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.


  1. You know, if you get paranoid enough, first thing you do is get your self some chickens. Then you put up Solar Panels. Then a wind Generators, and finally you build a Green House.
    The next thing will be graves in the front yard and gun turrets on the house
    I wish I had enough money to get that paranoid.

  2. If you want to see what the rate of inflation is without the "adjustments" that Mr. PJM sarcastically points out above, an economist named John Williams calculates it with the cumulative government changes since 1980 removed. You can see the graph here:

    You can see that the effect of the government changes is to systematically under-report inflation. Looks like we're running about 9% vs. the 2% reported rate.

  3. Oh, I don't know about the graves thing... You'd need a tractor with a front end shovel to dig them, wouldn't you?

    Oh, wait.. Yeah, I see what you mean, Roger.

  4. Hmmmmmm, do I detect some sarcasm in the Weimar Republic this morning? You know what they say, "There are lies, damn lies, and statistics." Apparently we can now count inflation as a statistic.

  5. Thanks for the lessons, PJM. If things get bad you could probably try being a teacher! Oops, you already are. I appreciate the style and occasionally humorous (sarcastic?)comments. I bet your students are captivated during your lectures.

    Love the old pictures and like the lessons. Keep it up!


  6. For just over 30 years I ran a small wholesale food business. Now I keep an eye on wholesale markets, futures, weather etc. because I can not help myself, it's in the blood.
    For several months now we have had lots of floods, and droughts and the crops are suffering for it.
    Just few weeks ago Cotton was selling at a 165 year high, the highest price since the end of the civil war.
    I have been skeptical of the government figures for about a year. Who can we trust, some bureaucrat in D.C. or my own eyes. When I go shopping and see the difference at the register I do not have to be hit with hammer to see the hard facts.

  7. China is going to call in our bonds, which will collapse our economy.
    Forget the US Dollar, we will have Yuens.
    Chairman Mao's image will adorn the section of the American flag where the stars once were {the stripes representing the 13 colonies will remain as a gesture of appeasement}.
    Forget the Hispanic takeover via Mejico; we will all be speaking Chinese and the American unemployed laborer will finally have a job in a sweat shop making cheap clothes for the Chinese. Wal Marts will still exist as a form of appeasement.
    This scenario was agreed upon by Obama as payment for his election {rigged by the Chinese} as President.

  8. But other than that, how are things?

  9. In response to "anonymous" above with the doom and gloom predictions about China taking over the US...

    First, have you been watching trailers for the new "Red Dawn" movie? Your tone matches the tone of that movie.

    Second, as someone who has lived in China for three years and knows a little about the other side of the situation, let me say that most Chinese DO NOT WANT the scenario you described any more than Americans do. Sure, a few military die-hards would love it, but the leaders of China do not.

    1)A HUGE portion of the Chinese economy depends on US consumerism. It used to be all cheap plastic toys, but now it's computers, TVs, and other high end goods. Got and iPod, iPhone, etc? Made in China. If they call our bonds, our economy collapses, we stop buying, and their economy collapses. The only way to keep it going is for everyone to pretend the US is good on its word for its debt. Americans keep consuming, and Chinese still have jobs.
    2) The Chinese have enough societal "growing pains" to deal with in their own country, and they don't want another country to babysit. They love to rattle their swords over Taiwan, and they are happy to do business with (or exploit, depending on your point of view) Africa, but controlling America is the last thing the leaders actually want.
    3) You think Wal-Mart will remain in the US as a form of appeasement? How much do you know about China? McDonald's, Pizza Hut, KFC, and Starbucks are HUGE in China, and Dairy Queen, Papa John's, Wal-Mart, and other US companies to a lesser extent. No, the Chinese will not replace our culture; they are absorbing it.

  10. somebody sounds a little depressed today. relax everything will be fine.

  11. Let's if the US greenback suddenly becomes a blankback, I should start hoarding, right?


  12. Reminds me of a story my dad used to tell about when he was stationed in Germany in 1951. He and several of his buddies had become friends with an old man in the nearby town and were visiting one day when he took them up to the attic.

    Pointing at a huge steamer-type trunk, he told my dad to go over and open it. Needless to say, my dad was speechless when he saw the trunk was full of money, the denomination of each being in the millions of marks. [The exchange rate in 1951 was 4 marks to the dollar.]

    He was even more speechless when the old man told him that trunk full of money wouldn't buy a loaf of bread back in the early 20s.

    With all the news about OUR inflation lately and the financial problems in the rest of the world, I can't help but wonder when it will be our turn in the barrel.