Wholesale inflation rate soars..

[Neil D]

AP Source The question of this president's ultra conservative policies have brought the US to a new low...that of returning inflation....

By MARTIN CRUTSINGER, AP Economics Writer

9 minutes ago

WASHINGTON - Inflation at the wholesale level soared in January, pushed higher by rising costs for food, energy and medicine.

The Labor Department said Tuesday that wholesale prices rose 1 percent last month, more than double the 0.4 percent increase that economists had been expecting.

The January surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years, since prices had risen at a 7.5 percent pace in the 12 months ending in October 1981.

The worse-than-expected performance was certain to capture attention at the Federal Reserve, which has chosen to combat a threatened recession by aggressively cutting interest rates in the belief that weaker economic growth will keep a lid on prices.

But the combination of rising inflation and weaker growth raises the threat of "stagflation," the economic malady that plagued the country through the 1970s, when a series of oil shocks left households battered by the twin problems of stagnant growth and rising inflation.

The 1 percent jump in wholesale prices followed a 0.3 percent decline in December and was the biggest one-month increase since a 2.6 percent increase in November. That gain had been driven by sharply higher energy costs.

The big jump in wholesale prices followed a report last week that consumer prices had risen by a worse-than-expected 0.4 percent, reflecting higher costs for food, energy and health care.

The wholesale report said that energy prices jumped 1.5 percent, as gasoline prices rose by 2.9 percent and the cost of home heating oil jumped by 8.5 percent.

Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.

Core wholesale inflation, which excludes food and energy, posted a 0.4 percent increase, the biggest increase in 11 months. This gain was led by a 1.5 percent spike in the cost of prescription and non-prescription drugs.

The cost of book publishing was up 1.7 percent while the price of light trucks and passenger cars both rose by 0.3 percent.

Prices excluding food and energy are up 2.5 percent over the past 12 months, the fastest 12-month gain since a 2.5 percent rise in the 12 months ending in October.

[Dr. Shane]

One really has to SPIN this story to blame ultra-conservative policies. (I have yet to understand how "ultra" conservative is different than just "regular" conservative)

Food costs are rising because of ethanol production. Is ethanol one of those "ultra" conservative ideas?

Energy costs are rising in part due to the expanding economies of India and China and in part due to speculation. Where are the "ultra" conservative policies there? It is concern for the environment (perhaps justified) that keeps the US from tapping large oil reserves off the coasts of Florida and California as well as in Alaska. Are these environmental policies now part of the "ultra" conservative agenda?

[fccool]

We have a doublespeak here . Conservative and ultraconservative policies by definition would not result in inflation. These usually favor saving and conservative spending and borrowing. The more money you borrow, the more overall supply of it devalues, and the less things that the money you have will purchase. So it is actually the liberal policies of overspending and over borrowing that cause the price hikes.

[Bravus]

Perhaps what Neil is talking about (I can't speak for him) is the conservative belief in absolutely unfettered and unregulated markets. The roots of pretty much this entire catastrophe are in the policies that allowed the banks and financial institutions to package up a whole lot of really bad quality debt and sell it off as though it were good quality debt. It can be argued that a policy setting that saw a larger role for government in actively legislating and regulating against such abuses could have averted or reduced the impact of the crisis.

[Bravus]

'conservative' and 'liberal' are increasingly useless terms though, since they now tend to refer to large constellations of loosely associated beliefs and values

[Neil D]

The more money you borrow, the more overall supply of it devalues, and the less things that the money you have will purchase. So it is actually the liberal policies of overspending and over borrowing that cause the price hikes.

Ok, let me get this straight....

The last 8 years, a conservative has been at the helm of this country. He set the agenda. The previous 8 years, a conservative congress under Gingrich ruled the roost....

Precisely, what "liberal policys" were being enforced by a liberal goverment???

[Dr. Shane]

Bush and Gingrich are not in the same category of conservative. I think it was no coincidence that Gingrich stepped down as Speaker of the House when Bush took office as President. The two of them have very different ideologies for the role of federal government.

