Federal Reserve Chairman Ben Bernanke frequently points to “low inflation” as justification for a continuation of his current policy of Quantitative Easing (QE1, QE2, QE3, QE4). Simply put, Bernanke believes, (or is betting), that he can continue to flood the economy with newly printed, nearly worthless dollars because inflation is still low and deflation is supposedly the real problem.
Well yes, if you are a banker or a government, holding trillions in toxic mortgages, in the midst of what is still a very depressed housing market, deflation is a problem. They need those toxic mortgages to go back up in value. As such, Bernanke has taken it upon himself to buoy the housing market by buying $45 billion dollars worth of mortgage backed securities each month from now until–well, until the housing bubble has been re-inflated to a satisfactory degree.
And the federal government, strapped by massive budget deficits costing almost one-half TRILLION dollars in interest payments, (even with interest rates near zero), for fiscal 2012, are getting desperate for more and more cash. The interest payments on federal borrowing are so high, they are now the 4th largest expenditure that the government has. If interest rates were to rise, even only slightly, the government would be faced with a choice between paying their creditors or paying for defense, food stamps and social security. Indeed it’s already been that way for a number of years now, so they have devised clever ways of manipulating their debts. But the fact is that their manipulating and maneuvering is leaving you with less and less buying power as a consequence.
Anyone who has been shopping for groceries lately has noticed that those prices have been rising much faster than home values. QE1, 2,3, and 4 may have kept interest rates from rising, but it did nothing to help reduce food prices. Those of you on a budget are well aware that $100 does not buy nearly as much at the grocery store as it did 10 years ago. And to boot, many product manufacturers are helping maintain the “game” by reducing the sizes of food packaging as a way to keep the price more or less the same. So even where prices seem to be holding steady, chances are the amount of actual contents you are purchasing is getting smaller.
Take coffee as a prime example. 30 years ago, coffee sold for less than $2 per pound, and a package of coffee actually weighed 1 full pound. (16 oz) But today, coffee, (depending on the brand) has gone up to about $5 for that same package of coffee. Except that now, the typical pack of coffee only weighs 11 ounces. It looks about the same sitting there on the shelf, but the contents have been gradually reduced over time to keep the price “low”.
Sugar has been repackaged from 5 pounds to 4 pounds, to keep the price from obviously going up. Ditto with cereals, and thousands of other grocery items which can be reduced in quantity, without actually reducing the packaging size. So it looks like you are getting the same amount, but there is actually less and less content inside the package.
Prices for a dozen eggs on the other hand, have gone up about 80% in my area over the past 3 years or so. It’s more difficult to sell a dozen eggs if there are only 10 or 11 eggs actually in the container. So, the price had to rise, to keep pace with the falling value of a dollar. Milk would already be near $7 a gallon if not for subsidies paid to dairy farmers. If those subsidies were to be discontinued, we’d see drastic increases for basic food products in a matter of days.
Incomes on the other hand, are falling across the board, even for those with advanced college degrees, as globalization moves companies to look for cheap labor in other countries. So incomes are not keeping pace in America, with the rising costs of living. To hide this fact, the government has conveniently changed the way that the Consumer Price Index is calculated, in order to make it seem as if prices are not rising. And this game has been going on now for over 30 years.
Ultimately for the general public, the cost of living is rising despite what the politicians claim. In fact, one of the big points of argument over the so called “fiscal cliff” was about whether to use a handy smoke and mirrors tool called “chained CPI” to continue the “no inflation” charade. The idea with this one is to use a calculation of the cost of living that will be lower than reality, so that the government can reduce it’s social security payments to seniors. Check this article on shadowstats.com for a detailed analysis of how the manipulation is accomplished.
Keeping interest rates at ridiculously low levels has not done much to help bolster the housing market, but it has reduced the amount of interest that the government has to pay each year on it’s debts. If interest rates go up just a few percentage points, those interest payments would balloon to unsustainable levels. Calculating the inflation rate to keep it artificially low means that the government pays less to social security recipients.
But the bottom line is that they are “robbing Peter to pay Paul” as the saying goes. Unfortunately you are Peter, not Paul. Your buying power is being reduced, as the real costs of living continue to escalate. I believe this is already impacting the housing market to the extent that you cannot expect home prices or sales figures to rise substantially or “recover” to any respectable level if people have to spend more and more of their income just to eat and put gas in the car.
The problem is that inflation, whether it is 2% as Bernanke claims or higher, has a CUMULATIVE effect on your income. In other words, the 2% inflation from last year stays and another 2% gets added to that the following year. Over ten years that low 2% inflation rate that Bernanke loves to quote will become 20%. Since 1980, the official inflation rate has compounded to a total of 179.4% according to inflationcalculator.com. and this is based on “official” inflation numbers.
This means that if you earned $300 per week in 1980, you would need to earn $838.18 per week today, just to keep pace with the official inflation rate. This is why playing the lottery is now one of today’s hottest retirement plans. It’s why people are desperate to “get rich” and why everyone needs to constantly increase their income. It’s also why nearly 50 million people are now on food stamps. Fewer people today are able to even support themselves without some type of government assistance.
Unfortunately the housing market will have to begin “downsizing” itself just like they have done with coffee, sugar, and other commodities. Eventually we’ll be back to building and selling those 1000 square foot, 2 bedroom houses that were so common in the 1950′s. Only instead of costing $5000 they will sell for $42,320.04.
The government is chasing it’s proverbial tail. Monetary policies create more inflation, and that inflation leads to more people on the government dole, and fewer people who can afford to buy and pay for a home. The fiscal cliff is just a little preview of what awaits our economy, as we continue to do things that will eventually lead to the edge of a fiscal abyss.