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September 27, 2012

September 27, 2012

Stimulus Occurring All Over the World

Everywhere we look, governments and central banks are pulling out the fiscal and monetary stops.  Japan is implementing further QE close on the heels of QE from the US and Europe. Yesterday China implemented a small QE leading to a rally in the Chinese stock market, more is expected.  India and Brazil are lowering interest rates, in spite of inflation risks.  Brazil is lowering taxes on electricity, and several other countries are talking about lowering tax rates to stimulate economic growth.  Singapore’s finance minister has announced that the country stands ready to take action if the economy weakens — and in our opinion, its central bank will soon lower rates.  Protectionist taxes in Brazil, Russia, India, and China are under attack.  India is undertaking a major program to stimulate growth.  Foreign direct investment in the retail sector is being encouraged.  In exchange for market access, foreign retailers agree to spend half of their investment on infrastructure, cold storage, warehouses, and roads.  A global flood of QE and fiscal stimulus is underway.

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Households Feel the Squeeze of Rising Inflation and Falling Wages

The new annual report from the U.S. Census Bureau http://www.census.gov/prod/2012pubs/p60-243.pdf on income, poverty, and health insurance (published this month) shows a nearly 9 percent decline in median household income from its all-time peak in 1999, and registers a 1.5 percent decline in 2011 alone.  Of course, these figures are adjusted for inflation using the Consumer Price Index (CPI) — an index which, as we point out in our frequent Guild Basic Needs Index™ articles, is carefully constructed to understate the rising cost of living.  CPI does little to measure the price increases American families are faced with as they acquire their basic needs — in fact, in the official CPI reports, the Bureau prefers to strip out food and energy from the index in order to provide a less volatile “Core CPI” number.

Over the last five decades, the analytical methodology used to calculate the CPI has shifted several times, and the weight and numbers of items included in the index have changed frequently.  We along with others have no doubt that these changes have been instituted to improve public sentiment about the inflationary environment.  This benefits a wide spectrum of institutional actors, both public and private.  If data were selected and analyzed today with the methodology used in past decades, official CPI figures would show a far higher rate of inflation.  As we discussed in the last GBNI™ commentary, wages rising in nominal terms have fallen far short of the rise in cost of basic needs for food, clothing, energy, and shelter.  This trend is continuing, and is visible even in the official Census Bureau figures — but the contrast between actual costs of basic needs and income is more stark when income is compared to the GBNI™.

Guild Basic Needs Index (August 2012)

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The Producer Price Index (PPI), another official inflation measure, tracks the average prices received by domestic producers for their products.  As with the “core CPI,” “core PPI” excludes food and energy prices.  The PPI showed a disquieting 0.6 percent increase for the month of August 2012 alone.

The Federal Reserve has a dual mandate: first, to maximize employment, and second, to keep prices stable.  According to recent Fed announcements, Fed policy is now favoring its mandate to maximize employment over its mandate to moderate inflation.  To summarize, with inflationary policies being deployed in the U.S. and worldwide to combat the threat of deflation and contraction, inflationary effects are already being seen in various economies, and we believe they will be seen in Japan, Europe, and the U.S. in the not-too-distant future.  The August PPI data mentioned above may be an example.


In this week’s Premium Global Market Commentary available for Gold Subscribers, we also discuss:

  • Emerging Market Infrastructure: A Perfect Storm

  • Former High Frequency Traders Reveal how High-Frequency Trading has been Given Advantages over the Public

  • Job Creation:  Why is Non-Banking Business Subjected to So Much Regulation?

  • Guild’s Weekly Global Market Summary

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