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On Iran’s Inflation Bogey
Steve H. Hanke
With Friday’s Iranian Presidential election fast approaching, there has been a cascade of reportage in the popular press about that opaque country. When it comes to economic data, Iran has resorted to lying, spinning and concealment – in part, because of its mores and history, and more recently, the ever-tightening international sanctions regime. In short, deception has been the order of the day.
The most egregious example of this deception concerns one of Iran’s most pressing economic problems – rampant inflation. Indeed, while the rest of the world watched Iran’s economy briefly slip into hyperinflation in October of 2012, the Statistical Centre of Iran and Iran’s central bank both defiantly reported only mild upticks in inflation.
It is, therefore, rather surprising that the major international news outlets have continued to report the official inflation data without so much as questioning their accuracy. Even today, with official data putting Iran’s annual inflation rate at a mere 31 percent, respectable news sources faithfully report these bogus data as fact.
As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, such as the recent hyperinflation episodes in Zimbabwe and North Korea, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. Often, they stop reporting economic data all together; or, when they do report economic statistics, they do so with such a lag that the reported data are of limited use by the time they see the light of day.
Iran has followed this course – failing to report important economic data in a timely and replicable manner. Those data that are reported by tend to possess what I’ve described as an “Alice in Wonderland” quality. In light of this, it is fair to suggest that any official data on Iran’s inflation be taken with a grain of salt.
So, how can this problem be overcome? At the heart of the solution is the exchange rate. If free-market data (usually black-market data) are available, the inflation rate can be estimated. The principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable estimate. Indeed, PPP simply states that the exchange rate between two countries is equal to the rates of their relative price levels. Accordingly, if we can obtain data on free-market exchange rates, we can make a reliable estimate of the inflation rate.
In short, changes in the exchange rate will yield a reliable implied inflation rate, particularly in cases of extreme inflation. So, to calculate the inflation rate in Iran, a rather straightforward application of standard, time-tested economic theory is all that is required.
Using this methodology, it is possible to estimate a reliable figure for Iran’s annual inflation rate. At present the black-market IRR/USD exchange rate sits at 36,450. Using this figure, and a time series of black-market exchange rate data that I have collected over the past year from currency traders in the bazaars of Tehran, I estimate that Iran’s current annual inflation rate is 105.8 percent – a rate almost three and a half times the official annual inflation figure (see the accompanying chart).
View full post on Cato @ Liberty
Will It Be Inflation Or Deflation? The Answer May Surprise You
Is the coming financial collapse going to be inflationary or deflationary? Are we headed for rampant inflation or crippling deflation? This is a subject that is hotly debated by economists all over the country. Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation. Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts. So what is the truth? Well, for the reasons listed below, I believe that we will see both. The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. This will happen so quickly that many will get “financial whiplash” as they try to figure out what to do with their money. We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.
So why will we see deflation first? The following are some of the major deflationary forces that are affecting our economy right now…
The Velocity Of Money Is At A 50 Year Low
The rate at which money circulates in our economy is the lowest that it has been in more than 50 years. It has been steadily falling since the late 1990s, and this is a clear sign that economic activity is slowing down. The shaded areas in the chart represent recessions, and as you can see, the velocity of money always slows down during a recession. But even though the government is telling us that we are not in a recession right now, the velocity of money continues to drop like a rock. This is one of the factors that is putting a tremendous amount of deflationary pressure on our economy…
The Trade Deficit
Even single month, far more money leaves this country than comes into it. In fact, the amount going out exceeds the amount coming in by about half a trillion dollars each year. This is extremely deflationary. Our system is constantly bleeding cash, and this is one of the reasons why the federal government has felt a need to run such huge budget deficits and why the Federal Reserve has felt a need to print so much money. They are trying to pump money back into a system that is constantly bleeding massive amounts of cash. Since 1975, the amount of money leaving the United States has exceeded the amount of money coming into the country by more than 8 trillion dollars. The trade deficit is one of our biggest economic problems, and yet most Americans do not even understand what it is. As you can see below, our trade deficit really started getting bad in the late 1990s…
Wages And Salaries As A Percentage Of GDP
One of the primary drivers of inflation is consumer spending. But consumers cannot spend money if they do not have it. And right now, wages and salaries as a percentage of GDP are near a record low. This is a very deflationary state of affairs. The percentage of low paying jobs in the U.S. economy continues to increase, and we have witnessed an explosion in the ranks of the “working poor” in recent years. For consumer prices to rise significantly, more money is going to have to get into the hands of average American consumers first…
When The Debt Bubble Bursts
Right now, we are living in the greatest debt bubble in the history of the world. When a debt bubble bursts, fear and panic typically cause the flow of money and the flow of credit to really tighten up. We saw that happen at the beginning of the Great Depression of the 1930s, we saw that happen back in 2008, and we will see it happen again. Deleveraging is deflationary by nature, and it can cause economic activity to grind to a standstill very rapidly.
