Thanksgiving 2011

With US markets are closed on Thanksgiving there is no change to our automated forecast, which remains uncertain.  Instead we decided to comment on inflation as it is a frequent topic in our daily market commentary.  Growth in the supply of money (and credit) is inflation, and it causes prices to eventually go up.  This is a well understood economic principal with centuries of history to support this causal relationship.  When the rate of money creation is mild to moderate, prices increase but lag behind the growth rate of the money supply itself.

We found and received permission to republish the graphic below from the American Farm Bureau Federation®:

This shows the nominal cost increase of Thanksgiving Dinner (for 10 people) every year since 1986.  This is price inflation.  The graph also shows an Inflation-Adjusted Cost by correcting the nominal increase by the Consumer Price Index for food published by the Bureau of Labor Statistics.  In 1990 the BLS changed the methodology for calculating CPI.  The new method results in a lower rate of CPI versus the method in place from 1980 to 1990.  The American Farm Bureau Federation® appears to be unaware of this fact when they constructed the Inflation-Adjusted cost on their graph.  Had they used the CPI values calculated with the same 1980 methodology instead, the Inflation-Adjusted Cost would have gone down instead of remaining flat since the early 90’s.  Shadowstats.com provides CPI data calculated with the 1980 methodology shown on the blue line below, compared to the “official” CPI data (red line) from the BLS:

Let’s give thanks to the American agricultural industry for their ability to reduce their costs and increase their productivity!  Over the past 25 years they have actually reduced the real cost to feed consumers.  Unfortunately, the Federal Reserve has given us a large increase in the money supply over the same period of time.  Starting in July of 1986 and using the annual values of the US M2 (seasonally adjusted) money supply, along with the American Farm Bureau Federation® data, we created the following indices to graph the quarter-century increases:

The indices show a nominal increase in the cost of Thanksgiving dinner of 71% in 25 years, where the money supply increased 254% over the same period of time!  This is price inflation lagging the increase in the money supply.  Price inflation is going to continue, and we think it will get much worse in the future.  Exactly when is hard to predict as many factors influence this, but clearly the money supply has expanded enough to keep driving prices up.  As the Federal Reserve and US Banks continue to grow the money supply, price inflation and other more serious consequence will result.

Price inflation is among the consequence of a growing money supply, but it is not the most serious impact to a nation, its economy and the people.  Professor Hans F. Sennholz published The Age of Inflation in 1979.  Below we quote his opening words of chapter 2 as he succinctly describes many of the more serious effects of inflating money supplies:

We do not support monetary policies that expand the money supply.  Until the Fed stops printing money, all we can do is apply our understanding of the economic consequences and position our investments accordingly.

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