PCE Gap
A plot of PCE vs Real PCE shows the impact of inflation over time.
I picked 2012 because that is the year the BEA indexes 2012 at 100.
PCE Deflator vs Fed Target
PCE vs Real PCE Spread
- August 2012: -7.6 Billion
- June 2020: -1,333.7 Billion
Between 2012 and June of 2020, inflation took $1.33 Trillion from reported nominal spending.
This is despite the fact that the Fed is struggling to reach its inflation target.
Fed’s Inflation Target
The Fed’s inflation target is 2.0%. Some Fed presidents want the Fed to overshoot to make up for missing its previous targets.
The Fed wants your dollar to buy less and less (and it does) as the chart shows. But the Fed is not satisfied with that robbery. It wants even more.
Note that it’s Real PCE, not PCE that adds to GDP.
The lead chart would be an even bigger disaster if the Fed actually managed to hit its target.
The Core CPI Declines 3 Months for the First Time Ever
On June 10, I noted The Core CPI Declines 3 Months for the First Time Ever
Poor Measure of Inflation
These indexes supposedly measure inflation.
They do nothing of the kind. The indexes do not include home prices, only rent.
The purported medical inflation is a joke. Anyone who buys their own medical insurance will tell you their costs are up more than the reported 5.9%.
Anyone in college has not been pleased with the rising cost of tuition and rent in college towns.
And anyone with an ounce of common sense knows the current stock market bubble is a measure of inflation.
Lie of the Day, Month, and Year
The Fed and economists pretend that “inflation” is only up 0.1% year-over-year.
The Fed and economists in general do not know how to measure “inflation”.
And the Fed’s efforts to produce it has created destructive bubbles sure to pop causing the deflation they hope to prevent.
No Economic Benefit to Inflation
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.
The Fed complains about income and wealth inequality but they are the primary source.
BIS Deflation Study
The BIS did a historical study and found routine price deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations
Asset Bubble Deflation
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.
The Problem is Not Deflation, It’s Attempts to Prevent It
For discussion of these ideas, please see The Problem is Not Deflation, It’s Attempts to Prevent It.
Consumer Spending Jumps for a Second Month … But
For additional comments on PCE and the economic dilemma of the Fed and Congress, please see Consumer Spending Jumps for a Second Month … But
Deflationary Bust Coming
Meanwhile, there is no bang for the CPI buck and the Fed wants even more pain for consumers. Asset bubble are the result.
The Fed can print money but it cannot dictate where it goes. Since 2000 the Fed has sponsored three major bubbles: The DotCom bubble, the Housing Bubble, and the bubble we are clearly in now, widely known as the “everything bubble”.
But bubbles always end the same way: with deflationary busts. That is why the long bond yield is a mere 1.2%.
Mish
Can the farmers keep feeding us? Will the food chain hold?
Corporate farms will hold because they have access to endless debt to operate with. Family farmers are going the way of the dodo bird though. Then again there is organic farming that costs consumers multiples of what is charged for corporate groceries. Those farmers will probably be able to stay in business.
Mish: “They do nothing of the kind. The indexes do not include home prices, only rent.” They do not include rent, at least the measurement of rent is such a ridiculous farce that I believe long ago the BLS just started to make up a number that served to support the policy needs of the Fed and treasury. You might as well count tree rings as do that telephone survey of homeowners they allegedly call to do the owners equivalent rents. I know that from the 2013/14 lease back in Oregon to the end of the 2019 lease my rent had risen by 90% even as the government said rents were stable to slowly rising. I do not know anyone that has ever participated in that survey, so a show of hands here, there are enough readers at this page that odds are over the years someone would have been asked to participate if they are actually doing a survey.
I know we do not agree about what is to come, at least in the near term, I say inflation or stagflation, on steroids, but that does not mean that is what I want. I am on a fixed income so I can and probably will be inflated into real poverty as the faux CPI numbers reduce spending power year after year. What I need is warp speed deflation because my pay cannot by law drop. Unless they change the law anyway, meaning I would have more left every month to pay down debt.
Maybe I am just having a bad week but it seems to me this nation has already failed and is in the process of ending much like the Soviet Union did in 91. There it was also obvious to all well before the actual fall that they were no longer viable. Then it was just a matter of when the military and the public would have a duel, and that was when Yeltsin and the population of Moscow rose to confront the military at their White House. The military stepped aside, will we be that lucky?
I say Trump is determined either to not have an election he knows he will lose, or to stay in office after his term ends claiming the election was fraudulent and void. The riots we will have he will try to put down using the military, but they will come to the point where they will not kill masses of civilians at his demand. It will still be the breaking point from the “Old USA” to the New nation or nations, because just like the USSR we now have a high probability of breakup, and even a decent shot at a civil war because a breakup of the US would be so contentious as to division of assets. Trump would likely try to lead red states to fight blue. They would have a territorial advantage, but the blue would have a population and wealth advantage.
