CPI Usefulness and Uselessness

Mark Thornton of the Mises Institute wrote an article on the many failures of the CPI.  His article is worth a read, but I am going to add a few things that were not directly mentioned.

First off, I will often do a short commentary on the latest CPI numbers for my readers.  I fully acknowledge that the CPI statistics are government-issued numbers and are far from reliable in actually telling us the true inflation picture.

I use the CPI though for a couple of reasons.  First, the Fed and financial analysts look at this data, so it is important just from that standpoint.  For example, if the CPI comes in low, then the Fed is more likely to pursue a looser monetary policy.

A second reason I use the CPI is for trends.  It doesn’t give us a good picture of asset bubbles, such as in stocks or bonds, but it can help us with trends for daily consumer goods.  While the CPI has its many flaws, it can still give us a decent picture of what prices look like.  I can also look at my grocery bill, but it is too small of a sample with too many variables.

Near the end of his piece, Thornton quotes someone writing about what prices would look like today if the money supply had not changed since 1959.  For example, a hamburger would only cost 12 cents today.  But this short excerpt is open to criticism because he does not address the fact that nominal wages are also far higher today.

The bigger point that needs to be made is that central bank monetary inflation distorts markets and misallocates resources.  This will tend to cause bubbles.  It will also cause certain prices to rise before others, and wages typically lag behind.  It also harms savings and production.

I think many libertarians and Austrian School economists make a mistake sometimes in obsessing over price inflation.  I hear many say that price inflation is severely understated right now.  That may or may not be the case, but that is not the main point.

Rising price inflation is not the only bad consequence of the Fed’s monetary inflation.  It is not even the biggest consequence in most cases.

As stated above, the Fed’s monetary policy misallocates resources.  This is the main problem.  It doesn’t matter if the CPI is at 1% or 10%. If the Fed is creating money out of thin air, then it is misallocating resources and distorting savings.  It redistributes wealth and it makes our overall standard of living lower than it otherwise would have been.

When the Fed started increasing the money supply like crazy in the fall of 2008, many libertarians were predicting runaway price inflation.  Some were even saying we would get hyperinflation.  Some are still saying that.

But Austrian economics isn’t supposed to predict that for us.  What Austrian economics does is tell us this monetary inflation is bad for the economy.  It tells us that resources are not being put to their proper uses and we are poorer for it.  A rising CPI is just one possible consequence of an increasing money supply.

Price inflation has stayed relatively low because most of the new money created by the Fed went into bank reserves.  We have not seen the fractional reserve lending process multiply the money.  In addition, money demand has stayed high because some fear remains from the last major recession.

We may still see high price inflation in the future.  That is what I am betting on.  But it doesn’t make Austrian school economics wrong if we don’t get high price inflation, regardless of how you measure it.  Austrian economics tells us that we would be better off if the Fed doesn’t engage in massive monetary inflation.  It can’t predict the future though, and it can’t give us the exact consequences of such a policy.

In conclusion, the CPI is useful in giving us trends.  It is also useful in helping us guess Fed policy going forward.  The CPI is useless – at least these days – in telling us the damage that the Fed has done.  The next major recession will give us a better indication of just how much damage the Fed has done.

FOMC Statement – April 29, 2015

The FOMC has released its latest statement on monetary policy.  It is not really showing its hand in regards to interest rates.  The bigger news of the day was the first quarter GDP coming in at a measly 0.2%.

As I have said before, the obsession with the Fed raising rates is overblown.  It really doesn’t mean as much as the financial media is making it out to be.

Since 2009, as the Fed has dramatically increased the monetary base, the new money has gone into excess reserves in banks.  Therefore, the banks easily meet their reserve requirements and have no need for overnight loans.  This is what the federal funds rate reflects.  It has been under a quarter of a percent because banks don’t need the overnight loans.

The Fed can raise the federal funds rate, but it has no impact on the money supply at this point.  The Fed can inflate, deflate, or keep a stable money policy, as it is doing right now.

In addition, the Fed’s threat of raising the federal funds rate has done nothing to raise market interest rates.  If anything, rates have gone down, despite markets factoring in future Fed rate hikes.