During the next major wave of the economic collapse, there will be times when it will seem like hardly anyone has any money. The “easy credit” of the past will be long gone, and large numbers of individuals and small businesses will find it very difficult to get loans.
When the debt bubble bursts, cash will be king – at least for a short period of time. Those that do not have any savings at all will really be hurting.
And some of the financial elite seem to be positioning themselves for what is coming. For example, even though he has been making public statements about how great stocks are right now, the truth is that Warren Buffett is currently sitting on $49 billion in cash. That is the most that he has ever had sitting in cash.
Does he know something?
Of course there will be a tremendous amount of pressure on the U.S. government and the Federal Reserve to do something once a financial crash happens. The response by the federal government and the Federal Reserve will likely be extremely inflationary as they try to resuscitate the system. It will probably be far more dramatic than anything we have seen so far.
So cash will not be king for long. In fact, eventually cash will be trash. The actions of the U.S. government and the Federal Reserve in response to the coming financial crisis will greatly upset much of the rest of the world and cause the death of the U.S. dollar.
That is why gold, silver and other hard assets are going to be so good to have in the long-term. In the short-term they will experience wild swings in price, but if you can handle the ride you will be smiling in the end.
In the coming years, we are going to experience both inflation and deflation, and neither one will be pleasant at all.
Get prepared while you still can, because time is running out.
View full post on The Economic Collapse
Will It Be Inflation Or Delfation? The Answer May Surprise You
Is the coming financial collapse going to be inflationary or deflationary? Are we headed for rampant inflation or crippling deflation? This is a subject that is hotly debated by economists all over the country. Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation. Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts. So what is the truth? Well, for the reasons listed below, I believe that we will see both. The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. This will happen so quickly that many will get “financial whiplash” as they try to figure out what to do with their money. We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.
So why will we see deflation first? The following are some of the major deflationary forces that are affecting our economy right now…
The Velocity Of Money Is At A 50 Year Low
The rate at which money circulates in our economy is the lowest that it has been in more than 50 years. It has been steadily falling since the late 1990s, and this is a clear sign that economic activity is slowing down. The shaded areas in the chart represent recessions, and as you can see, the velocity of money always slows down during a recession. But even though the government is telling us that we are not in a recession right now, the velocity of money continues to drop like a rock. This is one of the factors that is putting a tremendous amount of deflationary pressure on our economy…
The Trade Deficit
Even single month, far more money leaves this country than comes into it. In fact, the amount going out exceeds the amount coming in by about half a trillion dollars each year. This is extremely deflationary. Our system is constantly bleeding cash, and this is one of the reasons why the federal government has felt a need to run such huge budget deficits and why the Federal Reserve has felt a need to print so much money. They are trying to pump money back into a system that is constantly bleeding massive amounts of cash. Since 1975, the amount of money leaving the United States has exceeded the amount of money coming into the country by more than 8 trillion dollars. The trade deficit is one of our biggest economic problems, and yet most Americans do not even understand what it is. As you can see below, our trade deficit really started getting bad in the late 1990s…
Wages And Salaries As A Percentage Of GDP
One of the primary drivers of inflation is consumer spending. But consumers cannot spend money if they do not have it. And right now, wages and salaries as a percentage of GDP are near a record low. This is a very deflationary state of affairs. The percentage of low paying jobs in the U.S. economy continues to increase, and we have witnessed an explosion in the ranks of the “working poor” in recent years. For consumer prices to rise significantly, more money is going to have to get into the hands of average American consumers first…
When The Debt Bubble Bursts
Right now, we are living in the greatest debt bubble in the history of the world. When a debt bubble bursts, fear and panic typically cause the flow of money and the flow of credit to really tighten up. We saw that happen at the beginning of the Great Depression of the 1930s, we saw that happen back in 2008, and we will see it happen again. Deleveraging is deflationary by nature, and it can cause economic activity to grind to a standstill very rapidly.