In short I see things getting way worse than they are now, and before the year ends.
Off topic question, but does anybody know a joke about a lawyer, a journalist, and an economist involving a car?
A lawyer, journalist, and economist were social distancing at lunch. Everyone could hear their topic of discussion was how to stimulate the economy. The economist said, “If everyone would buy a new car, that would stimulate the economy.” The journalist replies, “… And I would be paid to write articles about the improving economy.” The lawyer chimes in, “When there is a car accident, I get paid to recover damages.” The economist has an epiphany, “Then we should get the government to pass a law that requires drivers to drive on the left side of the road on odd numbered days so drivers are more likely to crash their cars!”
“Deflationary Bust Coming”
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Yes.
Credit tightening. One example – per Lending Tree – 70 million credit card users have had limit lowered or account terminated since May.
How? The republicans are out on their asses in November, and the democrats will assuredly make it rain.
A bunch of people getting money for producing nothing instead of the the goods and services they used to produce means there is less to buy and the same amount of money to buy it. As I understand it, that’s inflation.
It will ave to be over The Fed’s dead body, though.
70 million retail customers may have had their credit lines tightened/rescinded, but in order to keep the bubble which is all that’s left of once-was-America, Goldman Sachs and Blackrock will be undoubtedly “need” to be handed 70 million credit card’s worth of free money. In order to prevent “The System from Collapsing.” Which is something idiots the world over, have been told is some sort of scary hobgoblin. And, sadly enough, they seem mostly illiterate and dumb enough to fall for it as well.
“It will ave to be over The Fed’s dead body, though.”
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Sorry, this cycle over.
The “energy” necessary to inflate further too great …. and risk too great for $US. Let it implode … then ride to the rescue. A lot easier to pump once sentiment hits rock bottom (no where to go but up).
Federal Reserve’s balance sheet currently SHRINKING.
“Federal Reserve’s balance sheet currently SHRINKING.”
Their nominal is shrinking.
Their effective balance sheet, OTOH, by now largely includes almost all debt issued by the “banking system,” as most lending these days it is undertaken only based on the tacit understanding that the Fed will make lenders whole no matter what.
If/when faith in that evaporates, and the Fed is no longer able to restore it by delivering on its implicit “promises”, then we’ll sure see a major deflationary bust. Covid may well be the trigger for that.
But The Fed won’t let it happen without a fight. That balance sheet won’t continue shrinking, once nominally “private sector” lending freezes up.
“That balance sheet won’t continue shrinking, once nominally “private sector” lending freezes up.”
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Oh, I know it will grow some more this cycle.
For the record, I expect NIRP + balance sheet in the $10 trillion to $15 trillion range.
But it won’t be nearly enough to arrest down cycle in asset prices. As Tim Geithner (in)famously said last go round ~ actions by Treasury and Federal Reserve were to foam the airstrip for crash landing.
One can certainly hope…..
how long before apple is a $10t company?
Well, if Tim Cook became President, he could force everyone to buy Apple products.
they have a lot of tailwind — if they make the switch to arm successfully that will increase profitability, they will continue to benefit from p/e expansion because of the fed’s accommodation, large untapped market in india as they introduce less expensive models and local manufacturing, etc.
Tim Cook wants to turn our orphanages into phone production facilities.
What country do you live in? I’m not sure there are any orphanages in the US.
Thats what they want you to think.
Depends on the POTUS.
If a Bernie Sanders type in the WH, expect Anti – Trust (break up) well before $10 trillion.
We currently know the only two outcomes of the election and we know that neither is going to do that to Apple.
The more the economy deflates, the more the fed will print & lower rates, and that will be good for AAPL’s P/E expansion.
Market cap $1.85 trillion … quite a ways from $10 trillion. Doubtful Apple hits that number next 4 years.
“The more the economy deflates, the more the fed will print & lower rates, and that will be good for AAPL’s P/E expansion.”
Opinions vary.
it has almost doubled in 4 months. if it continues that pace, it can get to $10t in 1 year.
I was around in 1999.
Were you?
I was too. The fed actively popped that bubble. We have the exact opposite going on now.
“The fed actively popped that bubble. We have the exact opposite going on now.”
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Really?
Please explain PRECISELY current actions by Federal Reserve to stem the tide.
I heard A LOT of justification nonsense in 1998 and 1999 how things are different.
Same nonsense now.
They popped the bubble by raising rates. Right now their balance sheet is going vertical and rates are at 0. And they are committed to keeping things that way.