Author Topic: Discussion of Gold and All Items Pertaining to It  (Read 1195 times)

Golden Oxen

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"Cluster Of Central Banks" Have Secretly Invested $29 Trillion In The Market
By Tyler Durden

Another conspiracy "theory" becomes conspiracy "fact" as The FT reports [9]"a cluster of central banking investors has become major players on world equity markets." The report, to be published this week by the Official Monetary and Financial Institutions Forum (OMFIF) [10], confirms $29.1tn in market investments, held by 400 public sector institutions in 162 countries, which "could potentially contribute to overheated asset prices." China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials, and we suspect the Fed is close behind (courtesy of more levered positions at Citadel), as the world's banks try to diversify themselves and "counters the monopoly power of the dollar." Which leaves us wondering where are the central bank 13Fs?

While most have assumed that this is likely, the recent exuberance in stocks has largely been laid at the foot of another irrational un-economic actor - the corporate buyback machine. However, as The FT reports [9], what we have speculated as fact for many years now (given the death cross of irrationality [11], plunging volumes, lack of engagement, and of course dwindling credibility of central planners)... is now fact...

    Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions.

     

    “A cluster of central banking investors has become major players on world equity markets,” says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif), a central bank research and advisory group. The trend “could potentially contribute to overheated asset prices”, it warns.

     

    ...

     

    The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries.

     

    ...

     

    China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, as the report argues is “partly strategic” because it “counters the monopoly power of the dollar” and reflects Beijing’s global financial ambitions.

     

    ...

     

    In Europe, the Swiss and Danish central banks are among those investing in equities. The Swiss National Bank has an equity quota of about 15 per cent. Omfif quotes Thomas Jordan, SNB’s chairman, as saying: “We are now invested in large, mid- and small-cap stocks in developed markets worldwide.” The Danish central bank’s equity portfolio was worth about $500m at the end of last year.

Read more here [9]

So there it is... conspiracy fact - Central Banks around the world are buying stocks in increasing size.

To summarize, the global equity market is now one massive Ponzi scheme in which the dumb money are central banks themselves, the same banks who inject the liquidity to begin with.

That would explain this.

                                         

                   

That said, good luck with "exiting" the unconventional monetary policy. You'll need it.

               

   www.zerohedge.com/news/2014-06-15/cluster-central-banks-have-secretly-invested-29-trillion-market  :o ::) :o ::)

Golden Oxen

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Golden Oxen

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      For my final article for SmartPlanet, which is closing down as an independent publication, I take an in-depth look at the research to date on stranded carbon assets, and offer my own thoughts on the subject. I believe that the risks of stranded assets are far larger than has been contemplated thus far.
(Note: The title at SmartPlanet wasn’t mine. As my article details, estimates of the size of the “carbon bubble” vary from $1.1 trillion to $28 trillion, and I think even the latter estimate is too low.)

         
                                                           By Chris Nelder   Posting in Technology | From Issue 20   June 16 & 23, 2014

Energy analyst Chris Nelder argues why the risks associated with investing in fossil fuels companies are considerably larger than researchers think.


The topic of stranded assets in the fossil fuel sector is all the rage in climate policy circles, as well it should be. Even so, the discussion has really only scratched the surface of the subject, which deserves much broader attention. But first, a brief history is in order.

The concept of stranded assets was born in July 2011 when the UK-based non-profit Carbon Tracker published its initial report, "Unburnable Carbon - Are the world's financial markets carrying a carbon bubble?" It offered some straightforward math for us to consider: To limit planetary warming to 2°C, the world cannot exceed 886 Gt (gigatons) of CO2 emissions from 2000 to 2050. Subtracting the emissions from 2000 through 2010 left a budget of 565 Gt. But the reserves of the world's private and public companies and governments amount to 2795 Gt of potential emissions. Therefore, only 20 percent of the remaining reserves can be burned through 2050 to achieve the desired result.

After allowing state entities (nationally owned fossil fuel producers) to maintain a normal share of global production, the 20 percent rule would also apply to the world's top 100 listed coal companies and the top 100 listed oil and gas companies; only 149 of the 745 Gt on their balance sheets could be consumed. That puts the combined market value of those 200 companies -- $7.42 trillion in February 2011 -- at risk of "impairment" should the world enact policies to stay under the safe warming limit.

