Wednesday, August 03, 2016

The Real Rate Of Inflation, USA, UK (Europe's is off the scale). The Global Economy Is Bankrupt.

What would happen if the real rate of inflation was revealed? The entire economy of the developed world, and the case for globalisation with it, would immediately collapse. Consider the immediate consequences to Social Security, interest rates and the cost of refinancing government debt (most of those three, five and ten year bonds governments issue each month to fund their current account deficit are rolled over rather than being paid off).

Unbiased private-sector efforts to calculate the real rate of inflation have yielded a rate for the USA of around 7% to 13% per year, depending on the locale, many times the official rate of around 1% per year. Figures calculated by Ed Butowsky of Peak Prosperity reveal what economically literate people have long suspected, that government economic statistics should be displayed on the 'fairy tales' shelf.

The cost of living for many British households is also close to four times the Government's published rate of inflation, while such figures as are available for other major European economies are simply irrational, the result of prointing money and claiming it represents GDP growth. GDP itself, the sacred cow of modern economics, is not a true measure of economic health.

Millions of families all around the developed world are experiencing inflation far beyond the official rate of 2.4 per cent, new research suggests.

The UK Government was recently accused of neglecting hard-up families as the research shatters the illusion that the Consumer Price Index - used by the Bank of England to set interest rates - represents the true cost of living as experienced by many households.

Pensioners are the hardest hit, with inflation rates of almost nine per cent, as record gas and electricity bills take a massive slice out of their budgets.

Both middle class and poor families are also shown to be experiencing inflation well above the national average, as the increased costs of household bills, food and other essentials erode their earnings.

The research, produced by Capital Economics (site available to subscribers only), reveals the enormous difference between the CPI and the inflation rates experienced by many families.

According to the study, pensioners' costs rose by 8.9 per cent in the 12 months to October.

Hard-up families, getting by on £20,000 a year, saw their costs increase by 4.6 per cent — almost twice the national average and well above the annual rate of wage increases, 3.9 per cent.

So what happens if the status quo accepted the reality of 7+% inflation? Here are a few of the consequences:

National Insurance and Social Security beneficiaries would demand annual increases of 7% or more instead of zero or near-zero annual increases. Social Security systems in the USA, Britain, the European Union and other advanced nations which already distributing more in benefit payments that is received in payroll related contributions, would immediately go deep in the red.

Governments claim past surpluses are ring fenced and have accumulated so much interest they will remain solvent for decades. The reality is that governments have blown the family fortune on universal benefits (to buy votes), foreign aid (to buy influence) obsolete and useless weapons systems (to buy testicular fortitude) and vanity projects (to buy a place in history). Thus they have to borrow every Dollar, Pound, Euro, to cover deficit spending by Social Security and other government departments by selling more Treasury bonds. And some governments are already in a situation where they have to borrow money just to pay the interest on existing borrowing.

Another consequence of admitting the real inflation rate would be Global investors demanding yields on Treasury bonds that are above the real rate of inflation. If inflation is running at 7%, then bond buyers would need to earn 8% per year just to earn a real return of 1%. At the moment the 'coupon value' (published rate) in 3.1% for US bonds, 3.5% for UK paper ranging up as high as 7.5% for Italian bonds and 8.6% for Greek bonds. Some Swiss bonds however carry a negative interest rate (bond holders pay the Swiss government for the privilege of holding its debt, betting that Swiss Frances will increase in value against other currencies. In other words the investors know governments are printing money to hide the true states of their economies.

Governments and central banks are only able to sustain their enormous deficit spending because interest rates and bond yields are near-zero or even below zero. This leads to another problem and another illustration of the lunacy of current economic policy. The near zero rates are not available you you and me, they are the rates governments lend money to banks in the hope of stimulating their national economies. But while governments need to borrow such vast sums to stay afloat, the banks simply lend back at three or more per cent the same money they have borrowed at half a per cent. Nice work if you can get it.

If governments suddenly had to pay 8% or more to roll over maturing government bonds, the cost of servicing the existing debt--never mind the cost of additional borrowing $400 b every year simply to fund overspends would rocket, squeezing out all other government spending and triggering massive deficits just to pay the ballooning interest on existing debt.

Bond yields of 8% and over would destroy the economic status quo which relies on massive government deficit spending.

Private-sector interest rates would also rise, crushing private borrowing. How many autos, trucks and homes would sell if buyers had to pay 8% interest on new loans? A lot less than are being sold at 1% interest auto loans or 3.5% mortgages.

Any serious decline in private and state borrowing would bring consumer spending on non - essentials to a near standstill; as my articles on The Baltic Dry exchange HERE and HERE explained, the quantity of manufactured goods moving around the world was and has remained disturbingly low. Recall that a very modest drop in new borrowing very nearly collapsed the global financial system in 2008-09, as the whole system depends on a permanently monstrous expansion of new borrowing to fund consumption, student loans, taxes, etc. As Steinbeck wrote in Chapter 5 of The Grapes Of Wrath, "The monster has to grow or else it dies, and if it is to grown the monster must be fed."

The reality is that real inflation stands at 7+% per year, and this reality must be hidden behind bogus official calculations of inflation. hiding it is an unsustainable policy however, already the number of economic alarm bells ringing out their warnings suggest a bigger crash than 2008 is on the way. Super-wealthy elites earning 10+% yields on stock, bond and real estate portfolios aren't particularly impacted by 7% inflation; their real wealth continues to expand nicely.

Ordinary savers, and people who rely solely on earnings and pensions however are seeing their standards of living and their aspirations evaporate.

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