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Journalists, politicians
and economists all seem
to agree that the biggest economic issue currently worrying voters is unemployment.
It follows then that most believe
that the deciding factor
in the presidential race will
be the ability of each candidate to convince the
public that his policies will create jobs. It seems that everyone got this memo...except the voters.
According to the results
of a Fox News poll released
last week (a random telephone sample of more than 1,200 registered voters), 41% identified "inflation" as "the biggest economic problem they faced." This is nearly double the 24% that named "unemployment"
as their chief concern. For further comparison, 19% identified
"taxes" and 7% "the housing market" as their primary concern. A full 44% of women, who often
do more of the household shopping and would therefore be more sensitive to prices
changes, identified rising
prices as their primary concern.
My most recent video
blog addresses this topic in detail.
While these statistics do not surprise me, they
should shock the hell out of the establishment. According to
the Federal Reserve, inflation is
not a concern at all.
Time after time, in front of Congress
and the press, Fed Chairman Ben Bernanke
has said that inflation is contained and that it is
below the Fed's "mandated" rate of inflation (whatever
that may be.) The Bureau of Labor Statistics
is saying the same thing. The measures they use to monitor
inflation, such as the Consumer Price Index (CPI)
and the Personal Consumption
Expenditure (PCE), show annual
inflation well below 2%.
In fact, the GDP price deflator used by the Commerce Department to calculate the
second quarter's 1.3% annual
growth rate assumed annual inflation was running at just 1.6%.
In fact, Bernanke thinks inflation is so low
that he is actually worried
about deflation, which he believes is
a more dangerous issue. As a result,
he is recommending
policies that look to raise the inflation rate, not just
to combat the phantom menace of deflation
but to boost the housing market and reduce unemployment. He mistakenly believes these problems are the ones that concern Americans the most.
If inflation really
is as subdued as the government claims, how is it that so
many people are concerned?
It's not as if the media or political
candidates are fanning the fears
of rising prices. In fact, given the media's preoccupation with the housing market, the fact that nearly seven
times as many Americans worry more about rising food prices than
falling home prices shows
just how large the inflation problem
must be. Yet most economic observers continue to swallow
the government's inflation propaganda
hook, line and sinker. In
fact, although the Fox poll came out last week, I did not read or hear a single story on this topic, even from
Fox news itself, which appears to not have noticed the
significance of its own data.
For years my critics have always attempted to discredit my inflation fears by pointing to government statistics showing low rates. However, I have long
maintained that such statistics under-report inflation, and the results
of this poll seem to confirm my suspicion. There are only two possible ways to explain the disconnect. Either the government is correct and consumers are worried about a non-existent problem, or the consumers' concerns are real and the government's
statistics are not. From my perspective, it seems that it
is far more likely that consumers are in the
right. If so, we are in a
lot of trouble.
If annual
inflation is actually higher than 3%, which would certainly
be the case if consumers
are so worried about it, then we
are already in recession.
Had government used a 3% inflation deflator (rather than the 1.6% that they actually used) to calculate 2nd quarter
GDP, then growth would have been reported at negative .1% rather than the positive 1.3%.
I believe that if the government used more accurate inflation data over the past
several years, it is possible that we would
have seen no statistical recovery from the recession that began in the fourth quarter of 2007. This would help
explain why the "recovery" has failed to create jobs or lift personal incomes.
The Fed's zero percent interest rate policy is predicated
on the assumption that there is currently
no inflation. If this is
not accurate, then they are making a major policy mistake. The Fed is easing when
it should be tightening. If inflation is such a major concern now, imagine how much bigger the problem will become once the Fed achieves its goal of pushing the rate higher. More importantly, how much tighter will future monetary policy have to be to put the
inflation genie back in her
bottle? If inflation becomes
so virulent before the
Fed realizes its mistake, then it may be
forced to raise interest rates significantly.
U.S. national debt is projected to reach $20 trillion
within a few years. As a result, a 10% interest rate (which would be
needed to combat 1970's style inflation) will require the U.S. government to pay about $2
trillion per year in interest
on the national debt. This will
absolutely upend all economic projections.
Since 10% interest rates will likely crush
the economy, not to mention the banks
and the real estate market,
tax revenues will plunge and non-interest government expenditures will go through the roof. Assuming we try
to borrow the difference,
annual budget deficits could go much, much higher from
the already ridiculously
high levels that they have reached during President Obama's term. Annual deficits of $2 trillion,
$3 trillion, or even $4 trillion, would result in a sovereign debt crisis that would
force the Federal Government
to either default on its
obligations or inflate them
away. Given the tendency for politicians to prefer the latter, voters who think
rising prices are a problem now should
just wait until they see
what is waiting down the road!
Peter Schiff is
the CEO and Chief Global Strategist
of Euro Pacific Capital, best-selling author and host of syndicated
Peter Schiff Show.
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