During the next major wave of the economic collapse, there will be times when it will seem like hardly anyone has any money. The “easy credit” of the past will be long gone, and large numbers of individuals and small businesses will find it very difficult to get loans.
When the debt bubble bursts, cash will be king – at least for a short period of time. Those that do not have any savings at all will really be hurting.
And some of the financial elite seem to be positioning themselves for what is coming. For example, even though he has been making public statements about how great stocks are right now, the truth is that Warren Buffett is currently sitting on $49 billion in cash. That is the most that he has ever had sitting in cash.
Does he know something?
Of course there will be a tremendous amount of pressure on the U.S. government and the Federal Reserve to do something once a financial crash happens. The response by the federal government and the Federal Reserve will likely be extremely inflationary as they try to resuscitate the system. It will probably be far more dramatic than anything we have seen so far.
So cash will not be king for long. In fact, eventually cash will be trash. The actions of the U.S. government and the Federal Reserve in response to the coming financial crisis will greatly upset much of the rest of the world and cause the death of the U.S. dollar.
That is why gold, silver and other hard assets are going to be so good to have in the long-term. In the short-term they will experience wild swings in price, but if you can handle the ride you will be smiling in the end.
In the coming years, we are going to experience both inflation and deflation, and neither one will be pleasant at all.
Get prepared while you still can, because time is running out.
View full post on The Economic Collapse
Deficit Reduction and the Coming Inflation?
Would a higher rate of inflation be a worthwhile tool for lowering the federal deficit?
Some in Washington, DC, think so.
In a blog post written last month, Doug Elmendorf, director of the Congressional Budget Office (CBO), makes the case that greater inflation would raise revenue more than it would raise spending. Here’s an excerpt:
Inflation as measured by the consumer price index averaged 5.1 percent annually during the 1980s and is projected by CBO to average 2.2 percent over the coming decade. If CBO assumed that inflation over the next decade matched the average seen during the 1980s, to parallel the assumption about interest rates, projected tax revenues would be much higher than in CBO’s baseline projections, and federal spending would be moderately higher. On balance, those two effects would reduce deficits.
Next question: Would the Federal Reserve get on board with the plan?
Again, CBO thinks so. In its February publication Budget and Economic Outlook, Fiscal Years 2013–2033, the agency is forecasting that Ben Bernanke and company will increase the Fed’s holdings of government bonds and mortgage-backed securities in 2014 and 2015.
The more securities bought by the Fed, the logic goes, the lower the government’s cost of borrowing. (The illogic of ignoring what happens to interest rates once the public realizes that prices are rising faster and faster can be addressed at some later date, after policymakers finish dealing with the current mess.)
Many years ago, when price inflation was the crisis at hand, I heard some oblivious pundit (on The MacNeil-Lehrer New Hour, as we called it then) hail the Federal Reserve as “the country’s best inflation fighter.” Now it seems that some in Washington are trying to soften up the public for a counterpunch: the Federal Reserve as “the country’s best deficit fighter.”