                   

The investment community heard this warning loud and clear, and began considering its exposure. A high-profile coalition of investors, politicians and scientists warned the Bank of England "to investigate how Britain's exposure to polluting and environmentally damaging investments might pose a systemic risk to the UK financial system and prospects for long term economic growth."

Carbon Tracker followed up with an April 2013 report, "Unburnable carbon 2013: Wasted capital and stranded assets," calling on regulators, investors and governments to prevent a $6 trillion "carbon bubble" from developing over the next decade, and to reconsider the risk of a fossil fuel industry that spends $674 billion a year "to find and develop new potentially stranded assets." The report mapped the exposure to carbon reserves held on each of the world's major stock exchanges.

Even if carbon capture and sequestration (CCS) technology were deployed under a best-case scenario in which nearly 3,800 CCS projects were running by 2050, it would only begin to take a bite out of emissions after 2030, and so would have little effect, extending the carbon budget by only 125 Gt.

The findings reverberated around the world, and investors began taking action. The ethical investment group Ceres began facilitating conversations between investors and fossil fuel companies about how to manage $3 trillion in potentially at-risk assets. Large funds started ditching investments in companies with coal and tar sands assets. The $800 billion Norwegian Petroleum Fund halved its coal investments. Activists began pushing universities and other large investors to divest their fossil fuel interests, following the model that succeeded in helping end apartheid in South Africa. Reports on stranded asset risk were issued by the UK government's Environmental Audit Committee, the Australia Institute, and the EU Parliament Greens-European Free Alliance Group. Ratings agencies like Standard and Poor's and Moody's began worrying aloud that stranded asset risk could lead to credit downgrades. The International Energy Agency (IEA) admitted that a significant fraction of fossil fuel reserves are unburnable, while banks like HSBC and Citi got on board with the thesis.

The Stranded Assets Programme at the Smith School of Enterprise and the Environment, headed by Ben Caldecott, also began publishing research papers to quantify the stranded asset risk in various markets and under various scenarios. It also established a research network and launched a series of workshops.

A third report from Carbon Tracker, "Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditures," was released May 8, along with a handy video summary by former Deutsche Bank Climate Change Advisors head of research Mark Fulton, an advisor to Carbon Tracker. That analysis put the stranded asset risk of oil into sharp focus, and encouraged investors to look specifically at the risks associated with $1.1 trillion of capital expenditures planned over the next decade to develop unconventional oil projects which need $95/bbl or more to break even, such as deepwater oil, tar sands, and oil from the Arctic. Through 2050, nearly $13 trillion are expected to be invested in this high-cost, high-risk group, which then would constitute one-third of potential global oil production. Private sector companies would be responsible for three-quarters of it. All told, an estimated $21 trillion of capital expenditures in high-cost production "poses substantial financial risks for investors in oil companies," wrote Fulton and Reid Capalino, a Senior Energy Analyst with Carbon Tracker, on May 21.

Source: "Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditures"

The report also quantified how much exposure each of the world's major oil companies have to each type of oil. The Brazilian national oil company Petrobras, ExxonMobil, the Russian oil company Rosneft, and Shell topped that list for having the greatest exposure to high cost and high risk oil projects.

ExxonMobil finally bowed to shareholder pressure on March 31, releasing its first-ever report on the risk that climate change poses to its portfolio. On May 16, Shell issued a similar letter to investors. Predictably, both companies dismissed stranded asset risks because they expect oil demand to override climate concerns for decades into the future, with neither climate policy nor a transition to renewables posing a significant threat to their businesses.

Putting an even finer point on the financial risks associated with the fossil fuel industry, Mark Lewis, former Head of Energy Research at Deutsche Bank and an external research advisor to Carbon Tracker, has issued three research notes from his current post at Kepler Cheuvreux, a Paris-based financial services company. The first, on April 24 ("Stranded assets, fossilised revenues: $28trn of revenues at risk for fossil-fuel industry"), examined how much money the fossil fuel industry would stand to lose under the IEA's "450 Scenario." In that scenario, the world takes action to remain under 450 parts per million of CO2, which is thought to be the threshold that would limit the world to 2°C of warming. Lewis calculates that over the next two decades, $19.3 trillion of oil, $4 trillion of gas, and $4.9 trillion of coal revenues would be lost under that scenario, compared to the IEA's vision of business as usual.