The GDP is the bigger story here.  If the economy is headed into a recession, then new talk will come up about another round of quantitative easing.  That is the real significance.

Until we hear talk about a new QE program, we will watch the stories about Fed interest rates with mild interest.

Rand Paul vs. The Other Republican Candidates

I haven’t been weighing in much on presidential politics, but I’m sure I will get into it more as the year goes on.  I don’t know that it is going to make much difference in who ends up in the White House, but it is still a good idea to pay attention.

Rand Paul is now in full swing and his comments are being recorded.  He came out and said that ousting Saddam was a mistake.  I’m not sure that it takes that much courage or wisdom to say that in 2015, but there are still a lot of Bush apologists in the Republican ranks, including a Bush that is running.

On the other hand, Rand Paul also stated that he stands by Obama in his use of drone attacks that “accidentally” killed two hostages, including an American.  I put the word “accidentally” in quotes because what does anyone expect when people are dropping bombs from thousands of miles away?

Rand Paul is the most pro-liberty candidate in the field right now for either major party.  Perhaps it would be more accurate to say that he is the least statist.

Rand Paul is also probably the best senator out of a hundred, but we can only judge that based on what he says.  It also isn’t saying much with that group of people.

With that said, I hope that libertarians are not counting on Rand Paul to be anything like a good president, if elected.  Maybe we could hope that he would be slightly better than Ronald Reagan, who grew the federal budget by two-thirds while in office.

On foreign policy, I don’t trust Rand Paul at all.  He will fold in favor of the establishment.  He probably won’t be a war hawk to the extent of George W. Bush, but he could still be bad.  Don’t confuse Rand for his father, Ron.

If Rand Paul is already sucking up to the establishment by taking these wishy-washy positions on foreign policy, then it will be even worse when he is president.

I really don’t like to pick on Rand Paul, but there is little choice at this point.  I think his dad is great and he has been the single biggest promoter of liberty in the last hundred years or more.  And I’m sure Rand Paul is a nice guy.

I don’t like being so critical of Ron’s son, but he has given us no choice.  He is a sitting U.S. senator.  He is running for the presidency.  He wants to have power over our lives.  Therefore, I have no choice but to criticize him where he ought to be criticized.

I am not against Rand Paul any more than any of the other candidates.  But if I spend more time criticizing him, it is only because many libertarians support Rand Paul and I don’t think they should.  They can support him when he says something that is actually pro liberty.  But overall, he does not deserve to get the same supporters who supported his father.

We’ll see how his ever-changing positions develop as the campaign goes on.

The Zero Aggression Principle

The late, great libertarian Harry Browne was an original founder of the American Liberty Foundation.  This ended up becoming the Downsize DC Foundation.  For tax purposes, this split into the Downsize DC Foundation and DownsizeDC.org.

You can sign up at DownsizeDC.org and there are campaigns to email your so-called representatives in Congress on various issues.  They all seek to downsize DC.  The system makes it easy to do, as you can enter in your initial information and then it is easy to send a message to all three of your representatives with basically the push of a button.

Now the Downsize DC Foundation is initiating a project called the Zero Aggression Project.  At its core, it promotes the idea of the Zero Aggression Principle, or ZAP.

The ZAP promotes the idea that you should not initiate force or the threat of force against others.  Most people follow this in their daily lives, but they fail to apply the same principle to what we call government.

Harry Browne was a big advocate of getting rid of the federal income tax.  He said that if you persuade someone on a single issue such as gun laws or the drug war, then you will just convert that person on one issue and they can’t generalize it to a universal principle.

“But”, Browne said, “when you’ve persuaded someone that we need to repeal the income tax and reduce government accordingly, you’ve gained a new libertarian.”

Harry Browne certainly knew what he was talking about, but perhaps he did not go far enough with this idea of persuading on a universal principle.

The Zero Aggression Project and its core principle of the ZAP are there to persuade people based on purely moral arguments.  It’s primary purpose is not to try to persuade people based on their self-interest.  And interestingly, this seems to work better than utilitarian arguments.  And once you have gained agreement on the ZAP, you have gained a hardcore libertarian.