Tuck your chin, and keep your hands on your wallet.
HT: Rick Ferri
View full post on MyGovCost | Government Cost Calculator
Other • Does inflation matter? The real cost of living for middle c
Does inflation matter? The real cost of living for middle class Americans. Fed on path to growing balance sheet to $4 trillion.
Posted by mybudget360 in banks, debt, economy, inflation
Does inflation matter? If you ask this question to the Fed, it appears like it doesn’t. The Fed is doing everything it can to stoke the fires of inflation. Instead, what it is doing is causing further asset bubbles and misallocation of capital in markets. For most people the cost of living is becoming more expensive. Tuition costs are soaring, healthcare is extremely expensive, energy costs have reached a new level, and incomes are stalled. It is hard to see how inflation is a good thing when incomes get stuck but it is also part of the plan. The psychology of inflation is excellent for a consumer driven economy. If you think prices are going to go up tomorrow, you are more likely to spend today. Falling prices cause consumers to hoard. So the Fed is trying to manufacture more spending but this only works if underlying household incomes move up as well. Inflation for most, does matter.
Inflation back in business
The overall rate of inflation is picking up:
Of course when incomes are stalled, even a modest bit of inflation is going to cause pain. Think of all the items that you pay for in your life. Things have certainly gone up in price yet some people may not notice it because the financing has simply made it longer. How so? For example, you can pay $100,000 in student debt over many decades. Yet the price tag is still $100,000 and many times higher once you factor in the cost of interest.
The Fed continues to offer near zero percent rates to member banks and speculation is now prevalent throughout the financial system again.
Fed balance sheet will hit $4 trillion
The Fed’s balance sheet continues to expand:
The Fed balance sheet is now over $3.3 trillion. At the current rate, it will get very close to $4 trillion within a year. A big driving force is the $85 billion a month of mortgage backed securities it is purchasing to keep the housing market afloat:
Back in 2008, the Fed did not have any Agency MBS on its books. Today it has well over $1 trillion. The Fed also recently discussed the challenges of winding down this massive trade in the market. The Fed is driving the housing market by keeping rates low but also, assuming MBS onto its balance sheet. This is creating severe distortions in the housing market once again.
Japan is a demonstration of what happens when quantitative easing is taken to the next level. Recently, Japan has jumped into the financial markets to boosts its ailing economy. It is hard to see how this adds any benefit to the real economy aside from short-term bursts.
Rising healthcare
Many baby boomers are now facing growing healthcare bills while having very little saved:
You can see how quickly inflation is hitting some areas like nursing home care. Ultimately, many items that many Americans need to access have far outpaced any real wage growth. The end result is the standard of living for most Americans continues to diminish. Does inflation matter? Only if you live in the real economy and only if you care about the shrinking middle class.
http://www.mybudget360.com/does-inflati … dle-class/
Statistics: Posted by yoda — Sun Apr 14, 2013 2:11 pm
View full post on opinions.caduceusx.com
Iran’s Inflation Statistics: Lies, Lies and Mehr Lies
Steve H. Hanke
The Mehr News Agency is now reporting that Iran’s annual inflation rate has reached 31.5%. According to the Central Bank’s official line, Iran’s annual inflation rate has bumped up only 1.3 percentage points from February to March.
Never mind that this official inflation statistic is well below all serious estimates of Iran’s inflation. And yes, Iran’s official inflation statistics are also contradicted by the overwhelming body of anecdotal reports in the financial press.
Since September 2012, I have been estimating Iran’s inflation rate – which briefly reached hyperinflation levels in October 2012 – using a standard, widely-accepted methodology. By measuring changes in the rial’s black-market (read: free-market) U.S. dollar exchange rate, it is possible to calculate an implied inflation rate for Iran.
When we do so, a much different picture of Iran’s inflation emerges. Indeed, Iran’s annual inflation rate is actually 82.5% – a rate more than double the official rate of 31.5% (see the accompanying chart).