[Neil D]

Bush and Gingrich are not in the same category of conservative. I think it was no coincidence that Gingrich stepped down as Speaker of the House when Bush took office as President. The two of them have very different ideologies for the role of federal government.

And how does that affect the " the liberal policies of overspending and over borrowing that cause the price hikes."???

[fccool]

I guess what I was trying to say that Bush was not conservative in his spending. He nearly doubled the governmental debt during his presidency. Granted, much of these spending were due to the wars. So you would expect that from any country going to war, as wars are fought using deficits ("borrowing" printed money) that people will eventually pay via inflation.

It did not matter who was in the White House, this trend was not something that one party adheres less than another. They sure do talk much about balancing the budget, yet there are no real attempts to do so. But that's politics for you.

As far as unregulated markets, conservatives do not believe in these as both parties hold to Keynsian economics. This one requires a central bank which regulates the economy via handouts and interest rate manipulation. The banks would never have made these sub prime loans if the interest was not kept artificially low. Market interest rate would never have allowed for that, unless there were people who could pay that stuff back.

To demonstrate what is going on. We have tons of subprime loans and banks STILL practice loaning these out... and why? Because that's how banks make money. They package that debt as securities and then it goes up to the derivative market where people are willing to gamble to gain higher profits. If markets were let loose with interest rates, then people would not borrow something that they could not afford.

So it is precisely the artificially regulated rates that caused this credit boom. People wanted to borrow money because of the

"no money down" low interest rates, and the banks were only happy to lend it, knowing that they could turn around and sell this debt as a IOU at a lower rate. Now we have an entire "industry" of these sub-prime hedge derivatives that everybody is having a heart attack over.

[Dr. Shane]

Quote:

how does that affect the "the liberal policies of overspending and over borrowing that cause the price hikes."???

One must remember that fccool's positions are outside of the political reality of today. I think he or she would freely admit that.

Terms that I use, on the other hand, are within the framework of the ruling political parties and the spectrum of relevant political thought within the arena of political ideas in our current world.

President G.W. Bush has been a big spender. I doubt Gingrich would have went along with all of Bush's programs had Gingrich remained Speaker of the House.

The current inflation is due to 1) using our food to make fuel and 2) refusing to access the fuel sitting off our coasts and in Alaska. Neither of those two policies are part of conservative thought.

[fccool]

Shane, I know it's hard to bite a hand that feeds.

http://video.google.com/videoplay?docid=...h&plindex=0

[Neil D]

Quote:

how does that affect the "the liberal policies of overspending and over borrowing that cause the price hikes."???

One must remember that fccool's positions are outside of the political reality of today. I think he or she would freely admit that.

Terms that I use, on the other hand, are within the framework of the ruling political parties and the spectrum of relevant political thought within the arena of political ideas in our current world.

In other words, you don't know what he/she is talking about.....

Thank you, Shane...

[fccool]

If you look at the inflation purely as a fluctuation of supply demand sides of goods, you will miss the big picture:

And that big picture is in fact the real inflation, which devalues money relatively to the supply of the goods.

[Dr. Shane]

Quote:

In other words, you don't know what he/she is talking about.....

I understand what s/he is talking about. That is not the issue. I am just saying that it may not be too relevant in a discussion about current events because it is coming from a conspiracy-fringe type of element. I don't want to pass judgment on him/her as an individual so I can only talk about others I have known with similar beliefs. They won't buy stocks or bonds. They invest only in precious metals. They have lots of guns, ammunition, canned goods and attend "militia" meetings. They are preparing to be ready for when society falls apart at the seems. These are not exactly the type of people you get into a normal discussion about current events with.

[fccool]

They won't buy stocks or bonds. They invest only in precious metals. They have lots of guns, ammunition, canned goods and attend "militia" meetings. They are preparing to be ready for when society falls apart at the seems. These are not exactly the type of people you get into a normal discussion about current events with.

NONE of which is true in my case. I don't own guns, I do invest, and I don't buy any food outside of having a pantry stash. I am trying to be fairly reasonable and ask you reasonable questions. Questions like... What do you think is the cause of the currency devaluation that you see in the graph above? Questions that you can not answer by way of modern economic idea. Classical view holds that currency devaluation is historically explained by banks and governments issuing money out of nothing. Some of the biggest minds through history agree with my position. Would you dismiss these too? A young economist Alan Greenspan wrote this in 1967:

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

Was he a fringe lunatic too?

