John Williams on the Retail Sales Number - A Brief Interlude on Hyperinflation and Deflation

Although I am still firmly in the stagflation camp, I do allow at least for the possibility of a protracted deflation or a bout of serious inflation, or even a hyperinflation.

Just because something is possible does not make it probable, much less inevitable. I exhausted the subject of deflation, at least to my satisfaction, some years ago. Please do not recommend I read anything more about it. Those who believe it is coming will believe it no matter what, as Gary Shilling has done, with an exquisitely unrequited love, for many, many years.

Deflation is the outcome of a policy choice, nothing more, in an independent fiat currency regime.  So as you can see I am not intolerant of the Modern Monetary Theorists when they repeat what Lord Keynes, and even Friedman and Schwartz, have said for so many years.  It is the 'deficits don't ever matter' meme, wrapped in sophistry, that is cloying. The overlay of state fascism on monetarism is repugnant, and it has been attempted, and failed, several times in the last century.  And it will fail again if it is tried again, as do all Ponzi schemes that fail to conquer the majority of the world.

On the other hand, I am still struggling with the mechanism that John Williams believes makes hyperinflation in the dollar so likely.  I made a study of the forty or so serious inflations since WW II a couple of years ago, and think I understand it.

The difference here is that none of these hyperinflations involved the world's reserve currency, or a country not set upon by the compulsion or after effect of a highly destructive war, or some other exogenous force, or  even a fatal political collapse as in the case of the former Soviet Union. 

I am going to read the paper referenced below again to try and understand why John thinks a hyperinflation fits the case so well here. I still believe it is not probable. But if the American political structure collapses, then it is a different story. But I cannot think how likely that may be, at least for now. It is not that I cannot imagine it; a major policy error in response to a derivatives collapse that threatens the TBTF Banks is one such scenario. A concerted financial attack on King Dollar by a coalition of large economic powers is another. It is just that none of these seems particularly likely at this time.

From John Williams at Shadowstats:

Opening Comments and Executive Summary.

Inflation increasingly is the issue. Looking at February data, where the headline retail sales number put in its strongest monthly showing in six months, headline consumer inflation likely showed its strongest monthly gain in at least 11 months. Higher prices accounted for much of the February sales gain. Whatever gain was left over for the series—net of inflation—was accounted for by unseasonably mild winter weather in much of the country, in the context of ongoing concurrent seasonal factor distortions and normal monthly reporting volatility.

Along with labor data, trade balance, industrial production and housing construction, real (inflation-adjusted) retail sales—as a measure of the physical demand for consumer goods and services—is one of the key monthly economic releases. Accordingly, today’s Commentary is relatively brief, just outlining the nominal (not-adjusted-for-inflation) retail sales detail. A more comprehensive discussion on the latest inflation and economic information will follow in Friday’s (March 16th) Commentary, which will cover February inflation (CPI and PPI) and key economic (industrial production and real retail sales) reporting.

Hyperinflation Watch.

Irrespective of any intervening economic, inflation and financial-market developments, the broad economic, inflation and hyperinflation outlooks discussed in Hyperinflation 2012 of January 25th are not changed...

Despite the Miss on Expectations Today's US 4Q GDP Number Was Still a Puffball

I just did not have the time or energy to do the work analyzing today's US GDP estimate for the 4Q10.  The drop in stocks and spike higher in metals had me squaring off accounts between the usual non-financial chores. 

For me the 'tell' that something was dodgy was the unusualy lower chain deflator which is used to calculate the 'real' GDP by removing the inflationary effect. .3% versus 1.5% expected and 2.1% prior. For every tick lower on the deflator the headline GDP growth number rises.

John Williams of ShadowStats did his usual excellent job of dissecting the corpus of the BEA's work and I am grateful for this excerpt. His site is a must read.

You may wish to take the time to read some of the free reports, on how the US government numbers are 'adjusted' over time, and his hyperinflation report which is quite interesting. I still do not agree, preferring to stay with my stagflation forecast which has long been my expected outcome. But I am keeping an open mind to both the deflationary and hyperinflationary outcomes.

Bear in mind that the UK had showed a contraction for the same period, a much more credible representation of the numbers. And so the talking heads would say that the UK suffered from the weather, and was mired in snow. Yes, and the US economy is mired in self-serving scoundrels and craven nincompoops.

GDP Estimate Was of Unusually Poor Quality.

This morning’s "advance" estimate of annualized 3.17% real (inflation-adjusted) GDP growth was nonsensical, even though it was somewhat shy of consensus. Most of the reporting was based on guesses; hard data simply are not available this early. Consider that more than the total reported fourth-quarter growth was accounted for by a narrowing of the trade deficit. The Bureau of Economic Analysis (BEA) indicated that 3.44 percentage points of growth was generated by an improved net export account. That estimate, however, was based on just the two months of available data (October and November) for the quarter. December’s data will not be available until February.

