Best of the Week
Most Popular
1.Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - Nadeem_Walayat
2.Gold And Silver – A Reality Check - Michael_Noonan
3.The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - Nadeem_Walayat
4.Stock Market S&P 500 Volatility-Based Price Probability Range - Richard_Shaw
5.A Stocks Bear Market Is Now More Likely Than Not - Richard_Shaw
6.Money Supply and the Fed’s Serious Inflation Risks - Zeal_LLC
7.More Selling for Stock Market, Gold? - Brad_Gudgeon
8.Gold, Silver Precious Metals: a Critical Week Ahead - Rambus_Chartology
9.Gold Price Change in Character - Gary_Savage
10.Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - TLSReport
Last 5 days
Stock Market Rally May be Broken - 9th Oct 15
Gold Stocks Major Breakout - 9th Oct 15
Contrarian Investing - Being the 10th Man - 9th Oct 15
U.S. Can Expect Recession in 1-3 Years - 9th Oct 15
The Greater Economic Depression Deep State - 9th Oct 15
Financial Markets Calm Before the Storm? - 9th Oct 15
Stock Market History Calling, Says Performance will be Crappy for Another ~10 years! - 9th Oct 15
Why This Feels Like an Economic Depression for Most People - 9th Oct 15
Dr Copper Back from the Dead - Time to Buy or Blink - 8th Oct 15
Glencore Rout Blamed on Short Sellers Playing With CDS - 8th Oct 15
The Real Reason for the Refugee Crisis You Won’t Hear About in the Media - 8th Oct 15
US Stocks: The [Trend]Line Between Bull and Bear Market - 8th Oct 15
Bundesbank “Reassures” Re. Gold Bullion Reserves as Deutsche Bank Shocks With €6 Billion Loss Warning - 8th Oct 15
How Our Aversion To Change Leads Us Into Danger - 8th Oct 15
Moving Stem Cell Research Forward: Bernie Siegel of the Genetics Policy Institute - 8th Oct 15
Stock Market VERY IMPORTANT Turn Date - 7th Oct 15
The 5th Convergence…An Economic & Financial Superstorm That Will Devastate America - 7th Oct 15
Summers Grades Janet Yellen's Fed Performance 'Incomplete' - 7th Oct 15
Gold Versus Central Banks Paper Ponzi - 7th Oct 15
QE3 is Over Get Ready for QE4 - 7th Oct 15
How to Profit from Government Mandates in Biofuels - 7th Oct 15
A Key Oil Price Trend That Everyone Is Missing - 6th Oct 15
Stock Market Turn Appears to Have Been Made - 6th Oct 15
Designing a Dividend Growth Portfolio for a Specific Retirement Yield Objective - 6th Oct 15
Peter Schiff Predicts Gold Price Breakout - Video - 6th Oct 15
Theresa May Declares War on Immigration - Conference Speech Full Transcript - 6th Oct 15
Is Russia Plotting To Bring Down OPEC? - 6th Oct 15
Target Date Funds As Aid In Retirement Investment Portfolio Design - 6th Oct 15
Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - 6th Oct 15
Redesigning Internet and Facebook to Explore Their Full Potentialities... - 5th Oct 15
Nightshades Curb Your Enthusiasm - 5th Oct 15
U.S. Recession Watch, High-Yield – Rising Defaults - 5th Oct 15
The Social Challenge to Find Humanity in Capitalism - 5th Oct 15
Fed Interest Rate Hike: "I don't care. It doesn't really make much of a difference" - 5th Oct 15
Gold Rose 2.2%, Silver Surged 5.4% After Poor Jobs Number On Friday - 5th Oct 15
Gold, Silver Precious Metals: a Critical Week Ahead - 5th Oct 15
Stock Market Correction Still in Force - 5th Oct 15
Gold Price Change in Character - 5th Oct 15
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Symptoms Don't Lie, The Economic Patient is Getting Sicker

Economics / Inflation May 10, 2013 - 06:41 PM GMT

By: Peter_Schiff


A good doctor will not simply make a diagnosis based on measurements. The symptoms and complaints expressed by the patient are at least as important in making a determination as the data provided by diagnostic tools. When the data says one thing and the symptoms continuously say another, it makes sense to question the reliability of the instruments. This would be particularly true if the instruments are furnished by a party with a stake in a favorable diagnosis, say an insurance company on the hook for treatment costs. The same holds true for the U.S. economy. Although our government-supplied data suggests we are experiencing low inflation and modest economic growth, the economy shows symptoms of low growth, rising prices, and diminishing purchasing power.

