Being deeply
in debt is like being grossly overweight. You're carrying around this extra
baggage that slows you down, and without continuous, conscious effort you
tend to stop moving.
That's the
situation in which the world finds itself. The debts accumulated in the past
couple of decades are weighing down the major economies, threatening to pull
them back into recession if not countered by massive deficit spending and
monetary ease. This, according to the following Bloomberg article, is causing
prices to fall in most sectors:
IPhone
Price Cuts Send Bond Inflation Bets to 11-Year Low
Price cuts on
everything from iPhones to Folgers coffee show why investors in U.S.
government bonds anticipate low inflation for the next decade even as the
Federal Reserve considers injecting more cash into the economy.
A measure of
price-increase predictions used by the Fed to set policy, the five-year,
five-year forward break-even rate, has averaged 2.54 percent this year.
That's the lowest since 2001 for the measure, which gauges expectations for
inflation between 2017 and 2022. Economists surveyed by Bloomberg forecast
that 10-year government bonds will yield 1.76 percent by Dec. 31, down from
2.76 percent in 2011 and 3.19 percent in 2010.
Bond yields
show investors expect that soaring gasoline and corn prices will fail to
spread throughout the U.S. economy amid a slump in wages and unemployment at
more than 8 percent since the beginning of 2009. That's giving the Fed scope
to add to the $2.3 trillion of government securities it has bought since
2008, an option Chairman Ben S. Bernanke said last week is possible amid
"grave concern" about joblessness.
"The
bond market doesn't view inflation as a problem," Anthony Valeri, a market strategist in San Diego at LPL
Financial, which oversees $350 billion of assets, said Aug. 28 in a telephone
interview. "The bond market still views deflation as a greater risk to
the economy for the next one to maybe two years."
Retailers are
responding to sluggish economic growth by cutting prices. Sales rose 0.8
percent in July from the previous month, the biggest increase since February,
government figures showed Aug. 14. That followed
three straight months of declines, including a 0.7 percent drop in June, the
most since May 2010.
"What
we're suffering through in the job market is reverberating through the
economy," Adolfo Laurenti, deputy chief
economist in Chicago at Mesirow Financial Inc.,
which oversees $61.7 billion, said in a telephone interview Aug. 27.
"These lackluster sales at many major retailers are really reflecting
the fact that budgets are still constrained."
Average
hourly earnings rose 1.7 percent in July from a year earlier, the smallest
increase since December 2010 and down from a peak of 3.8 percent in June
2007, the latest Labor Department data show. The Bloomberg Consumer Comfort
Index was little changed at minus 47.3 in the week ended Aug. 26, from the
prior reading of 47.4 that was the weakest since January.
Price Cuts
J.M. Smucker Co., which owns the Folgers coffee brand, lowered
retail prices in May by about 6 percent as Arabica bean prices fell.
Orrville, Ohio-based Smucker sees lower coffee
costs for the remainder of the year, President and Chief Operating Officer
Vincent Byrd said Aug. 17.
Procter &
Gamble Co. (PG), the world's largest consumer-products company, rolled back
$400 million of the $3.5 billion in price increases it made last year, Chief
Financial Officer Jon Moeller said Aug. 3 during a conference call. The move
boosted Cincinnati-based P&G's U.S. market share of laundry detergents,
including category leader Tide, by 0.6 percent in July, he said.
Bentonville,
Arkansas-based Wal-Mart Stores Inc. (WMT) cut its price for Apple Inc.'s 16
gigabyte iPhone 4S to $148 from $188, which was already cheaper than the manufacturer's suggested retail price of $199.
Second-quarter sales at Wal-Mart's U.S. stores open at least a year gained
2.2 percent, below the 2.6 percent in the previous quarter, the company said
Aug. 16.