On May 21, Lewis went on the attack against Shell and ExxonMobil for their blithe dismissals of stranded asset risk or a possible low-carbon future, calling their approaches "naïvely binary" for focusing only on global climate policy instead of possible regional or national policy, and for failing to recognize the risk that fossil fuels might simply become socially unacceptable and prompt further shareholder revolt. Slamming Shell for its complacency and refusal to engage with investors, Lewis highlighted the obvious hypocrisy in the company's admitting on the one hand that "our scenarios take as predetermined that climate change will rise up the public and political agenda" and that "regulatory priorities could well be relatively sudden," while waving away with the other any possibility that the world would not continue to burn oil and gas at more or less historical rates for decades to come.

For its part, ExxonMobil has been actively engaged in modeling climate policy risk to its business for many years, and has supported the notion of a carbon tax as a risk mitigation strategy, as ably detailed by Steve Coll in his book Private Empire - ExxonMobil and American Power. He cites a January 11, 2007 email from Ken Cohen, vice president of public and government affairs, saying it would be "prudent to develop and implement strategies that address the risks [of climate change], keeping in mind the central importance of energy to the economies of the world. This includes putting policies in place that start us on a path to reduce emissions..." The company currently faces a proposal sponsored by major shareholders that would require it to set emissions-reduction goals, and assumes that CO2 emissions will be priced at $80/tonne by 2040.
A broader notion of stranded asset risk

The primary scenario examined thus far that might strand fossil fuel assets is one in which oil prices fall as a result of climate regulations; they would have to fall quite substantially (below a roughly $80/bbl production cost). Secondarily, slower growth, particularly in China, and the transition to renewables would also curb demand over the longer term.

Only Lewis seems to have recognized another scenario; one in which continued high prices -- even continually rising prices -- might also strand fossil fuel assets. I believe investors should give this scenario equal weight.

There are two factors at work under this scenario. The first, as Lewis explained in his April 24 note, is that "if oil prices rise faster in the future than currently assumed by the IEA in its base-case projections, we think this could lead to an acceleration of the policy incentives for, and deployment of, renewable-energy technologies and energy-efficiency measures." I have already detailed why I believe the clean energy transition is unstoppable, so I agree with this risk, although I think it applies far more to coal than to oil, and might not apply that much to gas, depending on how grid power evolves.

Those who are familiar with my model of oil prices can already guess the second: that prices could rise beyond the pain threshold of consumers, and oil demand could fall off through the mechanism of simple demand destruction and economic contraction -- precisely as it did (to some indeterminate extent) in the aftermath of the 2008 crash.

Although it's an understandable and uncontroversial baseline for analysis, it's also of dubious value to use the IEA's scenarios as reference, because the agency has a long track record of poor forecasting and overly optimistic scenario construction. Without delving into that deep subject, I'll just mention that expecting CCS to become a significant factor in the carbon equation is likely straight out of the question, and the future of nuclear power is dour.

Even if the IEA's 450 Scenario could be achieved (and I don't think it can, for a variety of reasons I won't elaborate on today) I would still project higher, not lower, prices in real terms by 2035, driven by the increasing cost of oil production. IEA's oil price forecasts are far too low. Nor would I assume, as Lewis did, that unconventional oil continues to "sells at a discount in the market to conventional crude for a number of reasons, for example because it is landlocked, or because it does not meet refinery specifications." The global market will sort out those inefficiencies in time. And indeed, it is already the case that some unconventional projects like Suncor's older operations in the Canadian tar sands could remain profitable at prices well below that of some newer conventional projects in geopolitically challenged locations.

I agree conceptually that high-cost projects are the most at risk, and that unconventional projects are generally the highest cost, but it wouldn't be quite correct for investors to assume that the entire unconventional group would be the first to be shut-in under a 450 scenario. However, I do concur that since unconventional projects are dominated by independent, non-state oil companies, the risk is weighted toward them and to investors in publicly listed companies.
Anatomy of an unconventional oil project

Investors must examine closely the full cost of developing new projects -- a task made increasingly difficult by oil and gas companies' increasingly opaque financial statements -- and understand exactly which projects are likely to be at risk.

For example, I conducted a short examination of exactly how ExxonMobil might fare with its investments in the Canadian tar sands if the Keystone XL (KXL) pipeline failed to materialize. Its two main projects in the tar sands appear to be the Kearl and Cold Lake projects, being developed through its majority stake in Imperial Oil Ltd.

