Great Depression Online Archive Issue:

The Ghost of 1981

Great Depression Online
Long Beach, CA
August 22, 2008

Inside This Issue You Will Discover…

*** The Ghost of 1981
*** Putting It In Perspective
*** Simply Because We’re Simpletons
*** And More

The Ghost of 1981

It’s no secret.  Everything costs more.  And the rate at which things cost more is rising at the fastest pace since 1981. 

The Labor Department crunched the numbers and on Tuesday reported that wholesale prices were up 1.2 percent in July.  Martin Crutsinger, AP Economics Writer, offers the particulars…

“Wholesale inflation soared in July, leaving prices rising at the fastest pace in nearly three decades.

“The increase was more than twice the 0.5 percent gain that economists expected and left prices rising over the past 12 months by 9.8 percent.  That marked the biggest annual increase since the 12 months ending in June 1981, a period when the Federal Reserve was driving interest rates to the highest levels since the Civil War in an effort to combat a decade-long bout of inflation.”

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Upon discerning these grim realities, the DOW took a 130.84 point swan dive to close at 11,384.55…this was on top of the 180 point loss on Monday.

Putting It In Perspective

The wholesale inflation numbers reported Tuesday further confirmed last weeks Bureau of Labor Statistics’ Consumer Price Index numbers, which showed a 5.6 percent annual increase as of July of 2008.

To put these CPI numbers in perspective, consider the following…

If you don’t get a 5.6 percent raise this year, you will be poorer next year than you are this year.  And even if you get a 5.6 percent raise, you’ll just be running on the treadmill.

The 10 Year Treasury Note was yielding 3.84 percent on Tuesday.  An investment in this fixed income security would confiscate 1.76 percent of your money…and possibly more.

Today it takes $1.06 to buy what $1 could last year.  And that $100 bill you stuffed in your mattress last year will now only buy you $94.40 worth of the stuff you thought it would.

And if you’d put your money in stocks you’re suffering the double whammy of bear market inflation.  The DOW is down 13.5 percent from this time last year.  Add in the 5.6 percent inflation…and you’ve lost 19.1 percent.

Not a good way to save for retirement.

Simply Because We’re Simpletons

Still, we’re suspicious of this inflation.  For we’ve heard economists describe inflation as too much money chasing too few goods.  They refer to this as demand-pull inflation…where higher employment results in higher demand, which in turn results in higher employment to meet that demand.  As demand increases faster than production, prices are pulled higher.

Last we saw, unemployment is increasing…not decreasing.  And the highly optimistic GDP, which included a boost from the stimulus checks, is at 1.9 percent for the second quarter 2008.  In an economy where consumer spending accounts for over 70 percent of GDP, this is a strong indication of weak demand.  So if demand is weak, why are prices rising?

So, too, there’s cost push inflation which must be considered.  With this theory, an increase in the cost of a certain good – such as oil – results in the increase of other goods and services.  That could be what’s happening now.  For example, as oil prices increase thus increasing shipping costs…those costs are pushed on to consumers.

Still we don’t entirely buy the cost push idea…simply because we’re simpletons who like to follow the money.  And if the money supply were constant, increases in the costs of one thing would decrease the money available for other things, and prices of all things would adjust accordingly.

But when the CPI’s increasing at 5.6 percent annual rate and wholesale prices are increasing at a 9.8 percent annual rate, it can only mean one thing…

New money is being artificially created.

And who’s responsible?

You guessed it…  The Federal Reserve.  They just borrow it into existence.

Over the coming months we’ll discover that receding oil prices don’t always translate into receding inflation.  In fact, we may only be just beginning a protracted period of dramatic price increases.  And this is because of one fundamental secret…

Inflation of the money supply is what’s driving prices higher…it’s not higher prices that cause inflation.

We anticipate more bank failures and more government bailouts.  We anticipate the full nationalization of Fannie Mae and Freddie Mac.  We anticipate further money creation by the Federal Reserve to pursue these endeavors.

And, alas, we anticipate higher prices of goods and services.

Sincerely,

M.N. Gordon
Great Depression Online

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