Cocktails anyone!!

[Lydia Leftcoast]

9. Damn that math anyway!

It cuts through too much BS. That's why we have to keep our young uns ignorant of it.