What I found is that all sorts of delays and cost increases have already reduced the expectations for Kearl quite substantially.

ExxonMobil Canada submitted the initial public disclosure for the project in 1997. It was approved in 2008 and development began. First production came in April 2013. ExxonMobil's page on Kearl says that initial production was anticipated by the end of 2012 at an initial production level of 160,000 barrels per day (b/d), and that the project would produce almost 500,000 b/d when fully developed. The actual initial production rate doesn't appear to have been reported, but Imperial's page on Kearl says that production should reach 110,000 b/d later in 2013, and that full capacity of 345,000 b/d would be reached by about 2020. But on April 2, Financial Post reported that "Imperial Oil Ltd. is struggling to work out the bugs at its $12.9-billion Kearl oil sands mine nearly one year after production began as the company seeks to bring the project to full capacity...Production at the massive bitumen mine averaged 70,000 barrels a day in the first quarter this year, the company said. That's up from an average 52,000 barrels per day in the fourth quarter last year, but still below the mine's 110,000-barrel capacity."

So from 2008 to 2014, after spending nearly $13 billion and running more than a year over schedule, the Kearl operation achieved a first-quarter production level of 52,000 b/d when 160,000 b/d was expected, is only achieving 70,000 b/d now, and its ultimate capacity has been downgraded from 500,000 b/d to 345,000 b/d.

Importantly, the Kearl project's troubles have nothing to do with the KXL pipeline, nor with carbon policy. They're simply a function of the difficulty of production and rising costs. And they raise some important questions: How are ExxonMobil/Imperial booking the reserves related to Kearl? Have the claimed reserves changed at all since the 2012 projection? What production output level will the project actually achieve, and when? Will it turn out that cost expansion and delays are actually "stranding" some of those assets in the complete absence of any effective carbon policy?
Hard questions

A comprehensive assessment of stranded asset risk would be based on such real-world experiences as the Kearl project, and might point more to a "revenue risk" than "stranded assets" risk, but it could be at least as potent a warning to investors, and a powerful counter-argument to the sunny outlooks on production offered by the oil majors. Current metrics on free cash flow, capital intensity, the crude to natural gas liquid ratios, return on investment, and so on could be even more damning than the unknown risk that as-yet-unformed climate policy might pose at some unknown point in the future.

The IEA offered a simultaneously stark and oblique warning on this point in its World Energy Investment Outlook, released June 3. The world will need to invest $53 trillion in energy supply and efficiency to meet its energy needs and get on a 2°C emissions path through 2035, the agency said. More than half of the $40 trillion investment in energy supply will be needed just to keep production flat -- "to compensate for declining oil and gas fields and to replace power plants and other equipment that reach the end of their productive life" -- including a doubling of investment in upstream oil by the Middle East.

Yet the recent trend in the fossil fuel sector has been one of declining, not increasing, investment, underscored most recently by Total's decision to put its $11 billion Joslyn tar sands project on ice due to cost inflation.

And, as Lewis pointed out in his June 6 note ("The $2 Trillion Question: New IEA Capex Numbers Underline Oil-Price Upside"), IEA has increased its estimate for global upstream oil capital expenditures in this report by 20% over its 2013 World Energy Outlook published just seven months ago but did not raise its oil price forecast. Not only is this "counter-intuitive," as Lewis observes, I would plainly call it a false signal. Oil prices will need to be considerably higher over the next 20 years -- a time in which I expect global oil supply to be declining -- to realize the IEA's investment scenario, even if over 90 percent of the spending on upstream oil were strictly to stem declines, as the agency expects.

More likely is that the world will not invest sufficiently in future oil supply -- a risk IEA acknowledges -- driving prices up far more quickly than the world can adjust to and kicking off a long period of price volatility as oil producers and consumers struggle to maintain a grip on the "narrow ledge." That volatility alone would strand assets and starve upstream projects of investment.

Further useful information might be gleaned from a close examination of the models oil and gas companies use to forecast production, and of the models put forward by agencies like the U.S. Energy Information Administration (EIA) to estimate reserves.