Wal-Mart Cuts
Wal-Mart cut
prices on paper household products by 14.1 percent in August from a year
earlier and health and beauty aids by 13.7 percent, according to Bloomberg
Industries data. The cost of laundry goods has climbed 18 percent since
September 2010 at the stores, while household paper items have increased 2.3
percent, the data show.
The company
announced a program discounting gasoline by 15- cents-per-gallon on Aug. 29.
The average U.S. price of a gallon of regular unleaded gasoline has risen 16
percent this year to $3.80, according to AAA.
"Our
customers are under pressure from the economy," Duncan MacNaughton, chief merchandising officer for the world's
biggest retailer, said that day on a conference call. "We have always
had aggressive prices on gas. This takes it to the next level."
A measure of
prices tied to consumer spending was the same in July as in the previous
month, according to an Aug. 30 Commerce Department report. The core personal
consumption expenditure deflator, which excludes food and energy costs, rose
1.6 from a year earlier, down from 2.2 percent in March.
Price Index
The consumer
price index was unchanged for a second month in July after plunging 0.3
percent in May, the most since December 2008, according to the Labor
department.
Food price
inflation caused by the worsening U.S. drought, as well as higher gasoline
prices, is being offset by employment and wages that have failed to recover
sufficiently, Valeri said.
Corn has
surged 57 percent since June 15, reaching a record $8.49 a bushel on Aug. 10,
as the drought parched millions of acres across the U.S. Soybeans gained 33
percent since mid-June and reached a record $17.605 a bushel on Aug. 27. Oil
touched a 15-week high of $98.29 on Aug. 23, and gained 20.9 percent on Aug.
31 to $96.47, as Tropical Storm Isaac strengthened, crimping output in the
Gulf of Mexico.
"The
real driver of inflation is labor costs, how much people are making,"
LPL Financial's Valeri
said. "Salaries aren't increasing much at all." Valeri
said he favors intermediate-maturity corporate bonds because "interest
rates are going to stay low for a while."
Some thoughts
To summarize,
prices for grains and oil (and health insurance and college tuition) are way
up but since wages are stagnant, higher prices for some things leave less
disposable income for other things, which fall in price due to reduced
demand. The increases and decreases tend to cancel out, resulting in low or
no inflation, and maybe, if the process gathers momentum, deflation. That's
the story of the coming year.
Now the
question is how governments will respond. If their goal is to inflate away
their debts, then they will, very soon, open the monetary floodgates and give
us the much-anticipated global coordinated quantitative easing. In which case
by late 2013 we'll be back in inflation mode, with soaring commodity prices,
falling currencies and a general sense of things spinning out of control.
But what if
near-term inflation is not their goal? As reader Bruce C noted in a comment
on a
previous DollarCollapse article:
I'm still
unclear on what the Fed's (and all of the big central banks') real agenda is.
I know the official and conventional belief is that the Fed works for the
benefit of the US, and that all the other central banks are exclusively
concerned about their own country of domicile, but that is not necessarily
true. Another perspective is that the central banks form a global cartel that
is primarily interested in a global consolidation of the banking and
financial system, often described as "a one world government with a
single currency." I honestly don't know if, or the extent to which, that
conspiracy theory is true, but I think we are all going to find out pretty
soon. I say this because the way things have evolved so far all over the
developed world is a perfect opportunity to usher in global governance, if
that is their intention. Basically, what I'm saying is IF the Fed or the ECB
initiates a significant level of "monetary stimulation" relatively
soon then I submit that the one-world conspiracy theory is wrong. Stated
differently, by holding back on additional monetary aid the resulting
economic chaos will foster the level of desperation required for Westerners
to accept global "solutions". Watch what is actually done going
forward, not what they say.
Agreed. The
global slowdown is forcing policy makers' hand. Either they ease big-time (as
yesterday's announcement of ECB bond buying indicates that Europe may do), in
which case growth and inflation are their near-term goals. Or they wait and
let the recession turn into a depression - which it will if not fought with more
credit - implying that we're being softened up for something even more
dramatic.
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