As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. And, in some cases, such as Zimbabwe and North Korea, the government simply stops reporting economic data altogether.
Iran has followed a familiar path, failing to report inflation data in a timely and replicable manner. Those data that are reported by Iran’s Central Bank tend to possess what I’ve described as an “Alice in Wonderland” quality and should be taken with a grain of salt.
View full post on Cato @ Liberty
Deficits and Inflation, from the Fed to the Cartoon Page
David Boaz
You know you’ve arrived when your name starts showing up in cartoons. Here’s the Wall Street Journal’s legendary “Pepper … and Salt” cartoon from last Thursday:
Of course, most inflation obsessives are deficit scolds, so it’s not clear that host is going to get much debate.
One person who might be called both an inflation obsessive – that is, a person who objects to the robbery of savers through the erosion of the value of their money – and a deficit scold is David Stockman, former budget director for President Ronald Reagan. He has a new book out, The Great Deformation: The Corruption of Capitalism in America, which he summarized in the New York Times on Sunday. He’ll be speaking about his book at the Cato Institute on Wednesday. Don’t miss it.
View full post on Cato @ Liberty
Business • Bank departs from tradition with warning on high inflation
Bank departs from tradition with warning on high inflation and weak economy
The Bank of England has warned that inflation will stay higher for longer while the economy will remain weak, as it departed from tradition by issuing a statement despite leaving monetary policy on hold.
Last month, the central bank reported that mortgage lending in the British economy is improving, in the clearest signal yet that the Government’s Funding for Lending Scheme was working to free up credit. Photo: PA
By Angela Monaghan7:12PM GMT 07 Feb 201310 Comments
The Bank’s Monetary Policy Committee (MPC) was downbeat about the economy, stressing the risks were “weighted to the downside”, while inflation was likely to rise further above the 2pc target for the next two years. Inflation is 2.7pc.
The MPC left interest rates on hold at 0.5pc and quantitative easing unchanged at £375bn, but said it would reinvest the proceeds of £6.6bn of gilts that it holds through QE which mature next month.
It came as the respected think tank the National Institute of Economic and Social Research estimated the UK economy was flat in the three months to the end of January.
The MPC said in its statement: “Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.”
Economists said the MPC was sending a message to markets ahead of the Bank’s latest quarterly Inflation Report next week that policy will not be tightened early, despite the forecast for above-target inflation.
“The MPC are trying to ensure that such a forecast does not prompt a stampede of expectations of early MPC tightening. If anything, as the statement indicates, the MPC still have an easing bias,” said Michael Saunders at Citigroup.
Meanwhile, major stock markets fell and the euro hit a near two-year low against the dollar after Mario Draghi, president of the European Central Bank, was downbeat about the region’s economy and said risks were on the downside .
http://www.telegraph.co.uk/finance/econ … onomy.html
Statistics: Posted by yoda — Fri Feb 08, 2013 12:31 am
View full post on opinions.caduceusx.com
If Spending Is Capped So It Grows at the Rate of Inflation, the Budget Is Balanced in 2018
Daniel J. Mitchell
New 10-year budget projections have been released by the Congressional Budget Office, so it’s time once again for me to show how easy it is to balance the budget with modest spending restraint (though never forget that our goal should be smaller government, not fiscal balance).
- I first did this back in September 2010, and showed that we could balance the budget in 10 years if federal spending was limited so it grew by 2 percent annually.
- I repeated the exercise in January 2011 after new CBO numbers were released, and re-confirmed that a spending cap of 2 percent would eliminate red ink in just 10 years.
- In August of that year, following the release of the CBO Update, I showed again that the budget could be balanced in just a decade by limiting spending so it climbed by 2 percent per year.
- Back in January after CBO produced the new Economic and Budget Outlook, I crunched the numbers again and showed how a spending cap of 2 percent would balance the budget over 10 years.
