Inflation is leaking back into the US

Feb 21, 2011

Paris, France

The big news at the end of the last week was barely noticed. Inflation - which had been going down for the last 30 years - may have finally bottomed out.

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It's too early to know for sure. But January showed an up-tick. Prices rose 0.4% during the month, say the number crunchers at the BLS.

Last year, the core rate of consumer price inflation in the US was only 0.7%. Nothing, in other words. The feds were desperately adding to the base money supply. But the banks didn't lend. And people didn't have jobs. So the money never got into the consumer economy. It was, after all, a Great Correction.

Instead, the hot money went overseas, where it bid for hot foreign stocks and hot "auction-priced" global goods - like food and energy. Commodities soared. Food riots broke out. Cotton just hit a new record high. Oil is trading over $100 a barrel, for Brent Crude.

And then what happened?

What goes around, comes around. Inflation began leaking back into the US.

Inflation went out of the US - courtesy of the feds. Foreign central banks had a hard time keeping up with it. They had to increase supplies of their own currencies to soak up the US dollar liquidity. Pretty soon, the whole world seemed to be bubbling up.

But now, the foreigners are re-exporting inflation back to us. How do you like that? Surely there is some congressional committee ready to investigate. Surely there's some member of Congress ready to make a jackass of himself by calling for a ban on it.

In the meantime, if you want to buy a food item imported from abroad you'll pay about 30% more than you did a year ago. Or, if you want to buy a barrel of oil, that will cost you about 60% more.

And now this imported inflation is raising consumer prices across the USA. Almost every business in America uses imported energy. Every American eats. As far as we know, you can't buy home-grown pineapples or coffee beans - not in the 48 states! And so, what do you know? Prices are going up.

In January, core consumer prices - not including food and energy, directly - rose 0.4%.

Wait a minute. If that happened every month, it would put the CPI at 4.8% for the year. That would be a lot higher than the 2% maximum allowable CPI that Ben Bernanke will permit. If it gets any higher - he promised on national television - he'll put a plastic bag over its head...just as he would to an aged relative.

Of course, we don't know whether disinflation has really bottomed out or not. And we remember the early '80s, when inflation topped out. Nobody knew for sure that Paul Volcker really had the matter under control. It took years before the new trend was clear.

Most likely, we'll see the same phenomena again...but distorted, as though reflected, grotesque and absurd, as in a bent-up mirror.

This time, we'll find out that Ben Bernanke has lost control completely. He may want to raise rates. But with 30 million people unemployed...will he be able to do so?

And let's imagine that this inflation squeezes corporate profits - it's already happening. How long will it take before investors begin to dump stocks? In the early '80s, they slowly, cautiously began to buy stocks...this time they'll be selling.

So, Ben Bernanke - guardian of the nation's money, guarantor of full employment, promissor of a bull market on Wall Street - will be in a very uncomfortable position. He'll have the plastic bag in his hands. He'll want to stifle inflation. His hands will shake. His voice will quake.

And he won't be able to do it....

But heck, that's still in the future...maybe far in the future. If disinflation has bottomed it could still be years before we're sure of it...and months or years before Bernanke's bluff is called.

In the meantime...

*** The Zombie Wars have begun. Social welfare governments are in trouble. They've made promises they can't keep. Will they own up and scale back the spending? Or will they go broke?

We've seen the massive strikes in France and fighting on the streets of Athens. We've seen the Prince of Wales attacked on the streets of London. And now the battles have begun in the US too.

Look at what happened in Madison, Wisconsin. Rep. Paul Ryan put it in perspective for MSNBC's 'Morning Joe:'

"It's not asking a lot, it's still about half of what private sector pensions do and health care packages do. So he's [the Governor is] basically saying, I want you public workers to pay half of what our private sector counterparts and he's getting riots -- it's like Cairo has moved to Madison these days,"
And here's the New York Times' report:
MADISON, Wis. - As four game wardens awkwardly stood guard, protesters, scores deep, crushed into a corridor leading to the governor's office here on Wednesday, their screams echoing through the Capitol: "Come out, come out, wherever you are!"