For example, on May 20, EIA slashed its estimate for the recoverable oil in California's Monterey Shale formation by over 95 percent. I believe it did so because David Hughes' careful examination of the formation last year, which I wrote up in December, shamed them into it. Investors in U.S. unconventional oil should note that Hughes' model indicates a tight oil peak around 2016, five years earlier than EIA projects (see "Oil majors are whistling past the graveyard").
Stranded assets on the grid

While the vast majority of the work on stranded assets so far has revolved around oil and gas, in my view the most immediate stranded asset risk is in grid power -- a point underlined by President Obama's new climate plan, which takes clear aim at coal power. Since existing coal and nuclear power plants are being rapidly retired, new nuclear plants in the United States and Europe are expected to generate power at more than twice the cost of new wind and solar plants, and the developing world is increasingly choosing renewables (in India, partly due to a lack of coal), the lack of attention paid to grid power in the stranded assets dialogue seems a curious oversight. Perhaps it owes to the fact that nearly all of the stranded asset research thus far has emanated from the UK, where power generators face a somewhat different set of challenges.

But I suspect that the first trillion dollars' worth of stranded assets will be in the grid power sector, not in oil and gas languishing underground. A quick look at the stock charts of major coal companies tells that story nicely. Note, too, that Barclays just downgraded high-grade corporate bonds across the entire U.S. utility sector, citing the emerging threat of solar power and storage.

The latest Carbon Tracker report, "The Great Coal Cap - China's energy policies and the financial implications for thermal coal" (PDF summary), released June 5, finally takes aim at stranded asset risk in the grid power sector. Up to 127 gigawatts (GW) of existing coal-fired capacity and 310 GW of expected future capacity, equivalent to 40 percent of the total installed coal-fired capacity by the end of this decade, could be stranded in the Asian nation as demand falls due to moderating economic growth, increased competition from cleaner fuels, and carbon policy. But these are not merely future risks; they're in the present. A report from Bloomberg released the previous day said that the economy in Shanxi province, which is "all about coal," is tanking as anti-pollution policies begin to curb coal use.

Understanding grid power stranded asset risk is a difficult undertaking. In the United States alone, it would requiring painstaking research in dozens of different power markets with hundreds (or thousands, depending on the granularity of your research) of generators and a complex web of regulations. But it's an effort worth making if you're running a major pension fund.

In my view, it's far more likely that carbon assets will be stranded by the falling costs and increasing deployment of renewables, somewhat irrespective of carbon policy, and that it will proceed from coal, to gas, and finally oil. And the main risk to oil assets will be consumer price tolerance, not climate policy. I also think natural gas use in the OECD will be greater than is generally assumed, while its use in non-OECD countries will be considerably lower than expected as parts of the world that still lack reliable electricity leapfrog fossil fuels and go straight to renewables.

So while the full stranded assets picture is complex, the take-home message is simple enough: Fossil fuels are on their way out, and renewables are coming on strong. This is irreversible. The entire universe of stranded fossil fuel assets is much, much larger than the research thus far has contemplated.

The only real question is who's going to wind up holding the bag.

Photo: "Electoral Campaign," sculpture by Isaac Cordal. Used by permission of the artist.

Related:https://cms.smartplanet.com/content/article/6ab413cb-63f0-4c58-a7f3-daf2b23d4bf5 

    Cleantech investments are sexy again, here's why
    Why the U.S. should not export oil
    Oil and gas price forecast for 2014




Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure


  www.smartplanet.com/blog/the-take/why-the-potential-for-a-trillion-dollar-carbon-bubble-grows-bigger-every-day/

Golden Oxen

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Darryl Schoon is a fellow Gold Bug and the gentleman that introduced me to Dr Fekete and his work. They are close friends.

Let me caution my readers that Darrel did some prison time for dealing drugs out of his bar when he was a younger man. I mention it since some use the fact to discredit him. Once you meet Mr Schoon you can decide for yourself if he is a man of character and merit, my decision is obvious.

My readers know I would no present the work of this out of the box, most interesting thinker, unless I felt it was of much merit. Interesting comments here for Illuminati watchers as well.

