The Daily View: Inflation, Peter Schiff, and QE

Peter Schiff and Josh Barrow are right to varying degrees as to the cause of rising prices, but Peter Schiff is wrong about the solutions or the economic implications. Rising prices, including pain at the pump, helps the economy by increasing consumer spending which goes into GDP.

We have bifurcated inflation of greater than CPI inflation for inelastic goods like air travel, gasoline, heating energy, and the cable bill and less than CPI inflation for stuff where there are a lot of substitutes like electronics and apparel. The bond market alludes to nonexistent inflation, but some essentials have had huge real gains in prices like education and healthcare. Inflation for inelastic goods & services is due to a combination of speculation, fed policy, inelastic arbitrage, collusion, and booming economic growth. Business and tourism depends on travel, especially overseas travel where distances exceed thousands of miles. The alternatives to long distance flying are impractical, so the airlines know they have the consumers and businesses over a barrel and raise fares accordingly. Being a cartel, once one raises fares or fees, the rest will follow. That’s why airlines have been such good investment and why the some of the major carriers got bailed out after 911.

We predict this trend of bifurcated inflation to continue with no foreseeable end. We predict $4.5/gallon gas, $130 oil, nosebleed healthcare and tuition, $200/month internet & cable bills, etc. Everything that you use and rely on is going to get much more expensive relative to wages and the official inflation rate. Laptops, appliances and TVs will be cheap but the internet, water, electricity, and cable will be super expensive and poor quality. We predict more summer brownouts due to steadily growing U.S. population and strained, aging infrastructure.

From Scientific American

The grid’s shortcomings have been well-documented, but efforts to modernize it haven’t kept up with demand. Many electrical transmission lines are outdated, and parts of the grid date back to the time of Thomas Edison.

You know you’re a liberal if you underestimate the U.S. consumer, if you think everything is a crisis or a bubble, if you want the economy to ‘reset’ to a more ‘equitable’ state and if you would choose a bear market and massive wealth destruction over a painless bailout funded by free money. Peter Schiff is a liberal for all the aforementioned reasons, and because he doesn’t like the fed. He wants your assets to be destroyed in a big bear market and depression, so that living expenses for main street will fall. This is another form of ‘spreading the wealth around’, but not through taxation and regulation, but through wealth destruction. The outcome is classic Marxism: the richest individuals, especially those with assets like stocks and real estate, get poorer. For example, lets assume I have $1 million in stocks and real estate and Peter Schiff somehow forces the fed raises rates to 5%. The economy falls into a deep recession and my home and stocks lose 30% of their value. While I didn’t lose money due to taxes, the outcome is still bad: I’m $300,000 poorer. In the era of dyseconomics, we can have perpetually low interest rates and low taxes; there’s no need to raise either. The debt binge is sustainable and we don’t need to get our fiscal house in order. The problem with some republicans attacking the fed and deficits is that they are promoting policy that will destroy wealth.

Even though I’m a libertarian republican, I’ll concede fed policy, including quantitative easing (QE), has been a resounding success. People get rich because they create value (though creating a business for example) or by taking risk (buying a home, buying stocks). What’s wrong with economic policy like QE that helps people become rich? In keeping with the principles of supply side economics, the motivation behind fed policy is to create macro environments conducive to wealth creation.

QE is not money printing. It’s a transfer between fed reserves and the banks. This increases the fed reserves, but not the money supply. The idea is to push long term rates lower because short term rates are already at zero. QE creates incentives to invest & spend, instead of hording money, as well as sending a signal that the fed will not allow deflation, which helps boost confidence. This caricature of a poor elderly person living off his or her savings doesn’t exist; if such a person were poor he would have no savings to begin with, and secondly, those who do have a lot of money don’t just keep it in a savings account. They put it in bonds, stocks, and other higher yielding assets.

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