Wednesday, November 10, 2010
Tougher Times in the Weimar Republic
After seening the breadlines in Germany yesterday, I am sure we were all hoping things would get better today . . . that the Weimar Republic could return to its grand parties, theater, and cabaret. It it my unfortunate duty to report that things did not get better, they actually took a sharp turn for the worse. You remember how we described that the Central Bankers printed money in order to spur the economy, and then the economy actually got worse? Well, the Central Bankers then decided that the problem was that they had just not printed enough money. If they printed more money, then the people would have the money they needed to buy food. Well, they printed more money, but mysteriously, no matter how much money they printed, food would always go up even more. This went on for a while until we ended up with scenes like the one above. The person is taking notes on $1,000,000 German mark bills. Why, you ask, would someone use $1,000,000 bills as scratch paper? That would be because a sheet of paper cost more than a million dollars, and it was cheaper to use marks than to buy scratch paper. Luckily, to save ink, the bills were only printed on one side, so the backside could be used for calculating things like how many wagons you needed to carry money to the store to buy a loaf of bread. Some continue to insist on drawing analogies between the Weimar Republic and the present US condition. Again this is completely inappropriate, as inflation in the US is running at a wonderful 2%. You keep forgetting that our Federal Reserve is MUCH smarter than the Central Bankers in Weimar.
In a Completely Unrelated Story:
I decided to study food prices in the US in a little more depth. It is hard to really track grocery store prices as that depends a lot on store, brands, specific items, and region of the country. So, I decided to look at soft commodities. Soft commodities are the things that farmers grow, that eventually end up in things you eat or use. The soft commodities include Corn, Wheat, Coffee, Cocco, Sugar, Cotton, Rice and the like. These are the raw commodities as grown by the farmer. There is an index that tracks the prices of these raw materials, and for your enjoyment, I present the price of a "basket" of these commodities below.
Hmmm . . . looks like a 17% increase in 3 months, which on an annualized basis would be a food inflation of
68%. Wow, but that can not be, as inflation in the US is a wonderful 2%.
So, we must dig deaper to understand how foodstuffs are up by 17% in three months, but reported inflation is up only 2%. Well, we need to understand how they calculate inflation. They look at things that you buy, and then they take out Food and Energy (the two things you really need to live). It is unclear why they take out Food and Energy. The only thing I can come up with is that if you work for the Federal Reserve, they send a limousine to pick you up and take you to work, and you have a personal assistant which caters a fancy lunch for you. Perhaps they are under the impression that the rest of us do not have to buy our gas and food. Just a thought.
In looking at how they calculate inflation, the other thing I learned is that they have something important in the equation which is the Weighted Equivalent Rent. This is how that works. Lets say you own a house and are making a house payment, and the value of the house goes down. If you were to move out of the house and rent, then the rent would be less than if you had moved out of the house and rented in the last year. So, in effect, you are saving virtual dollars that would be real if you had moved. Since housing prices are down, this part of the inflation equation is keeping the number very tame.
I hope this explanation helps, and helps you to see how these things work. If you sitting at home and are cold and hungry, you need to Pretend that you have moved into a rent house, and Pretend your rent is less, and then Pretend that you have money for groceries. Tonight, we are having a wonderful Pretent Ribeye.
The other thing to keep in mind about the increase in commodity prices is that it takes a little while for these prices of commodities to work their way into the grocery store. The stores try their best to absorb the increased costs, and try not to raise prices. The leading edge of the price increases are starting to be seen in the grocery stores. Mrs. PJM has noticed that what they are doing in MANY products is leaving the price the same, but reducing the amount in the container. They typically relabel in different units so you don't notice. So, some brands of coffee have what was always a 2 pound bag, but now is a 29 ounce bag. Most people dont catch that when they changed the units, they actually shaved contents. We have found this in coffee, ice cream, and many other products.
So, just remember, our Federal Reserve has smart people on top of this, and you have nothing to be concerned about.