As noted in Commentary No. 345, the relative improvement suggested in the trade deficit for the fourth-quarter (based on the October and November reporting) could have added 1.3 annualized (0.3 quarterly) percentage points to fourth-quarter real GDP growth, but not 3.44 percentage points. That differential required extremely optimistic assumptions on the part of the BEA as to the December trade results. Accordingly, the upcoming trade release will be particularly interesting in terms of its implications for GDP revisions.

Separately, after quarters of a significant inventory build-up, a reduced pace of relative inventory increase reduced the reported real fourth-quarter GDP growth rate by 3.70 percentage points. Inventories at this point in time are even less reliable than the trade data. Nonetheless, inventory build-up still accounted for half the annual average GDP growth in 2010.

Also, despite the 30% annualized (8% quarterly) quarter-to-quarter contraction in housing starts, residential investment rose at a 3.4% annualized pace.

The point here is that reported 3.17% annualized growth, with the regular +/- 3.0% 95% confidence interval, along with such unusually large swings in unreliable components, should not be taken as a serious or meaningful measure of quarterly economic growth. I believe that realistic growth would have been flat-to-minus and eventually that should prove out in long-range revisions.

Where early GDP reporting generally is of extremely poor quality, some catch-up should be seen in the annual benchmark revisions due for release on July 29th. At that time — as will be seen with the payroll employment reporting due for revision a week from now — the revisions to prior economic growth generally will be to the downside, showing a more-protracted and deeper economic contraction in place than officially is recognized at present.

With quarterly weakness in the housing starts and in new orders for durable goods, the indications remain in place for a re-intensifying economic downturn, as discussed inSpecial Commentary No. 342.

"Advance" Guesstimate on Fourth-Quarter 2010 GDP Was Unusually Flimsy.

The opening comments covered several unusual issues with the current GDP report. A more traditional problem lies in how inflation was handled. On a one-to-one basis, the lower the inflation rate used to deflate the GDP, the higher will be the real or inflation-adjusted GDP growth rate. Annualized GDP inflation — the GDP Implicit Price Deflator — was reported showing annualized inflation of 0.3% in the fourth-quarter, down from 2.0% in the third, while annualized CPI inflation rose to 2.6% in the fourth-quarter, up from 1.5% in the third.

And some practitioner of economic auterism will snarkily say, "But har har and tut tut. You obviously do not understand that the deflator has nothing to do with inflation, although it purports to perform the function of taking out the inflationary effect. The deflator is merely what we say it is."

And to that I say, yes, and it also has nothing to do with reality, but rather the desire to make black appear white, and hell seem a heaven.

ShadowStats: CPI-Alt Running 4.3%, Gold $2,382, Silver $139

Something Weimar this way comes?

There is almost no doubt in my mind that we will see these prices of $2382 for gold and $139 for silver. I am just not sure exactly how we will get there, and when. But we should expect the unexpected, or at least that which is not expected by the many.

The gold / silver ratio between those prices is 17, which is close to the historically important ratio of about 16. The legal ratio of gold to silver set in France in 1803 was 15.5, and this was emulated in England and later in the US.

Obviously I am thinking of a possible return to a bi-metallic 'weak standard' through the inclusion of both gold and silver in the basket of currencies that will be replacing the US dollar as a unit of value in international trade. There are also several movements in the developing world to adopt silver for domestic use as a store of value and at least partial backing for their currency when the more prominent fiat currencies begin to hyperventilate. I think these movements will gain some traction as the currency wars intensify.

The current ratio is about 67. I cannot help but feel that silver is going to be simply amazing when its time comes, in part due to the decades of price suppression by US banking institutions.

According to the latest report from Shadowstats:

Alternative Consumer Inflation Measures

"Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.3% in June 2010, versus 5.4% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was about 8.4% (8.37% for those using the extra digit) in June, versus 9.2% in May.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact not otherwise published by the BLS.

Gold and Silver Highs

Adjusted for CPI-U/SGS Inflation. Despite another recent all-time high in the price of gold in the current cycle, gold and silver prices have yet to approach their historic high prices, adjusted for inflation. Even with the June 28th historic high gold price of $1,261.00 per troy ounce, the earlier all-time high of $850.00 (London afternoon fix, per Kitco.com) of January 21, 1980 has not been breached in terms of inflation-adjusted dollars. Based on inflation through June 2010, the 1980 gold price peak would be $2,382 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, and would be $7,689 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.

In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce (London afternoon fix, per silverinstitute.org) has not been hit since, including in terms of inflation-adjusted dollars. Based on inflation through June 2010, the 1980 silver price peak would be $139 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, and would be $447 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.

As shown on page 22 in the Hyperinflation report, over the decades, the price of gold has more than compensated for the loss of the purchasing power of the U.S. dollar as reflected by CPI-U inflation, while it has effectively fully compensated for the loss of purchasing power of the U.S. dollar based on the SGS-Alternate CPI."