As the Downsize DC Foundation put it, “This contradicted everything we ‘knew’ about marketing [and] the entire structure of the libertarian movement”.

I believe this is the way going forward to achieve a more libertarian society.  We can argue all day long about this or that detail of each law.  But the way to gain new and principled libertarians on a consistent basis is by hitting people with the moral arguments.

The moral arguments should come first.  After some acceptance is gained, then you can start answering some of the details, or perhaps those interested will just do all of the research themselves.

The Zero Aggression Principle is the way forward.  We have to put a priority on using moral arguments first.

Obama Taking “Full Responsibility” for Operations

It was reported that an American and Italian, who had been held hostage by al-Qaeda, were killed in January.  The Obama administration has admitted that they were killed in the border region of Afghanistan and Pakistan due to U.S. counterterrorism operations.

Obama says that he takes “full responsibility for these operations”.  Does that mean he is going to jail?  Does it mean he is stepping down as president?

It is not clear why Obama came clean with this admission, but we can assume that this story was going to come to light at some point anyway.  I know that Obama promised an open and transparent administration when he first campaigned in 2008, but the actions of the administration have been quite the opposite up until this point.

Obama also says that an independent review will be conducted to find out what happened.  However, he assures everyone that the operations were lawful.

This just shows that the law is a joke.  I don’t really care if it was lawful.  This is what separates libertarians from others.  Libertarians don’t really care what is printed on a piece of paper and signed into law.  The issue is whether it was moral.

Since it was an American that was killed, Obama had to address the country, and the media will give it some attention.  But why is Obama all of a sudden sorry for this happening?  I guess that means he isn’t sorry about the tens of thousands of innocent people who have been killed either directly or indirectly from U.S. military presence overseas.

If these two people were killed inadvertently by American operations, then how many innocent people are killed who aren’t Americans?  Do the people of Afghanistan, Iraq, Pakistan, and elsewhere not count?  I guess they don’t count to Obama or a large portion of the U.S. media. They don’t seem to count with many Americans in general.

Murder is murder.  It doesn’t matter if it is an American or a little Pakistani child walking home from school.  U.S. drones are almost infamous for blowing up wedding parties and funerals.  These are innocent lives being taken out on an almost constant basis.

There are a lot of people responsible for this, but Obama could stop it all, or at least try to stop it all.  He is a responsible party, just as Bush before him is a responsible party.  If he is allowing drone bombings in foreign countries, then he is part of the murdering regime.

If you are an American, imagine how you would feel if a foreign country came in and started bombing your neighborhood.  Imagine that they cut off the water supplies.  Imagine that foreign troops are seen walking around your neighborhood.  Imagine that your family is blown to pieces by a drone in the sky that you know comes from the invading foreign government.  Who are the savages?

Most Americans are very peaceful and loving people, but we should not turn a blind eye to the atrocities that go on in our name overseas. The actions of the U.S. military in the Middle East are the opposite of peaceful and loving.  Thousands of people die, but many Americans only seem to take note when an American is accidentally killed.

Watch the 10-Year Yield in Greece

I finished writing a short piece yesterday on Greece running out of time and then looked at Drudge Report and saw a couple of stories on Greece.

In particular, shares in Greek banks are hitting all-time lows and the rumors are picking up that the European Union may let Greece sink.  Perhaps they are finally going to stop throwing away good money.

I checked the 10-year yield for Greek government bonds and, as of this writing, the yield is over 13%.  It is about double what it was a year ago.

Interest rates had spiked back in 2011 and 2012 to really high levels (above 30%) with fear of a default.  Then Germany and the rest of the EU came to the rescue and bailed out the Greek government.  Things calmed down and interest rates went back down.

Germany’s 10-year yield is nearing zero and Switzerland’s 10-year yield is in negative territory.  Even Italy and Spain have low yields.

