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"What goes around….comes
around” is an old adage with common sense logic. It’s just
perfect karma for those with an affinity for the concept of eastern
thought. However, if this simple cliché means you got what you
deserved and justice prevailed, the Federal Reserve has a lot of explaining
to do to the American people about the depreciating dollar that, according to
the Fed, boosts exports and helps the economy. As a humble student of
central banking, I have come to realize it has never occurred to Ben Bernanke
that zero interest rates forever (plus QEI and QEII, adding $2 trillion to
the Fed’s balance sheet), might do more than just depreciate the
dollar.
According to figures compiled by the United
Nations, the cost of food worldwide rose 37 percent from February 2010 to
this year. You may also have noticed in the news lately that rising
food prices have toppled Arab governments around the Mediterranean, and
scared Chinese leaders lily white as they face strikes and the nightmare of
possible revolution. If only our central bankers could think
differently about money printing and the hazards that have resulted because
of it. When I fill up at the gas pump now, I can see the inflation from
easy money that boomerangs right back at me as I contemplate putting in
regular gas (up 30 percent over the past year) rather than a higher grade,
which my car calls for.
Boomerang inflation is a weapon that works
like this: While the Fed sits back and prints more money like
there’s no tomorrow, higher food prices are created
worldwide. Some countries have been so badly influenced by rising
food costs that their citizens are fighting back by rioting in the
streets. The Saudi royal family, not wanting to lose their country to
“dumb-ocracy”, had to bribe their
citizens with another $150 billion a year in handouts to avoid riots and
revolution. The price that America will pay to keep the Saudis running
Arabia is a higher oil price. (In order for the Saudis to balance
their new government budget, they need oil at over $100 a barrel.) So, by
printing too much money, America has effectively been put over a barrel.
The Chinese economy, in the meantime, is
feeling the heat as rising food and fuel prices have put incredible pressure
on their economy. The government was forced to raise the minimum wage
by 20 percent last year and then again this year by another 20 percent.
The combination of 10 percent real growth and higher wages has added to the
world demand, resulting in budget busting gas, food, and raw material
inflation as evidenced everywhere in stores around the globe.
What’s coming next is the inflation boomerang
ricocheting back to America accelerated by China’s vicious wage price
spiral. Chinese truckers are blocking ports and other workers are
striking because they are getting crushed by the rising cost of fuel and
food. The government remains afraid of yet another political upheaval
reminiscent of the Tiananmen Square protests which rocked China’s
leaders to their core as people stood up to the government. It’s
highly likely that the leadership there will cave in to the people, rather
than be trampled by them, as the unrest continues to build.
Inflation in America could fluctuate even
higher due to a big shift in China’s policy of holding their currency
down against the dollar. A rising Yuan helps them absorb rising
commodity prices, and letting the Yuan appreciate is the last big change they
can make to hold back domestic inflation and pray they don’t have riots
and demand for political change. A rising Yuan and higher wages also
make Chinese workers more competitive with Americans for scarce food and fuel,
pushing up their prices even further. China has 1.3 billion people to
feed and clothe (a billion more people than America) so any increase in the
Chinese currency and wages influences the demand in a very big way for
commodities, input costs, and goods America must import. It’s
sad but true that stores like Wal-Mart can’t buy American-made goods
because it seems we don’t make them anymore.
So, how is the American consumer really
influenced by the Fed’s policies of money printing and a falling dollar?
In the past few months, the CPI has risen while disposable income has fallen
at a five percent annual rate. This is equivalent to putting on a five
percent national sales tax. Moreover, if inflation is just measured by
the cost of necessities, the cost of living is rising at 10
percent a year. (See: http://www.shadowstats.com).
The current generation is about to learn
firsthand what stagflation feels like. With prices rising faster than
incomes, and the real standard of living going down, the only thing that has
“Made in America” stamped on it is our inflation boomerang
balanced by karma coming right back at us. If what goes around comes
around – and boomerangs are known for returning to their point of origin
– Fed officials should take duck and take cover as an angry public
gathers and begins to throw pies in their faces at press conferences after
FOMC meetings. (The new press conferences are, of course, being
organized to try to convince Americans that the massive inflation is not the
Fed’s fault).
During the recession we were told that
unemployment was the biggest threat, but now it’s becoming clear to
hard working Americans that with the Fed’s soft dollar, they
won’t be able to buy a tank of gas to drive to work. The central
bank itself is now becoming the biggest threat to the average American.
Richard Benson
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