Inflation chicken and centrally planned failure

Today Australia finds itself riding shotgun in the passenger seat of a Chinese car speeding at breakneck pace toward a brand new General Motors land-crushing vehicle piloted by Ben Bernanke. The Bernanke is driving a money bomb. The car is rigged with billions of inflation bomblettes (Federal Reserve Notes). He’s stepping on the accelerator.

So who is going to blink in this game of inflation chicken? We were disappointed/satisfied to see Albert Edwards of Societe Generale use the same metaphor we’ve been stewing on for the last few days about the great currency game between the United States and China. It’s high-stakes game with more than just financial assets on the line. We’ll get to what’s at stake for Australia in just a moment.

Last week as we left the office with Slipstream Trader Murray Dawes, he mentioned that one explanation for The Bernanke’s behaviour is that the US is sticking it to the Chinese good and hard. That is, the US is exporting inflation to China and unleashing socially destabilising rising prices in food and fuel to force the Chinese to do what America has been asking for all along: allow the Yuan to appreciate. It’s War, which as Clausewitz wrote is the “continuation of politics by other means”.

If you’re scoring at home, it’s not hard to see who’s winning the game. According to the almost useless official statistics from the United States Bureau of Labour Statistics, consumer price inflation in the US rose just 0.6 per cent in the last year. If it were true, it would be the lowest level of inflation in consumer prices since the US first started keeping/manipulating the figures since 1957.

Why so sceptical of official inflation figures? Inflation happens by design in a fiat money system with fractional reserve banking. The gradual weakening of purchasing power is not something most consumers notice or worry about, as long as it’s accompanied by higher house prices and stock prices. This allows inflationary monetary policy to keep a low public profile while still eroding the value of middle class savings over time.

The other more obvious reason to be sceptical of the official inflation figures is that they exclude food and fuel. The official statisticians remove them from the calculation because they are “volatile”. But you suspect they’re also removed because if you actually included them, inflation would be much higher.

Why, you ask, would the producer of money in a financial system (the central bankers who are, in fact, the private banks) be worried if inflation were “too low”? Because they sell money. And in a deleveraging, disinflationary environment people hoard cash, or trade it for tangible goods like gold and food. If money isn’t circulating quickly enough (new loans, demand for credit) then the producers of money aren’t pushing enough new product/dope/smack.

As one speaker at the Gold Symposium put it a few weeks ago, you should expect to see inflation in the things you need and deflation in the things you want. Cars and white goods and plasma TVs are getting cheaper in a world with excess productive capacity and over production. But where the rubber meets the road in daily life for billions of people, inflation is pushing up food and fuel prices.

The bogus US number is important because it gives the Fed covering fire to engage in QE2 and beyond without having to answer the accusation that it’s feeding inflation. See! There IS no inflation. And with the news out of Ireland that some sort of blah blah blah deal has been agreed to postpone a debt reckoning there, the markets reversed their bias for a stronger dollar last night. The result?

Stocks were higher. Silver is up 7 per cent after making a two-week low on Tuesday. Silver is up 60 per cent in the last 12 months, by the way - a sure sign that in the trenches of the real economy savers are hedging cash positions with precious metals. Gold - which is up each of the last ten years - was up overnight too.

But the main reason you’re not seeing any QEII related inflation in the American economy is that the inflation has been directly exported to China. According to statistics released this week, the food component of China’s consumer price index rose 10.1 per cent in October.  That was the fastest rate in two years.

This is getting pretty serious for the Chinese, it would appear. Average wholesale prices for 18 types of vegetable in 36 cities surged by 62.4 per cent year-on-yea, according to figures released by China’s Ministry of Commerce and reported by Xinhua. Chinese officials are worried that “hot money” capital inflows are pushing up prices, which is socially destabilising.