Since Greece is still tied to the euro, at least for now, we can assume the high interest rates are not an inflation premium.  Instead, they are a default premium.  The market sees virtually no risk of default for German bonds.  But the risk premium for Greek debt is going higher quickly, as it should.

We may see the Greek 10-year yield spike even more over the coming days as more people anticipate a default.  I’m guessing no readers here are invested in Greek debt (hopefully), but it is still an interesting story to watch.

When the EU finally quits bailing out Greece and Greece leaves the EU, it will be interesting to see the ramifications.  Will other countries follow close behind?  Will the euro strengthen or weaken?  What will Greece look like and will it see some kind of hyperinflation eventually with its own currency?

As shaky as the American economy is, Americans should be thankful to not live in Western Europe or Japan.  The U.S. is still far less of a welfare state than most other places in the world.

Greece Running Out of Time

We can’t forget that Greece is still a major news item in the financial world.  It may not be getting a lot of attention at this moment, but it will be back in the spotlight shortly.

It is looking as though the Greek government will run out of money sometime in mid-May.  It won’t be able to pay the interest on its debts.

The European Union can continue to kick the can by lending even more money to Greece, but it will just be flushing more money down the drain.

There was an article on Yahoo Finance titled “It’s time to stop worrying about Greece defaulting”.  Perhaps this is the financial press coming to grips with the inevitable.

The article states: “Greece will be better off if it rebuffs the tough austerity measures demanded as a condition of two bailouts by European authorities.”

This is what is not understood, or is being purposely portrayed incorrectly.  If Greece defaults on its debts, then the EU so-called austerity for Greece will look like nothing.  If Greece defaults on its debts and nobody is willing to lend the government any money for a while, then they will see some true austerity.

The government won’t just be defaulting on its debt, but also many of the promises it has made to Greeks.  It will mean busted pensions and massive layoffs.  It is the only long-term solution, unless the EU (mostly Germany) wants to bail out Greeks indefinitely.

Be ready for more fireworks in the next few weeks.  We will see if the proverbial can gets kicked again or if this is the end of the line.

The price of gold has been hanging around the $1,200 mark for a while now.  Perhaps a Greek default will finally put some movement into the price of the yellow metal.

CPI Numbers for March 2015 – Published April 17

The latest CPI numbers are in for March 2015.  They show an increase of 0.2%, whether or not you include food and energy.

The price of oil has stabilized for now, or even gone up a bit, so this plays something of a role here.

The year-over-year CPI now stands at -0.1%.  But if you take out food and energy, it is at 1.8%.

The median CPI gives a better picture of overall price inflation.  It has stood at 2.2% for the last 6 months.  You can see that this number is far less volatile.  It takes out the big swings of items such as oil (or those things directly correlated to oil).

Overall, the CPI numbers are still relatively tame when you consider that the Fed has basically quintupled the adjusted monetary base since late 2008.  But much of this money went into bank reserves and the demand for money remains high.

I believe that with the Fed’s current tight monetary policy (its latest round of QE ended about 5 months ago), there is a considerably high risk of recession.  And even though the Fed is threatening to raise the federal funds rate, the market rate of interest for longer-term bonds has stayed low or even gone down.  The 10-year yield is under 2% as of this writing.

As long as the CPI numbers do not jump up dramatically, then a recession looks to be a more immediate threat than anything else.  We won’t see higher interest rates until we see higher price inflation numbers come in.

I still think the big story right now is China.  It is a country of 1.3 billion people with a massive real estate bubble and now a massive stock market bubble.  If the Chinese central planners have been able to prop up these bubbles for this long, then who knows how long the U.S. stock bubble will last?

China is in far bigger trouble than the U.S., yet they have managed to keep the game going.  I don’t think it is going to last much longer, but it really is amazing how many years it has gone on.

Perhaps a Chinese bust will lead the world into something of a global depression.  I know the U.S. has been somewhat immune to the weak economies of the rest of the world in the past, but the U.S. has its own major dislocations that will shake out.

This may sound pessimistic, but it is just the reality at this point.  You really need to prepare and put yourself in a good position for when things do get rough.  I think the biggest threat is the Fed’s next reaction and how much it returns to more monetary inflation.  But that will come after the initial downturn.