Behind closed doors, Scott Walker, the Republican who has been governor for about six weeks, calmly described his intent to forge ahead with the plans that had set off the uprising: He wants to require public workers to pay more for their health insurance and pensions, effectively cutting the take-home pay of many by around 7 percent.

He also wants to weaken most public-sector unions by sharply curtailing their collective bargaining rights, limiting talks to the subject of basic wages.

Mr. Walker said he had no other options, since he is facing a deficit of $137 million in the current state budget and the prospect of a $3.6 billion hole in the coming two-year budget.

"For us, it's simple," said Mr. Walker, whose family home was surrounded by angry workers this week, prompting the police to close the street. "We're broke."
*** World improvers are nice people. But they are egotistical morons.

They always want the best for humankind. How do they know what's best for people on the other side of the planet? Well, they don't. But they're vain enough to assume that everyone wants to be like they are.

So, if there are riots in's because the locals in the desert want to be more like the locals in, say, Madison, Wisconsin.

From Byron King, editor of Outstanding Investments, rated #1 by Hulbert for the last 10 years.
"The mainstream media is playing this as some sort of "democracy" revolution, where the hip, savvy, tech-head youngsters want to challenge the authority of the old princes and emirs, etc. Soon, the Middle East will be run just like Madison, Wisconsin... or something like that.

Not to be too flip, but that's way too tame.

Nope, this is religion and demographics boiling over. The Facebook folks might be part of it... but that's not the key to the story.

We need to assemble the pieces of this puzzle, and be prepared for what it may show... a civilization in open conflict and likely collapse.

Back in the 1990s, I spent time a fair amount of time in Bahrain.

Bahrain is about 70% Shiite, and 30% Sunni. The Sunnis run things, as in... government, industry, business, banking, commerce. Which is another way of saying that the Shiites are consigned to the other side of the camel-tracks.

I recall driving (and walking, too!) around Bahrain, and encountering these surly-looking groups of under-employed young men -- mostly Shiites, locked out of the economy. Nothing to do but smoke cigarettes, make a few dinar in the underground economy (as in, hauling 100-lb bags of stuff on their shoulders, loading trucks and such)... and nurse grudges against the guys on top.

It always struck me that Bahrain was a pot -- one pot among many on the stove -- that would boil over, sooner or later. I guess we're there....

Across the Middle East, we're watching a large-scale earthquake occur within Arab-Muslim culture. Different elements in different places, of course. In Bahrain, the lines are between the Shiite majority and the Sunni bosses, who lord it over. This aspect of Arab religious feudalism is falling apart. My bet is that the Bahraini bosses have dusted off the Chinese playbook from Tien an Minh Square.

Elsewhere (Egypt, maybe Libya?) we're seeing the end of the secular-military bosses running things -- Egypt's 1952 coup that spawned "Col." Nasser, and the subsequent ruling junta -- Gens. Sadat & Mubarak.

And Libya with its 43 year rule by "Col" Khadafy. (I guess he let it get too public that he's hanging out with that buxom Ukrainian babe who goes everywhere with him.)

Now the "rule by colonels" is giving way to a rising desire for rule by clerical principles- In lands where there's little in the way of a real economy to support what's coming.

As to that last item, at least in Iran, post-1979, they were exporting 5 million barrels of oil per day. That kind of oil money can subsidize a lot of utter stupidity.

So what to do?

Here in the West, we've seen nations collapse... Germany, Japan after WWII. We've seen empires collapse -- USSR. We've seen upheaval in global relationships -- the 1990s, as the "Soviet Bloc" unwound.

We've never seen a civilization in upheaval -- like now across that North African & Middle East arc. We're looking at the past 75 years or so of the "basic assumptions" about the Arab world breaking down in front of us.

Even when China had its war & civil war (1920s through 1940s) -- it was contained within China. What happened in China stayed in China. China had no key, crucial exports for the world. And the Chinese worked it out internally -- not pretty, but they worked it out.

We've never seen something like what's about to happen in the Arab world.

We in the West had better batten down the hatches for this one. And do our best to invest around it.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Inflation is leaking back into the US"

girish v shah

Feb 21, 2011



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