Dear members, Darryl Robert Schoon


                                                          www.youtube.com/watch?v=HxRC9GaVOyM
« Last Edit: July 07, 2014, 03:34:10 pm by Golden Oxen »

Golden Oxen

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Nothing here an optimist would be interested in.  :'( :'(

      Egon von Greyerz-Dollar Going to Collapse, Debts Can Never Be Repaid

     Published on Jul 15, 2014

http://usawatchdog.com/2008-meltdown-... Egon von Greyerz, who manages the largest gold vault in Europe, says, "We are specialists in wealth preservation. Our task is to analyze the risk and take all the measures possible to protect clients from the risk that we see, and the risks are bigger than ever in the world. . . . We are going to see a major financial disaster and possibly collapse. The world has been living above its means for a hundred years. It has gradually gotten worse as central banks have printed more and more money. . . . Just in the United States, in the last eight years, the debt has increased from $8 trillion to $17 trillion. That is an increase of $9 trillion in just eight years. That is more money than was created in the creation of the United States from over 200 years ago to when Bernanke took over. That is happening everywhere in the world. . . . The dollar is going to collapse, and all the other currencies will follow. It will then be revealed that all these debts can never be repaid.

                                        www.youtube.com/watch?v=ZM_hYgvhHRQ
                     

Golden Oxen

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Golden Oxen

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Moneynews
CNBC: Many Companies Raising Prices, Despite Fed's Lack of Concern
Tuesday, August 5, 2014 09:53 AM

By: Dan Weil

While the Federal Reserve has stated that it considers inflation to be well under control, some companies are raising prices by substantial amounts.

Companies across all industries are increasing their prices, according to CNBC.

Food companies have raised their prices due to climbing commodities prices. For example, Hershey is raising prices by an average of 8 percent for a majority of its products in the United States. "Commodity spot prices for ingredients such as cocoa, dairy and nuts have increased meaningfully since the beginning of the year," a Hershey executive said in a statement.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

Hershey competitor Mars is lifting it North American prices by 7 percent, the first increase since 2011.

And Kraft announced last week that it raised prices on cheese between 5 and 12 percent and many Oscar Meyer products by an average of 10 percent. "Beef, turkey and pork prices for our cold cuts have continued to increase and are at record highs as we speak," the company explained.

Fast-food restaurants across the country, including Chipotle and In-N-Out, are hiking prices because of higher meat costs, CNBC stated.

In addition, Starbucks, J.M. Smucker and Kraft are boosting their coffee prices, as they have to pay more for the beans.

Ford is increasing prices for its trucks, and Nike is raising prices for apparel and shoes.

"Inflation is here, regardless of whether it shows up in the Federal Reserve dashboard," CNBC noted. "Consumers are feeling it and will feel it further, whether it's driven by an increase in consumer demand, or simply as a way for companies to keep churning out impressive profits."

Consumer prices rose 2.1 percent in the 12 months through June. The personal consumption expenditures index, the Fed's favored inflation measure, climbed 1.6 percent in the 12 months through June.

The Fed's inflation target is 2 percent.

To be sure, some private economists share the Fed's comfort with recent inflation data. "The economy and the recovery remain on track, neither too hot nor too cold," Laura Rosner, U.S. economist with BNP Paribas, told Bloomberg, commenting on the latest consumer price figures.

The Fed "can continue with accommodative policy," she said.
www.moneynews.com/Personal-Finance/Companies-prices-Fed-inflation/2014/08/05/id/586912/

Golden Oxen

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Don't Believe Government About Price Inflation



It is an old adage that there are lies, damn lies and then there are statistics. Nowhere is this truer than in the government's monthly Consumer Price Index (CPI) that tracks the prices for a selected "basket" of goods to determine changes in people's cost of living and, therefore, the degree of price inflation in the American economy.

On August 19th, the Bureau of Labor Statistics (BLS) released its Consumer Price Index report for the month of July 2014. The BLS said that prices in general for all urban consumers only rose one-tenth of one percent for the month. And overall, for the last twelve months the CPI has only gone up by 2 percent.

A basket of goods that had cost, say, $100 to buy in June 2014 only cost you $100.10 in July of this year. And for the last twelve months as a whole, what cost you $100 to buy in August 2013, only increased in expense to $102 in July 2014.

By this measure, price inflation seems rather tame. Janet Yellen and most of the other monetary central planners at the Federal Reserve seem to have concluded, therefore, that they have plenty of breathing space to continue their aggressive monetary expansion when looking at the CPI and related price indices as part of the guide in deciding upon their money and interest rate manipulation policies.


Overall vs. "Core" Price Inflation

The government's CPI statisticians distinguish between two numbers: the change in the overall CPI, which rose 2 percent for the last year, and "core" inflation, which is the rate of change in the CPI minus food and energy prices. Leaving these out, "core" price inflation went up even less over the last twelve months, by only 1.9 percent.