Technology and productivity in many sectors will continue to grow, despite a bad economy.  But we should be prepared for some rough economic times ahead.

The CPI numbers are indicating that a recession is a more immediate threat than price inflation.  If this outlook changes, then I will be sure to provide updated information.

German Bonds Near Zero Percent

I recently wrote an article about worldwide low interest rates.  This is just an update to that piece.

The German 10-year yield has hit 0.1%.  We are not talking about 90-day treasuries here.  We are talking about turning over your money for a 10 year period in order to earn one-tenth of a percent of interest per year, which is effectively almost nothing.

In Switzerland, the yield on the 10-year has been in negative territory.  It has been as low as -.25%.  That is a minus sign.  You can turn over your money to the Swiss government for 10 years and pay a quarter of a percent of interest.

I really have no idea how this would work.  Do you actually have to write a check for the interest “payments” or do they just deduct the interest that you owe when you get your principal amount back after 10 years?

This sounds absolutely ridiculous and it really is.  This is the world that central banking has brought us.  Normally we think of higher rates because of inflation, but central bank buying can drive down rates in certain circumstances.

Right now, I believe there is a lot of fear and that is the biggest reason for low interest rates.  Money demand is high.  Velocity is low.  Money is not changing hands quickly because people are scared.

As I said before, if I lived in Greece, I might consider buying a German bond to earn essentially nothing.  I might even consider buying a Swiss bond and paying a small amount for the safety.  My first preference would be to accumulate some gold if I had a relatively safe place to store it.  But the last thing I would want to do is keep money in a bank in Greece.

One other reason for low, or even negative, interest rates is diversifying out of currencies.  This logic doesn’t hold up as well for German and other European debt, but it definitely holds up for Swiss debt and the negative interest rates.

If you use the euro or any other currency and you want to diversify, it might make some sense to buy Swiss debt.  You convert your money into francs and buy the debt, paying a small fee, which is the negative interest rate.  When it is time to get your money back, if the franc has appreciated against your usual currency, then you will be better off when you convert it back, at least as compared to having kept it in your faster depreciating currency.

Again, I would prefer to buy gold, as it acts as a better hedge anyway, but that is not always a viable option for some people.  In addition, some people just want further diversification.

I have one last question on this topic.  If you buy a bond with negative interest rates, do you get to write this off as a loss on your taxes?

Waiting for the China Bubble to Pop

The U.S. has had its share of bubbles in the economy.  There was the stock bubble (technology in particular) in the late 1990s.  There was the housing bubble of the early to mid 2000s.

You could even say that there was an oil bubble that has popped.  You could even say it has happened twice for oil in less than a 10-year period.

While the U.S. has seen its share of bubbles, which I largely attribute to the Federal Reserve, at least the bubbles have popped at different times.

China may not get so lucky.  I have known for several years about the real estate bubble in China.  They have built ghost cities that could house a million people or more, yet they sit virtually empty.

It seemed the real estate sector was starting to cool, but the central bank in China keeps trying to prolong the inevitable.  And in doing this, not only has it allowed the real estate bubble to stay alive for now, it has also spawned a stock bubble.

The Shanghai Stock Exchange Composite Index has doubled over the last year.  It is up over 25% year to date.  It sat under 2,500 just back in November 2014 and has now exploded past the 4,000 mark.  This is basically a parabolic rise.

These things don’t usually end well.  This could be the final part of the boom phase.  I am amazed it has lasted this long, but sometimes things take time to shake out, especially when you have a determined central bank.

China could very easily experience a stock market crash and a housing bust simultaneously.  This isn’t going to be pretty.  It will be China’s first modern-day recession, unless you count most of the 20th century as one giant recession.

There will be ramifications for Americans.  The Chinese might actually stop buying up U.S. government debt, which I would actually view as a good thing for the long term.  It would stop subsidizing Washington’s spending.

I believe the U.S. may have its own stock bubble, but it is nothing compared to China at this point.  Watch China closely, as it could get very interesting, very fast.