Leprechauns, the Tooth Fairy and Stagflation (Michael Pento)

Euro Pacific Capital
by Michael Pento
August 18, 2011

Three things that Ben Bernanke doesn’t believe exist are Leprechauns, the Tooth Fairy and Stagflation. He has totally relied on specious theories like output gaps and a very high unemployment rate to keep inflation in check. What he fails to realize is that an increase in the money supply doesn’t always engender job growth or put fallow resources back into production. However, what it does always achieve is to increase the aggregate level of prices in our economy.



More evidence of our battle with stagflation was found in today’s economic data. Jobless claims for the week ending August 13^th rose by 9k to 408k. Existing Home sales fell 3.5% in the month of July, while the median price decreased to $174,000 from $182,100. And the Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July.

However, the continued weakness in the real estate market and in employment figures didn’t serve to squelch the increase in prices. On the consumer level prices increased .5% in July and were up 3.6% YOY. Data released on Tuesday showed import prices were up 14% YOY and yesterday’s Producer Price Index showed inflation on the wholesale level surged 7.2% from the previous twelve months.

The message from the markets corroborates the economic data. Industrial commodities like copper have severely corrected in price and the Ten year Treasury note yield has collapsed to nearly below two percent in a sign that recession is here. Meanwhile, the monetary metal gold is up $25 today and trading at well over $1,800 an ounce.

The Fed, along with the European Central Bank (ECB), has decided that since debt levels have become so intractable they must monetize a massive quantity of government bonds. Analysts at the Royal Bank of Scotland have predicted the ECB will buy €2.5 billion worth of Spanish and Italian bonds each day, which is equivalent to €600 billion a year. And eventually the bank could wind up purchasing €850 billion ($1.2 trillion) of Spanish and Italian debt. Not to be outdone, the Fed Chairman has indicated that his $2.9 trillion balance sheet would remain intact (at a minimum) for an additional two years.

The Central Banks’ actions from the planet’s two largest economies have forced investors into the gold market. And their deliberate debasement of their currencies has led to a hallowing out of savings, productive investment and the middle class--leading to an exacerbated and prolonged economic malaise. Bernanke may ascribe to stagflation the same credibility as fairy tale creatures, but that doesn’t make it any less a reality.

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.