Singing The Same Song

Everyone's Singing The Same Song

By Chris Puplava | 12 June 2008

A case was made for stagflation earlier in the year in a previous WrapUp, and the case for stagflation is only getting stronger. US growth is clearly slow with a declining trend in employment and industrial production, all the while inflation continues to march ever higher. Businesses are getting slammed with the double-edged sword of rising input prices and falling demand. Something has to give and that something appears to be price stability.

The National Federation of Independent Business (NFIB) measures small business activity throughout the country through a broad survey. The figure below highlights that; unlike the last two recessions, this time IS DIFFERENT as small businesses are actually raising prices in the face of weakening demand (sales expectations are now below the levels of the last two recessions), a scenario that characterizes stagflationary periods.

Figure 1

Source: National Federation of Independent Business

Small businesses are raising prices to help protect margins as the price of their inputs are rising. Both the Institute for Supply Management (ISM) and the BLS are showing an accelerating trend in inflation with the ISM commodity price diffusion index reaching the upper end of its historical extreme.

Figure 2

Source: Institute for Supply Management/BLS

Figure 3

Source: Institute for Supply Management

While small businesses are raising prices for the goods that they sell, they are not raising wages for their workers. This is the result of weak demand (firms cutting down on inventories) and rising unemployment levels that raise the available pool of workers, which is hurting the bargaining power of employees who are having difficulty in negotiating wage increases.

Figure 4

Source: Institute for Supply Management

Figure 5

Source: Institute for Supply Management

All of this to say that the U.S. consumer is feeling the pain of rising prices amidst falling payroll compensation gains. Unfortunately, the trend in rising prices is likely to only accelerate as we are currently in a secular inflationary environment, which was the major argument in a previous article that deflated the commodity bubble argument (Show Me the (Commodity) Bubble! Part II). The US entered a secular inflationary period that began in 2003 and is still in its infancy in terms of length relative to previous cycles that have lasted between 15-20 years, meaning that the current period could last until 2018 to 2023. The historical inflation cycles in the US over the last two hundred years is shown below.

Figure 6


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Source: U.S. Census Bureau

The US isn’t alone in experiencing a rising trend in inflation. Every country seems to be singing the same song. Inflation has picked up all over the globe as countries expand the levels of their fiat currencies, depreciating the value of their currencies relative to real goods, and in turn driving up the prices of these goods. The link between money supply growth rates and inflation rates is shown below with a sample of 56 countries. A noticeable trend below is that on average, countries with higher money supply growth rates also have higher inflation rates.

Table 1. Global Inflation & Money Supply Rates (Y/Y % Chg)

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Source: Bloomberg, Data as of 06/11/2008


Table 2. Global Inflation & Money Supply Rates: Ave. & Median (Y/Y % Chg)

          CPI  Money Supply
Average   8.1    16.6
Median    5.6    12.8

Source: Bloomberg, Data as of 06/11/2008

As can be seen in the Table 1 above, countries with higher money supply growth rates experience higher inflation rates. Because countries all over the globe are expanding their money supplies, it should come as no surprise that inflation is rising globally, not just here in the US. In fact, the average and median inflation rate for the 56 countries sampled is 8.1% and 5.6% respectively. The average and median money supply growth rates for the sampled countries is a little more than twice the inflation rate, coming in at 16.6% and 12.8% respectively. The purchasing power loss for a currency with an 8.1% annual inflation rate is 98% after 50 years, as is shown below.

Figure 7


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With such rampant global monetary expansion, is it really fair to blame the "speculators" for driving the price of commodities higher? By the media blaming the speculators, they are distracting the public at large from the REAL culprit of higher prices. Instead of focusing on the price of commodities, the public should instead be looking at the purchasing power of their fiat currencies. The more fiat paper there is in supply for a fixed amount of goods, the less its value: each fiat paper bill is worth less and thus buys less. For example, the US dollar has lost 82.3% of the purchasing power it had back in 1970 using the BLS’s headline CPI, and over 93.6% of its value when using John Williams’ Shadow Government Statistics CPI, the CPI before all the 1980s and 1990s manipulations.

Figure 8


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Source: BLS/John Williams’ Shadow Government Statistics

The true culprit to the rising prices globally is the acceleration in fiat currency printing, a trend that is not likely to end soon. Moreover, the trend is likely to remain for another 10-15 years here in the US as shown in Figure 6. As this is likely to be a long term theme, investors will be rewarded by investing in REAL assets such as commodities, and the so-called "commodity bubble" will continue bubbling higher while the financial press stare baffled at $150 oil. Is oil really that high, or are is our dollar’s purchasing power that low?

Chris Puplava

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