But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Click here to continue reading Mr. Fitzgerald’s article.

The dollar and yen rose as worries persisted about global economic prospects despite a batch of better-than-expected U.S. economic data, prompting investors to seek shelter in the two safe-haven currencies.

Gold climbed to a six-week high after data showed U.S. core inflation rose more than expected in April, boosting the precious metal’s appeal as a hedge against rising prices.

Oil fell toward $56 a barrel, pressured by weak global demand and a stronger dollar.

Europe sank to what may have been the recession’s low point in the first quarter of this year as tumbling German exports and investment plus further sharp drops in output elsewhere hastened the pace of a year-old contraction.

Official GDP estimates showed the period was the worst since records at the European level began in 1995.

“Overall risk appetite is still down because of the bad numbers from Europe,” said Matthew Strauss, senior currency strategist at RBC Capital, in Toronto.

European shares closed higher, with gains for most banks outweighing losses for defensive plays such as telecoms.

But U.S. stocks turned lower after earlier gains due to the expiration of option contracts and a fresh assessment of a jobs report on Thursday that was worse than expected, said Rick Meckler, president of LibertyView Capital Management in New York.

“Yesterday’s rally, given the news, caught people off guard and left the market in a place where no one’s quite sure of the next direction,” Meckler said.

“With the weekend coming up and the potential for weekend news, some people are taking some money off the table,” he said.

Shortly after 1:30 p.m., the Dow Jones industrial average <.DJI> fell 46.43 points, or 0.56 percent, to 8,284.89. The Standard & Poor’s 500 Index <.SPX> shed 8.77 points, or 0.98 percent, to 884.30. The Nasdaq Composite Index <.IXIC> slipped 4.02 points, or 0.24 percent, to 1,685.19.

The FTSEurofirst 300 <.FTEU3> index of top European shares rose 0.5 percent to close at 839.94 points. Over the week, the index fell 3.1 percent, but is up 30 percent from a lifetime low on March 9.

But analysts were skeptical about when, and how strongly, an economic recovery will come through.

“We’ve had a spectacular rally,” said Philip Lawlor, chief portfolio strategist at Nomura. “Risk appetite has rebuilt. The question is about more green shoots.

“I don’t think the data is actually going to turn positive for another six or nine months,” he said.

U.S. and euro-zone government debt slipped after U.S. industry and consumer sentiment reports bolstered hopes the economy might soon start to recover.

U.S. industrial production fell 0.5 percent in April, a more modest pace than in recent months and less than the 0.6 percent economists had expected.

The data dimmed the allure of safe-haven investments such as U.S. Treasuries. Separate reports showing improved national consumer sentiment and a slower rate of contraction in New York state manufacturing this month also trimmed flight-to- safety bids.

The benchmark 10-year U.S. Treasury note fell 16/32 in price to yield 3.16 percent. The 2-year U.S. Treasury note fell 1/32 in price to yield 0.87 percent.

In Europe, June Bund futures fell 53 ticks on the day to 121.17, well off a one-week high of 122.07 set earlier in the session.

The dollar rose against a basket of major currencies, with the U.S. Dollar Index <.DXY> up 0.41 percent at 82.777.

The euro fell 0.80 percent at $1.3524. Against the yen, the dollar was down 1.04 percent at 94.87.

U.S. light sweet crude oil fell $2.06 to $56.56 a barrel.

Spot gold prices rose $4.70 to $930.05 an ounce.

Asian stocks rose as investors bought shares that stand to benefit from an expected global recovery. MSCI’s index of Asia Pacific stocks outside Japan rose 1.7 percent, while Japan’s Nikkei share average <.N225> added 1.9 percent,

May 15 (Reuters)

The core inflation rate, however, which excludes volatile food and energy prices, only rose 0.2%, easing fears that rising commodity prices would feed into more widespread inflation

But can the government’s inflation data be trusted? John Brown in The Daily Reckoning doesn’t think so…

Perhaps, the greatest area of concern about statistical manipulation is the measurement of inflation, or Consumer Price Index (CPI). By manipulating this single statistic the government can miraculously transform rising prices into economic growth.

