Printing money causes the wrong kind of inflation

The Fed's quantitative easing is pushing up asset prices elsewhere.

The Great Correction…still in business…

The latest news suggests that we’ve been right all along. Housing starts are down a surprising 12% – with house prices still soft or falling in most areas.

Jobs? Forget it. Joblessness continues to be a major headache…with no significant relief in sight.

And both consumer and producer prices are flatter than expected. In fact, the core CPI reading is at a record low. For all the talk of “inflation” – there isn’t any. Ben Bernanke is right, at least about “core” inflation. Prices for people who neither eat, nor travel, nor heat their houses are flat.

Yes, dear reader. We’re in a great correction. We just don’t know what it intends to correct. Not yet.

“US inflation moves close to zero,” says the BBC.

And here’s Bloomberg, with the details:

The cost of living in the US probably rose for a fourth month in October, led by higher gasoline and food prices that aren’t filtering through to other goods and services, economists said before reports today.

The consumer-price index increased 0.3 percent after a 0.1 percent gain the prior month, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. Excluding food and fuel, so-called core costs may have increased 0.7 percent from October 2009, matching a record low. Another report may show housing starts last month fell to the lowest level since July.

We were watching the descent of consumer prices this past spring. It looked like the CPI would approach zero by the end of the summer…and then head into negative territory.

But then, with all the excitement around quantitative easing, we kind of lost track. The feds were printing money intentionally, right out-in-the-open and without even a “sorry” or an “excuse me.”

Everyone knew it was “inflationary.” And it was – to the extent that it inflated the monetary base. But it didn’t inflate consumer prices. Why not?

“It’s the economy, stupid.”

When an economy is de-leveraging you get a phenomenon that John Maynard Keynes described as “pushing on a string.” You can push money into the system. But the other end of the string…where you find consumer prices…doesn’t move.

And now, it looks like Keynes was right. The Fed is pushing in $600 billion. Consumer price increases are still going down.

So we might be tempted to think that the feds can push on the string all they want; they’ll never get consumer prices to rise.

But it’s not that simple. It may be true that you can’t increase consumer prices simply by putting money into the banking system. But the Fed is now going one step further. It’s funding the US budget deficit – practically the whole thing. That frees all the money that would have gone into US Treasuries to go elsewhere. Where? Darned if we know.

But just look at cotton prices. And gold. And farmland in Iowa and Indiana. Farmland yields (not crop yields…financial yields, from renting out the land) are at an extreme low. Prices have been bid up – thanks to record low interest rates and record high agricultural output prices.

And look at prices of Indian stocks. They’re selling near record levels too.

All over the world, prices are going up – especially in emerging markets, where economies are growing fast.

But in America, consumer prices – when you take out food and energy – are going nowhere.

Just what you’d expect in this strange correction.

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