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Thread: The Boiling Frog - US Dollar Devaluation / QE2

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    Default The Boiling Frog - US Dollar Devaluation / QE2

    (snip)Monday, November 8, 2010
    The Boiling Frog: Effects of QE2 On The Bottom 80% of the U.S. Population

    An old metaphor: If you take a frog and drop it into a roiling pot of boiling water, it’ll jump right out, unscathed. But if you put that same frog in a pot of cold water, and then slowly raise the heat, that frog won’t move. It’ll stay in that pot of water, calm as can be, right up until it is boiled to death.(snip)

    (snip)I’ve been arguing that the unpayable Federal government debt, coupled with irresponsible Federal Reserve policies, will inevitably lead to a hyperinflationary event and currency collapse. In order to prepare for a web seminar on hyperinflation in America, I’ve been looking at the issue of how to safeguard assets before a currency collapse, and how to identify opportunities in the midst of a hyperinflationary crisis.

    But along the way—inevitably—it’s led me to consider the issue of the effects of hyperinflation on the American people. Not even hyperinflation—just regular old rising consumer prices: How will they affect the average household.

    It’s disturbing.

    Even if you don’t buy my hyperinflation call in the least—and a lot of very smart people don’t—the recently announced Quantitative Easing 2 policy of the Federal Reserve has had and will have a profound effect on the dollar.

    And a profound effect on the American people—especially the bottom 80%.(snip)



    Now, it’s no trick to see that rising prices of basic necessities—as a result of plain vanilla Fed-induced inflation, and not the hyperinflation I am positing—will affect everyone: But especially the middle class, the working poor and the poor.

    It would be nice if we could quantify that effect. But we can’t just input a hypothetical inflation rate, apply it to the data, and come out with a number expressing how much each percentage point of inflation will affect each quintile of the population.

    We can’t because, as prices rise, people buy less of a necessity: Higher gas prices means people drive less. Higher food prices means people eat less, or less quality of food. Higher heating oil prices means people heat their homes at a lower temperature—or in some cases not at all.

    But although we can’t easily quantify it, we can comfortably make certain claims about the effects of rising consumer prices on the population.

    The first claim I would venture to make—and one that I don’t think will be particularly controversial—is this: Any household spending more than two-thirds of their after-tax income on food, housing, clothing and transportation will suffer an immediate, negative impact from the Fed’s efforts at induced inflation.

    That covers pretty much the bottom three quintiles of American households. So 60% of the U.S. population will suffer an immediate effect of rising prices—the stated policy goal of Ben Bernanke’s QE2.

    QE2 is having the immediate intended effect of pushing up asset prices, bouying up the financial sector—but it’s also pushing up commodity prices, which have been rising ever since QE2 was first toyed with as a policy option back in the spring.

    Lag times may vary, but rising commodity prices inevitably translate into rising consumer prices for basic necessities on Main Street. QE2 is directly responsible for the rise in the last few weeks of all commodities. This will inevitably lead to higher consumer prices.

    This inevitable effect of rising prices for the basic necessities gives lie to the stated goal that the Fed has of helping the American people by way of QE2. The policy is not helping—on the contrary: A minimum of 60% of the population will feel immediate, unavoidable pain directly as a result of QE2. They will spend more for basic necessities than they spent previously for them.

    Or else, if they don’t spend more, they will consume less. This ought to be obvious: People who cannot afford to spend more on a necessity will instead consume less of it, be it food, gas, or heating oil.

    So here’s Fed Lie Number 2: QE2 will not get the economy spending again—on the contrary, rising consumer prices brought about because of QE2’s pushing up commodity prices will insure that the population cuts back on consumption, even if in nominal terms they are spending the same, or even more.(snip)

    (snip)Wages are key. If inflation hit consumer prices as well as wages in equal measure, the net effect would be zero—which is more or less what you see in ordinary expansion-driven inflation, the kind prevalent in healthy economies: There are price pressures on commodities, which eventually translate into higher prices at the supermarket—but there are also price pressures on wages, as the economy in toto is expanding, and therefore bidding up scarce labor as it grows. In an expanding economy, prices might be rising—but wages are rising too, so no complaints.