The government statisticians make this distinction because they argue that food and energy prices are more "volatile" than many others. Fluctuating more frequently and to a greater degree than most other commonly purchased goods and services, they can create a distorted view, it is said, about the magnitude of price inflation during any period of time.

The problem is that food and energy costs may seem like irritating extraneous "noise" to the government number crunchers. But to most of the rest of us what we have to pay to heat our homes and put gas in our cars, as well as buying groceries to feed our families, is far from being a bothersome distraction from the statistical problem of calculating price inflation's impact on our everyday lives.

Constructing the Consumer Price Index

How do the government statisticians construct the CPI? Month-by-month, the BLS tracks the purchases of 6,100 households across the country, which are taken to be "representative" of the approximately 320 million people living in the United States. The statisticians then construct a representative "basket" of goods reflecting the relative amounts of various consumer items these 6,100 households regularly purchase based on a survey of their buying patterns. They record changes in the prices of these goods in 24,000 retail outlets out of the estimated 3.6 million retail establishments across the whole country.

And this is, then, taken to be a fair and reasonable estimate – to the decimal point! – about the cost of living and the rate of price inflation for all the people of the United States.

Due to the costs of doing detailed consumer surveys and the desire to have an unchanging benchmark for comparison, this consumer basket of goods is only significantly revised about every ten years or so.

This means that over the intervening time it is assumed that consumers continue to buy the same goods and in the same relative amounts, even though in the real world new goods come on the market, other older goods are no longer sold, the quality of many goods are improved over the years and changes in relative prices often result in people modifying their buying patterns.

The CPI vs. the Diversity of Real People's Choices

The fact is there is no "average" American family. The individuals in each household (moms and dads, sons and daughters, and sometimes grandparents or aunts and uncles) all have their own unique tastes and preferences. This means that your household basket of goods is different in various ways from mine, and our respective baskets are different from everyone else's.

Some of us are avid book readers, and others just relax in front of the television. There are those who spend money on regularly going to live sports events, others go out every weekend to the movies and dinner, while some save their money for an exotic vacation.

A sizable minority of Americans still smoke, while others are devoted to health foods and herbal remedies. Some of us are lucky to be "fit-as-a-fiddle," while others unfortunately may have chronic illnesses. There are about 320 million people in the United States, and that's how diverse are our tastes, circumstances and buying patterns.

Looking Inside the Consumer Price Index

This means that when there is price inflation those rising prices impact each of us in different ways. Let's look at a somewhat detailed breakdown of some of the different price categories hidden beneath the CPI aggregate of prices as a whole.

In the twelve-month period ending in July 2014, food prices in general rose 2.5 percent, a seemingly modest amount. However, meat, poultry, fish and egg prices increased, together, by 7.6 percent. But when we break this aggregate down, we find that beef and veal prices increased by 10.4 percent and frankfurters went up 6.9 percent, but lamb rose by only by 1.7 percent. Chicken prices increased more moderately at 2.7 percent, but fresh fish and seafood were 8.8 percent higher than a year earlier.

Milk was up 5.4 percent in price, but ice cream products decreased in price by minus 1.4 percent over the period. Fruits increased by 5.7 percent at the same time that fresh vegetable prices declined by minus 0.5 percent.

Under the general energy commodity heading, prices went up by 1.2 percent, but propane increased by 7.3 percent in price over the twelve-month period, while electricity prices, on the other hand, increased by 4 percent.

So why does the overall average of the Consumer Price Index seem so moderate at a measured 2 percent, given the higher prices of these individual categories of goods? Because furniture and bedding prices decreased by minus 3.1 percent, and major appliances declined in price over the period by minus 6.2. New televisions went down a significant minus 15 percent.

In addition, men's apparel went down a minus 0.2 percent over the twelve months, but women's outerwear rose a dramatic 12.3 percent in the same time frame. And boys' and girls' footwear went up, on average, by 8.2 percent.

Medical care services, in general, rose by 2.5 percent, but inpatient and outpatient hospital services increased, respectively, by 6.8 percent and 5.6 percent.

Smoke and Mirrors of "Core" Inflation

These subcategories of individual price changes highlight the smoke and mirrors of the government statisticians' distinction between overall and "core" inflation. We all occasionally enter the market and purchase a new stove or a new couch or a new bedroom set. And if the prices for these goods happen to be going down we may sense that our dollar is going further than in the past as we make these particular purchases.