- Since even a weak economic recovery generates more revenue, the CBO numbers from last August showed that the budget could be balanced if spending was restrained so that it grew by 2.5 percent per year for a 10-year period.
The new numbers show the path is even easier. The budget can be balanced in 5 years if spending grows at the rate of inflation (the green line) and in just 10 years if spending is limited so that it grows 3.4 percent annually (the light blue line).
Today’s path to balance is even easier because of better 10-year growth numbers, and also because of projections that the recent tax increase will generate more revenue (the dark blue line shows total projected revenue over the decade).
Because of Laffer Curve reasons, I’m skeptical about whether all that additional revenue will materialize, so both the chart and the underlying numbers are a bit speculative.
But what they do show is that the nation’s fiscal problems easily can be addressed with some modest spending restraint. Sort of a practical application of Mitchell’s Golden Rule.
Here’s my video explaining the importance of spending restraint. The numbers are now outdated, but the concept is still completely relevant.
As noted at the beginning of the post, I’m much more concerned about reducing the burden of government spending. Balancing the budget is a secondary concern.
That’s why we should impose genuine budget cuts and not just restrain the growth of spending. That would also make it easier to adopt good tax policy.
Maybe, in a parallel universe where politicians are motivated by liberty, we can even get entitlement reform and a flat tax.
View full post on Cato @ Liberty
Other • Inflation, I see no inflation, don’t put your blind eye to
Inflation, I see no inflation, don’t put your blind eye to the telescope this year!
Posted on 19 January 2013
When Lord Horatio Nelson wanted to ignore a warning about ships about to attack his fleet he cunningly put his telescope to his blind eye and declared that he could see no ships. As the admiral of the British fleet some 200 years ago nobody dared to contradict him.
A similar trick is being performed by statisticians who tell us there is no inflation after five years of reckless money printing. Prices of essentials like energy and healthcare are sharply up but the official statisticians contrive to keep them out of the inflation index.
Inflation illusion
But this sort of illusion does not last forever. Eventually the ships are all around you and firing their cannons! Inflation is already in the can.
The head of the British supermarket chain Waitrose says food prices are heading for at least five per cent inflation this year due to bad harvests and crop failures around the world. That’s going to be tough on people paying higher taxes and possibly earning less.
Oil prices remain resolutely high and a price spike can be easily envisaged. Last week’s awful terrorist attack on a gas plant in Algeria is a reminder that a lot of the world’s energy supplies come from unstable countries in the Middle East and North Africa.
However, what nobody likes to admit and still fewer seem to understand is that the real reason for most price inflation has nothing to do with supply and demand of commodities but is down to the increasing supply of money. Global central banks have been pumping money into the world economy for five years at record levels.
Action and reaction
To take another analogy. This is like pulling and pulling on a string tied to a brick. Nothing happens for ages and just when you think it never will then the brick flies up and hits you in the face.
Money printing is like that. Central banks can print the stuff but they can’t force people to spend it. The first reaction of people who get this money is to save it in case of another crisis. So there is no inflation of price levels. However, just as they start to think the crisis is over the spending starts.
Inflation is the inevitable result and central banks can do nothing about it because the money is already in the system. They can try, of course, but the effect will be marginal against the incoming tidal wave of money. Is this where the global economy is going next?
Timing dear boy
Getting the timing spot-on is impossible on this. But it is pretty inevitable unless you put that telescope to your blind eye and pretend that all the money printing just has not happened and that central banks are not still cranking up the printing press.
Don’t look at what the new Japanese government is doing or what the Bank of England has already done. Forget that the Fed is buying 60 per cent of new US T-bonds. Ignore the stimulus the Chinese chucked into their economy for the leadership transition last year. Deny that the ECB’s Mario Draghi is buying up bonds.
Inflation, I see no inflation, but it is coming and investors need to be ready for it.
http://www.arabianmoney.net/gold-silver … this-year/
Statistics: Posted by yoda — Sat Jan 19, 2013 1:54 pm
View full post on opinions.caduceusx.com