    However, in a stagnating or contracting environment—such as what we are experiencing now in the American economy—there are obviously no pressures on wages: If anything, there are downward pressures on wages and salaries.

    So if commodity prices rise, people—especially the poor, the working poor, and the middle-class, but maybe even the upper-middle class—are really going to take a hit, as more of their after-tax income goes to paying for basic necessities.

    Some people might think that the debasing of the dollar via QE2 will mean that the real cost of housing will fall, as rents and fixed mortgages will be undermined by inflation. They might think this is a good thing.

    But this only makes sense if your earnings are absolute: If you’re boss is paying you in gold coins, or silver lingots. But if you live on a dollar income, especially a fixed income—as so many seniors do, let alone the average wage earner—even if your housing costs remain nominally static, rising food, transportation and clothing prices will still take bigger and bigger bites out of that dollar-based income. Please look at the last line of the above table—“Food, Clothing, Transportation as % of Income”—which I calculated precisely for this objection.

    The only ones who won’t feel the pain of rising prices of basic necessities that bad is the top quintile—maybe. If they’re income comes predominantly from equities, maybe. If not, then they’re going to take the hit as well.(snip)

    (snip)However, the CPI doesn’t slice the baloney fine: If a product-x that was sold in a 20 ounce package for $3.99 back in 2007 is now being sold in an 18 oz. package at the same price, CPI does not compute that there was an 11.1% inflation in the price of product-x. Rather, according to the CPI, there was zero price inflation in product-x—because it sold for the same price, regardless of whether the package was 10% smaller.

    But this is exactly what seems to be happening in food, as well as in other categories of what one would consider basic necessities: Foodstuffs are being sold in smaller units, cotton clothing is now being sold for the same price, only made of synthetic materials, and so on. A recent blog post on Zero Hedge highlighted the specific case of coffee at WalMart, previously sold in a package of 39 oz. for $9.88, now being sold for $10.48—in a 33.9 oz package. This represents a 22% jump in price. Cases such as this are common, and cropping up like mushrooms on the web—enough to confirm that stealth inflation is happening, without needing to stop by John Williams’ Shadow Government Statistics.

    This brings the obvious question: If food, transportation, clothing and housing prices rise, but the CPI doesn’t measure it—was there inflation?

    This isn’t a Zen koan or Berkeley’s tree falling in the woods—this is real. So my answer is obvious: Yes.

    But according to the Fed and to most of the economic commentariat (except for a few notable and distinguished exceptions), since the CPI is not rising, there is no inflation. At least not in theory. In practice? That’s something else.

    So! What does this all mean?

    It means that Americans are the frog in the metaphor. Between 60% and 80% of them—to be precise—are slowly being boiled alive. The bottom 60% to 80%, to be even more precise.(snip)

    with heartfelt thanks to Gonzalo Lira at


    And an even more obvious conclusion is that when Americans receiving unchanging US dollar amount paychecks must spend more of those US dollars for higher priced 'necessities', it leaves far fewer dollars remaining for 'discretionary' expenditures ( like lap dances ! ). Thus the author's excellent income vs spending analysis also probably constitutes an accurate predictor of the probable future dancer income potential at various clubs versus the typical earnings level of that club's customer base.

    ~
    Last edited by Melonie; 11-09-2010 at 03:57 AM.

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    Default Re: The Boiling Frog - US Dollar Devaluation / QE2

    It would seem though, that stage tips and lap dances are the one thing not being effected by inflation!

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    Default Re: The Boiling Frog - US Dollar Devaluation / QE2

    ^^^ well I'm aware that some clubs in MA facing mandatory 'employee' treatment of dancers have attempted to float 20% price increases for private dances ( with the clubs glomming onto the anticipated extra money to pay for the dancer's new tipped minimum wage paychecks ) ... but with a resulting decline in the number of private dances the girls were able to sell at higher prices.