The Department of Labor has set so-called “core” inflation, excluding food and energy, at 2.2%. Even “headline” inflation, including food and energy, is published officially at only some 4%. The problem is that these figures bear very little relation to the reality of price increases experienced on Main Street, which some estimate to be in excess of 10%.

Statisticians assign different weights to the elements comprising the CPI that are often not reflective of the spending habits of ordinary citizens. For example, housing maintenance (including heating oil), a major expenditure, is given only a small part in the Index’s makeup. In addition, the re-pricing of items such as automobiles to allow for added “hedonistic” features such as enhanced “value for money” is wide open to varying judgments. How these statistical decisions are made is really anyone’s guess. But it is absurd to assume that the government’s overwhelming interest in reporting low inflation does not influence the final numbers.

The financial consequences for investors can be severe. For example, the Dow Jones Industrial Average Index, against which many investment returns are measured, closed at a nominal high of 14,093 on Oct. 12, 2007. The media reported it as a sign of good things to come. On May 23, 2008, the Dow closed at 12,480 – off a bit, but apparently not too bad. But if that day’s close is adjusted for the official CPI, then it’s not worth 12,480, but only 9,856 when compared with its previous market cycle high, of 11,723, in the year 2000.

Worse still, if adjusted for the more likely but still conservative inflation rate of 8%, the recent close of 12,480 becomes the equivalent of only 6,742 in the year 2000. What looks like a nominal gain of some 757 points or 6.4% is, in fact, a real loss of 4,981 points or some 42% over those eight years!

House prices are falling and retail sales are down. In the normal way of things, that spells deflation. But raw materials prices are soaring, and that spells inflation.

So what are we facing? Well, let’s look at that data in a bit more detail…

First things first. The latest survey from the Royal Institution of Chartered Surveyors found that 19 in every 20 surveyors reported falling prices in April. That’s the worst reading in the survey’s 30-year history. I probably don’t need to point out that this includes the 1990s crash. Meanwhile, inquiries by new buyers are falling at the fastest rate since Rics began recording the data 10 years ago.

Unsurprisingly, this is all having an effect on consumer spending. The British Retail Consortium reported that the total value of retail sales was up 1.9% year-on-year in the three months to April. That doesn’t sound too bad – but in the quarter to March it was 3.5%.

The “horrific” rise in the price of manufactured goods

But at the same time, inflation is rocketing. The price of manufactured goods rose 7.5% in the year to April, the fastest since 1986. The rise was far greater than City forecasts, and was described as “horrific” by Ben Broadbent of Goldman Sachs, and “nothing short of terrible” by Paul Dales at Capital Economics. Even if you cut out food, alcohol and petrol costs, ‘core’ inflation was still higher than at any time since 1995 (for more on this story, see: UK inflation soars past City forecasts.

And the breaking news this morning is that consumer price inflation has hit an annual rate of 3%, way higher than the City had expected, and just a tenth of a percentage point away from triggering another letter to the Chancellor. Bank of England governor Mervyn King had better get his pencil sharpener out. We’ll be following up this story on the website later today.

Meanwhile, import prices are climbing too, as the pound weakens. Import prices in the first quarter were up 10.1% year-on-year, reports the FT. “There is a wall of costs waiting out there to dump on the UK consumer,” said Geoffrey Dicks of the Royal Bank of Scotland.

But consumers are spending less, and house prices are falling. That points to falling sales, which makes price hikes a hard sell. And even if prices do rise, rising employment insecurity will mean workers have a tough time demanding higher wages.

Good argument. But as John Plender pointed out in the FT a couple of weeks ago, there is a problem with it. The whole wage-price spiral might not be happening in the developed world. But the developing world – the erstwhile workshop of the world – is another matter.

The end of cheap labour

The global share of the pie taken by labour (the workers) has fallen to a historic low. But now, “emerging market workers are battling for their income share.” When we’re talking about the end of cheap shoes, and the end of cheap vests, what we’re really talking about is the end of cheap labour. That means “the developed world will have to pay more for its imports.”