But buying goods like these is an infrequent event for virtually all of us. On the other hand, every one of us, each and every day, week or month are in the marketplace buying food for our family, filling our car with gas and paying the heating and electricity bill. The prices of these goods and other regularly purchased commodities and services, in the types and combinations that we as individuals and separate households choose to buy, are what we personally experience as a change in the cost of living and a rate of price inflation (or price deflation).

The Consumer Price Index is an artificial statistical creation from an arithmetic adding, summing and averaging of thousands of individual prices, a statistical composite that only exists in the statisticians' calculations.

Individual Prices Influence Choices, Not the CPI

It is the individual goods in the subcategories of goods that we the buying public actually confront and pay when we shop as individuals in the market place. It is these individual prices for the tens of thousands of actual goods and services we find and decide between when we enter the retail places of business in our daily lives. And these monetary expenses determine for each of us, as individuals and particular households, the discovered change in the cost of living and the degree of price inflation we each experience.

The vegetarian male who is single without children, and never buys any types of meat, has a very different type of consumer basket of goods than the married male-female couple who have meat on the table every night and shop regularly for clothes and shoes for themselves and their growing kids.

The individual or couple who have moved into a new home for which they have had to purchase a lot of new furniture and appliances will feel that their income has gone pretty far this past twelve months compared to the person who lives in a furnished apartment and has no need to buy a new chair or a dishwasher but eats beef or veal three times a week.

If the government were to impose a significant increase in the price of gasoline in the name of "saving the planet" from carbon emissions, it will impact people very differently depending upon whether an individual is a traveling salesman or a truck driver who has to log hundreds or thousands of miles a year, compared to a New Yorker who takes the subway to work each day or walks to his place of business.

It is the diversity of our individual consumer preferences, choices and decisions about which goods and services to buy now and over time under constantly changing market conditions that determines how each of us are influenced by changes in prices, and therefore how and by what degree price inflation or price deflation may affect each of us.

Monetary Expansion Distorts Prices in Different Ways

An additional misunderstanding created by the obsessive focus on the Consumer Price Index is the deceptive impression that increases in the money supply due to central bank monetary expansion tend to bring about a uniform and near simultaneous rise in prices throughout the economy, encapsulated in that single monthly CPI number.

In fact, prices do not all tend to rise at the same time and by the same degree during a period of monetary expansion. Governments and their central banks do not randomly drop newly created money from helicopters, more or less proportionally increasing the amount of spending power in every citizen's pockets at the same time.

Newly created money is "injected" into the economy at some one or few particular points reflecting into whose hands that new money goes first. In the past, governments might simply print up more banknotes to cover their wartime expenditures, and use the money to buy armaments, purchase other military supplies, and pay the salaries of their soldiers.

The new money would pass into the hands of those selling those armaments or military supplies or offering their services as warriors. These people would spend the new money on the particular goods and services they found desirable or profitable to buy, raising the demands and prices for a second group of prices in the economy. The money would now pass to another group of hands, people who in turn would now spend it on the market goods they wanted to demand.

Step-by-step, first some demands and some prices, and then other demands and prices, and then still other demands and prices would be pushed up in a particular time-sequence reflecting who got the money next and spent in on specific goods, until finally more or less all prices of goods in the economy would be impacted and increased, but in a very uneven way over time.

But all of these real and influencing changes on the patterns of market demands and relative prices during the inflationary process are hidden from clear and obvious view when the government focuses the attention of the citizenry and its own policy-makers on the superficial and simplistic Consumer Price Index.

Money Creation and the Boom-Bust Cycle

Today, of course, virtually all governments and central banks inject new money into the economy through the banking system, making more loanable funds available to financial institutions to increase their lending ability to interested borrowers.

The new money first passes into the economy in the form of investment and other loans, with the affect of distorting the demands and prices for resources and labor used in capital projects that might not have been undertaken if not for the false investment signals the monetary expansion generates in the banking and financial sectors of the economy. This process sets in motion the process that eventually leads to the bust that follows the inflationary bubbles.

Thus, the real distortions and imbalances that are the truly destabilizing effects from central banking inflationary monetary policies are hidden from the public's view and understanding by heralding every month the conceptually shallow and mostly superficial Consumer Price Index.


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Richard Ebeling