Fed Claims Disappear in Light of Math [View All]

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Fed Claims Disappear in Light of Math
- But Congress Won’t Ask
By Dan Spillane
The Liberty Whistle
(SEATTLE) 02/13/05 - How is it possible for bonds, stocks, homes, commodity prices, and the trade deficit to be breaking out to all-time new highs, all at the same time?

Recent claims by the Federal Reserve that “inflation isn’t a problem” can be shown to be patently false, when math is applied.

Consider what is said about costs; specifically that labor accounts for 2/3 of production costs, with materials the other 1/3. Yet when that 1/3 doubles in price—as is the case now, for many materials as supply agreements run out—the resultant increase far outstrips other costs. A net doubling of costs for this 1/3 leaves an overall price increase of 100 times 1/3 or 33 percent—trouncing “tiny” increases in costs due to labor or health care. In fact, car makers the world over are reporting plans for 2005 vehicle price rises due to overwhelming price pressure. As further confirmation of intense inflation, a recent Federal Reserve poll of US companies suggests that price rises are so extreme, over half of the respondents said higher input prices would have “some” or “substantial” negative effect on business (Phil. Fed, 12/2004).

A 33 percent jump in overall costs is unprecedented--the closest scenario to such in the US is the 1970s, or possibly 1987.

More vexing still, is US home price appreciation, in light of high inflation, and relatively low US wage growth. The situation in the US is unlike other countries with high home price growth, such as England, where wage growth has been strong. Moreover, in the US, home price rises have been turned into an alternate to wages, leaving a long-term net deficit.

Which brings up the same question…how is it possible for bonds, stocks, homes, commodity prices, and the trade deficit to be breaking out to all-time new highs, all at the same time?

You’ve got me! Where does this all go? I’m not sure. But I am sure these thorny questions won’t be asked of Mr. Greenspan in front of Congress this week.

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