The other problem, Plender notes, is that even though emerging economies are experiencing rapid inflation (which would usually be bad for the currency – no one wants to be in a currency which is losing value), many are pegged to the dollar. So even though there’s more money around, in dollar terms, it can still buy the same quantity of goods. That puts more pressure on commodity prices as emerging markets gain more purchasing power over “globally traded commodities.”

So developing economies have stopped exporting deflation, and are now fuelling inflation both in raw materials (as they have always done), which is now feeding through to their exported goods too.

Why our government has good reason to seek inflation

And the truth is that here in the developed world, our policy makers have a very strong incentive to pursue inflationary policies. Why? Because our big problem is debt. And inflation decreases the value of debt. Good news if you’re in debt – bad news if you’re a creditor or a saver.

Of course, the flipside is that if the developed world can’t afford to buy all those exports from the developing world anymore, then China and other export-dependent economies could also face rising unemployment and slowing growth. That might take some of the pressure off prices, but would lead to more social unrest with potentially explosive consequences.

So what’s it going to be? Inflation or deflation? In the short term, Mervyn King will have to write another letter or two to the Treasury, that’s for sure. In the longer term, it’s hard to say, and it’s a subject we’ll be returning to regularly in the months ahead – but whichever we end up with, it’s going to be nasty.

Turning to the wider markets…

The FTSE 100 ended up 16 points at 6,220. Oil companies were among the main gainers as oil prices remained high.

Across the Channel yesterday, the Paris CAC-40 rose 15 points to end the day at 4,976. And in Frankfurt, the DAX-30 rose 32 points to 7,035.

On Wall Street, US stocks moved higher amid news that Hewlett Packard is nearing a deal to buy technology services group Electronic Data Systems Corporation for up to $13bn, reports the Wall Street Journal. The Dow Jones rose 130 points to end at 12,876. The broader S&P 500 closed up 15 points, at 1,403, while the tech-heavy Nasdaq jumped 42 points to close at 2,488.

In Asia this morning, Japanese stocks made gains, with the Nikkei 225 rising 210 points to close at 13,953, as higher earnings forecasts from camera maker Nikon and computer services group Fujitsu boosted confidence that the economy can withstand a US slowdown.

Crude oil was trading at $123.82 in New York. Meanwhile Brent spot was trading at $121.95.

Spot gold was trading at around $877 an ounce this morning, while silver was trading at $17.09. Platinum traded around $2,073.

Turning to forex, sterling was trading at 1.9524 against the dollar, and at 1.2571 against the euro. The dollar was last trading at 0.6440 against the euro and 103.60 against the Japanese yen.

This morning, more bad news for the housing market. Homebuilder Redrow said that reservations are running 50% below last year’s level, while its order book had shrunk by 27% to the end of April. Sales in the year through June will be 10% lower than its previous forecast, reports Bloomberg.

Source:http://www.moneyweek.com/file/46954/is-inflation-or-deflation-the-biggest-threat-to-the-global-economy.html 

The answer? The feds focus on what they call “core” inflation. This strips out energy and food from the consumer price index because of their theoretical vulnerability to short-term volatility — magically making inflation seem smaller than it is.

“We’re going to be murdered by inflation!” screams the perennially paranoid Mogambo Guru.

“Things are getting weirder and weirder out there, and I am getting weirder and weirder in the semi-gloom of the Mogambo Bunker Of Ultimate Paranoia (MBOUP), like when I (for some reason) weirdly thought that if I called 911 to report the emergency of a rampant 20% monetary inflation that is going to lead to unbelievable consumer price inflation which will lead to food riots and societal breakdown, it might do some good!The reason I did that was that I am just about to give up using the Mogambo Method Of Societal Change (MMOSC), variously called “crazy drunkard screeching and writing hate mail to the Federal Reserve, Congress, the Supreme Court, the United Nations and all the other lying, thieving, scumbags of the world, most of them Marxist trash who depend on the damned Federal Reserve and their own central banks to create so much money so that they can finance their loathsome socialist/communist agenda.”

According to Bill Bonner at The Daily Reckoning: “In terms of what a dollar will buy in the United States, a dollar is down around 25% so far this century. In terms of what it will buy in Europe, it is down by about 50%.”