How are U.S. Treasuries out of circulation? The government spends that. I dont’ think it’s out of circulation. Why would the government not spend the money it gets from auctioning treasuries? A recent Bloomberg story said the government didn’t get enough money in its recent auction to cover its deficit spending. So we need to consider why the CPI is low.
I think CPI is low for 2 reasons: because of cheap imported goods from China, and hedonic adjustment/substitution by the government. Let’s start with cheap imported goods. Back in 1970, a garden trowel was made of steel and cost $10, maybe, just guessing. Today it’s $1.79 and made of some cheap metal and breaks if you actually try to use it. Same with irons and vacuum cleaners. My first vacuum cleaner was a used Hoover, purchased in the late 1980’s, with a steel plate on the bottom. I used that Hoover until it burned in the 2003 Cedar fire. Since then, I’ve gone through 3 vacuum cleaners, all with plastic plates on the bottom (no more steel in these models). I’ve gone through 3 irons, and hope this Rowenta is my last. I’ve stopped buying goods at Walmart – I only get paper products there, because the quality is just getting worse and worse. The point is, inflation is down only because stuff is made cheaper and cheaper, and the quality is dropping.
If the Chinese ever let the renminbi appreciate, so our imported Chinese goods cost 30% more, then inflation will be much much higher.
Hedonic adjustment and substitution means the government tinkers with the prices of increasing goods by substituting and making assumptions about greater quality. The government does not want to report true inflation, because they don’t want to pay 10% annual increases in cost of living to veterans, social security, and other entitlement people. So if the price of milk goes up, they substitute low fat milk in the basket of goods. They put a big outlay like family medical premiums, which can take 5% of a family’s income, at .1% of the CPI. Other games …. all to make the CPI less than it actually is.
So in summary, I think inflation is low because it is not properly reported, and because the Chinese are keeping their currency undervalued and selling us very cheap goods.
No doubt, cheap goods and adjustments to CPI play a role in low inflation reported to-date, ps.
Question: what do you think, ps and sjk, will happen if (when, in my opinion) the Chinese, Japanese, and Brits decide to sell their $2.5 trillion in Treasury securities and the U.S. government gives them their $2.5T? That’s $2.5T dollars back in circulation. Given that M1 is only $1.4T, that sounds like a clear-cut formula for REAL inflation, not this wimpy stuff that we’ve seen to-date.
I am by no means a currency expert, so I am just explaining how I understand this to work.
The $2.5 trillion is already being spent, so if they sell their Treasury notes, then we either need new buyers, or we’ve got to print so many dollars that we would devalue the dollar very quickly. Likewise, converting $2.5 T into any other currency would cause a dollar glut, making its value go down further.
The dollar is going to fall unless we resolve this imbalance, but I”ve learned this things can take many years to play out. However, as much as I want this to be over with quickly, I realize that China has much to lose by stopping their Treasury purchases, or even cashing them in. Their export economy will suffer, and the dollars they already hold would lose value.
My limited understanding of this topic comes from Richard Duncan, former IMF banker and author of The Dollar Crisis.
Dolar plunges to 19 month low and is now hovering at $1.31, last seen in April 2005, before market started to take notice of US rate hikes. Analysts expect dollar to decline to $1.35 in coming weeks. The cause for decline is the poor shape of US economy thus increasing pressure on FED to cut rates. Futures market expects rate cuts to 4.75 next year.
I was expecting this rally but I slept over it as I forgot to put auto triggers for this at $1.29 (the ceiling at which eurodollar has kept bouncing off this year).
Gold picks up pace and reaches $645 an ounce (up 2% over long weekend), on dollar weakness. Gold is moving entirely on dollar weakness as inflation concerns seem to have gone away.
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