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    Default Re: The Boiling Frog - US Dollar Devaluation / QE2

    and here's a 'back of the envelope' calculation of the actual 'costs' of QE2 ... as well as which Americans are winners versus which Americans are losers ...


    (snip)"Quantitative Easing 2 makes no sense. Today I will quantify just how perverse and destructive the Fed's policies have been to U.S. households.

    The latest snapshot of the household's balance sheet comes from the Fed Flow of Funds for the second quarter (June 30, 2010). If we measure what has happened to the U.S. dollar and the S&P 500 since July 1, then we can measure the effects on the household balance sheet.

    Let's collect a few key numbers from the Balance Sheet of Households and Nonprofits. All numbers are as of June 20, 2010 (Q2 2010).

    Real estate: $18.8 trillion, down from $24.9 trillion in 2006 (bubble top)

    Total financial assets: Q2 2010 $43.7 trillion, down from $50.6 trillion in 2007 (pre-recession)

    Deposits (cash): $7.55 trillion, down from $7.9 trillion

    Credit market instruments: (bonds etc.) $4.3 trillion, up from $4 trillion in 2007

    Corporate equities (stocks): $6.7 trillion, down from $9.6 trillion in 2007

    mutual fund shares: $4 trillion, down from $4.5 trillion in 2007

    Liabilities (debts, mortgages, etc.):

    Total liabilities: $13.9 trillion, down from $14.4 trillion

    home mortgages: $10.15 trillion, down from $10.5 trillion

    Net worth: $53.5 trillion, down from $64.2 trillion, a decline of $10.7 trillion

    So mortgage debt decreased by a trivial $.35 trillion, total liabilities decreased by a modest $.5 trillion, and net worth declined by a whopping $10 trillion. Most of the mortgage and debt declines result from write-downs of debt by lenders, not from households paying down debt.

    In other words, after suffering a staggering 17% decline in net worth, households managed to write down or pay down a tiny 3.4% of their liabilities.

    Disposable personal income: $11.3 trillion, up from $10.4 trillion. As noted above, the increase flowed to the top 20%, as median income has declined by almost 5%.

    Homeowners equity: $6.9 trillion, down from $12.8 trillion in 2006. So homeowners have lost roughly $6 trillion in home equity: about 60% of the total decline in net worth. Since the bottom 80% have few financial assets (stocks and bonds) then this destruction of home equity means their only real asset base has been largely wiped out.

    Owners equity as a % of household real estate: 40.7%

    As I have noted before. since a third of all homes are owned free and clear, then 33% of the 40% equity left in homes results from homes with no mortgage, and thus a mere 7% of equity is all that's left for the 2/3 of homes with mortgages: 7% of $18.8 trillion (total value of all household real estate) equals $1.3 trillion in equity for the 50 million homes with mortgages.

    Now let's calculate the decline in purchasing power as the Fed purposefully depreciated the U.S. dollar:

    Decline in the dollar since July 1, 2010: 12.2%

    Decline in value (purchasing power) of all household assets since June 1: (12.2% of non-equities net worth--$42.8 trillion) -$5.2 trillion

    Decline in value (purchasing power) of household disposable personal income: (annualized: 12.2% of $11.3 trillion): -$1.4 trillion

    And exactly how much did household wealth in stocks rise as the dollar was crushed?

    Rise in S&P 500 since July 1, 2010: 19%

    Increase in net worth of equities from July 1: (19% of $10.7 trillion): +$2 trillion

    Net loss due to Fed's QE2 (from July 1): -$3.2 trillion. Decline in purchasing power of household disposable personal income (annualized): -$1.4 trillion

    Total loss inflicted on households by QE2 to date: $4.6 trillion. The Fed's QE2 has been an unmitigated disaster for 90% of American households, as it has destroyed the value of their purchasing power in a Devil's Pact to goose stocks, which only benefits the top 10% of households--and most of those paper gains are reserved for the top 1%.

    Those are the numbers; exactly what conclusion can be drawn from them except the Fed is a horrendously misguided, Elite-dominated destructive force which must be reined in ?(snip)

    from

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