In my latest commentary I discussed how the Big Mac Index (The Economist Magazine's 30 year data set on Big Mac prices) provided strong anecdotal evidence that inflation in the United States is higher than official figures. More information has come in since then that tells me the same thing: that Americans are downsizing their lives as their incomes fail to keep pace with rising prices. These symptoms are at odds with the widespread belief in an accelerating recovery that has resulted in braggadocio in Washington and euphoria on Wall Street.

Earlier this week Tyson Foods, one of the nation's largest providers of packaged meat products, announced that although their top line sales revenue increased by almost 2% (roughly in line with U.S. GDP growth), operating margins collapsed by almost 50%, leading to a 43% decline in profit. Consumer shifts away from relatively higher priced/higher margin beef and pork products to lower cost/lower margin chicken products were to blame. Tyson also noted that cost conscious consumers shifted away from higher margin packaged chicken products to fresh meat cuts, thereby sacrificing convenience for cost.

According to government statisticians, the Tyson announcement would reveal modest growth and low inflation. After all, revenue at the company grew and spending on their products had increased modestly. But rising prices were obscured by consumers purchasing lower quality products. Not only are consumers avoiding the beef and pork that they otherwise may have preferred, but they are opting out of the convenience of prepared foods. This behavior is symptomatic of diminished consumer purchasing power. This is known as getting poorer.

The trend corresponds with the steady increase in the share of income that Americans devote to food and energy. According to the Bureau of Economic Analysis data, in 2002 Americans spent about 17.8% of income on food and energy. In the first quarter of 2013 the share had risen by a factor of 20% to 21.3% of income. Increased share of spending on necessities like food and energy is consistent with falling living standards. In the poorest countries almost all of income is devoted to such things.

This week we also learned the seemingly positive news that the March trade deficit narrowed to $38.8 billion. But the reduction didn't come from increased exports (which actually declined), but by the sharpest drop in imports since February 2009. Oil imports declined to a seventeen-year low, in part due to rising domestic production, but also due to a record low in 13 years in gasoline consumption. While some may argue that is a function of greater energy efficiency, I believe it's more likely that usage is down because of high prices and high unemployment. Even more significant is that our trade deficit with China in March dropped by a whopping 23.6%, hitting a three-year low. On a year over year basis, the decline in our deficit with China was 90% attributable to the decline in imports.

In contrast to the declining import figures, the government reported that personal spending rose by .2% in March. If we are buying less stuff from abroad, where are Americans spending the extra money? If the prices are stable, and imports are way down, consumer spending should also be down and savings should be up. But the savings rate in March held steady at a meager 2.7%. The sad truth is that Americans are buying fewer Chinese products because they are spending more money on food, rent, utilities, healthcare, insurance, and other necessities that can't be imported. Again, this is consistent with a falling standard of living, as inflation forces consumers to forgo the things they want in order to buy the things that they need.

It was also announced this week that the big three airlines (United, Delta, and American) will be raising their "change fees" for booked tickets by 33%, from $150 to $200. However, it's unlikely that such a hike will make much of an impact on CPI. According to the CPI, airline fares in the United States increased only .3% from 2011 to 2012. This mild increase came at a time when airlines were rolling out more new fees than most air travelers could have possibly imagined.

But even if the government fully factored in the increase in fees, they would likely ignore the change in behavior that the increase would elicit. With the cost of changing a ticket so dramatically higher than it has been in the past, it is likely that far fewer Americans would be willing to change their travel plans once their tickets have been purchased. So even while the spending increase may be relatively small, the lost convenience is not factored into the equation. A ticket with low price (or no price) change option is a much better product than a ticket with high penalties.

CPI reports that from 2007 to 2012 air travel increased on average 4% per year. But that's only half the story. A new study released by MIT reports that during those five years, U.S. airlines cut the number of domestic flights by 14%,with the cuts falling most heavily on mid-sized regional airports. By 2012, the industry also closed more than 20 smaller airports, began using a higher percentage of larger airplanes, and reported record crowding on remaining flights. In other words, air travel not only became more expensive but less convenient and more crowded.

How much loss in value does this inconvenience and lack of flexibility create? It's hard to say, but we all have experienced it with varying degrees of frustration. But what is sure is that the government isn't interested in such trivialities.

The combination of these symptoms suggests that the extent to which people are being impoverished by accelerating inflation is not reflected in official government measurements. This explains why unemployment remains high even as GDP appears to rise. It is my belief that the unprecedented expansion of the money supply under the current Fed leadership is pushing up prices for stocks, bonds, real estate, and consumer goods. Market indices neatly capture the price increases for all of these categories except for the latter, which has been concealed by an overly adjusted CPI.

If consumer inflation data were reported more accurately, it would be revealed that much of the apparent growth is an illusion. The patient is getting sicker, but the doctors are too distracted to notice.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

Peter Schiff

Euro Pacific Capital

Peter Schiff Archive

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History