[Dr. Shane]

I don't know if the posted graph is accurate or not, don't have time to look into it and it really doesn't matter. The decrease of a currency is basically due to the manipulation of the interest rate by the central bank and the increase in the supply of the currency. However that is an academic discussion for another thread.

In discussing the inflation we are currently dealing with it boils down to the increased cost of energy and food - caused by converting food into energy. The falling dollar does play into the situation. Since oil is sold in dollars and the dollar is falling, those selling the oil are charging more dollars since their dollars are of less value. However that is only a small part of the problem. The US dollar has fallen 22% since the Euro started in 1999. If oil only increased by the same amount over the same amount of time it would cost around $30/barrel now instead of around $100/barrel. So obviously there is more to the price of oil than the falling value of the US dollar.

[fccool]

Shane, the wholesale prices, which this article is talking about, are not pinned solely to the price of oil, and the price of biodisel grains. The prices of food and energy will fluctuate, and these always had. But the steady universal price hikes over the years makes sense more when we discuss the diminishing purchasing power of the dollar. So if we look back far enough, then a pattern is emerging. Once again in Greenspan's own words:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Greenspan never publicly retracted the words of this essay, so I think deep inside of his soul he still holds these views, although his actions as a Fed chairman did not support his views on this subject.

I don't advocate going back to the Gold standard, as I think it will solve little. We have enough problems as it is with people cornering the money markets, and this is the biggest problem with gold. Nevertheless, I think that looney Greenspan was right about the intentions though.

As far as rising Oil prices, there are always more than one factor.

Quote:

Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall “significantly” were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.

The pegs restrict the Gulf’s ability to fight inflation by forcing them to shadow U.S. monetary policy at a time when the Fed is cutting rates to ward off recession and Gulf economies are surging on a near five-fold jump in oil prices since 2002.

Rifts are growing across the world’s top oil-exporting region on how to tackle inflation which hit a 27-year peak of 7 percent in Saudi Arabia in January and a 19-year peak of 9.3 percent in the United Arab Emirates in 2006, the most recent figure.

“In the short term free floating … will not fully dissipate inflationary pressure, although it would significantly do so,” Greenspan told an investment conference in Jeddah, Saudi Arabia’s second-largest city.

Saudi and UAE central bank chiefs spoke in favor on Monday of retaining dollar pegs, while Qatar’s prime minister advocated regional currency reform to avert possible unilateral revaluations designed to curb inflation.

“The economies of the Gulf and the United States are completely out of sync and that is exposing the shortcomings of the dollar peg,” said Simon Williams, Middle East economist at HSBC Holdings Plc in Dubai.

“Against a backdrop of inflation, high oil prices and low interest rates the debate over currency reform has to take on greater urgency,” he said.

[Bravus]

Currently reading Terry Pratchett's 'Making Money'. He's an extremely smart man, and writes about serious things in very, very funny novels.

[Dr. Shane]

Let's go back to the original post.

"Inflation at the wholesale level soared in January, pushed higher by rising costs for food, energy and medicine."

No mention of a falling dollar there.

"The 1 percent jump in wholesale prices followed a 0.3 percent decline in December and was the biggest one-month increase since a 2.6 percent increase in November. That gain had been driven by sharply higher energy costs."

Again, no mention of a falling dollar there.

"Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply."

No mention of a falling dollar.

So there we have it. The topic of the falling dollar may be interesting but is off topic. Our current inflation is being driven by the cost of energy and food which is being used for energy.

[Neil D]

Quote:

So there we have it. The topic of the falling dollar may be interesting but is off topic. Our current inflation is being driven by the cost of energy and food which is being used for energy.

not necessarily....Since I posted this, and since the subject is the dollar and since we started talking about the inflation of that dollar, the devaluation is not only of interest, but would add to our understanding of the economic forces that shape that dollar....

Carry on...gentlemen....this subject should be big enough for all now...