By Chriss Street

Last week in my article here, “Misery Index about to soar in CA, US,” I warned that a rise in a combination of inflation and unemployment, known as the Misery Index, could “distort financial markets.” And it could result in “significant capital losses” on their huge bond investments of the U.S. Federal Reserve. These distortions and losses would slam the economy, especially in California.

This week, Morgan Stanley heightened those concerns by stating that, if the economy contracted and inflation continued to rise, the U.S. government could suffer a loss of $547 billion on the Fed’s massive portfolio.

Given California’s heavy dependence on federal spending, the state’s treasury would be hit hard. According to a study by the California Budget Project, “In federal fiscal year (FFY) 2010, which ended September 30, 2010, $333.8 billion in federal funds came to California. Most of those dollars went directly to Californians without passing through the state budget.” Most of that money went to Social Security, Medicare, military pensions and other direct payments to persons.

Also, the study found that, for the state government, federal spending was “$91.5 billion in the 2010-11 budget — approximately 40 percent of total state expenditures.”

If the Fed’s portfolio loss leads to reduced federal-budget expenditures, California would lose the most of any state.

Bernanke testimony

In his semi-annual testimony to Congress on monetary policy and the economy this week, Federal Reserve Chairman Ben Bernanke was forced to try to reassure financial markets that there was only a very low possibility of an imminent financial crisis.  He calmly said, “Where the problem still remains unaddressed is in the longer term. And so it doesn’t quite match to be doing tough policies today when the real problem is a somewhat longer-term problem.”

Bernanke went to great lengths to make the case that central bank money printing and bond speculation were prudent stimuli to reinvigorate the American economy. He specifically pointed out that Fed’s easy-money policies have held down interest rates and helped a revival in the housing market and car sales.  The chairman also pointed out how a weak job market was more responsible than the Fed for keeping inflation low.

But as I had pointed out, the low inflation rate reported in of the Consumer Price Index has been dramatically understated because 41 percent of the index is real estate returns, which have been down over the last four years. And according to the McKinsey Global Institute Commodity Price Index; the prices for food, raw material, metals and energy prices rose over the last four years to historic highs.

During the same period, the price of a gallon of gas rose by 132 percent. And recently the costs of food rose by 8.1 percent. Now that the Fed money-pumping is providing below-market interest-rate financing, real estate inflation is jumping and the CPI will soon spike higher.

Sequestration

President Obama has been desperate over the last two weeks to try to avoid the 2 percent federal spending cuts that are part of the financial sequester.  But even after this modest reduction is implemented, the Congressional Budget Office projects that, over eight years, his administration will have engaged in $7.5 trillion in deficit-spending  and the national debt will almost have doubled.

Bernanke tried to help the president’s cause by uttering the usual concerns that suffering by millions of long-term unemployed was good reason to not make cuts until the economy recovered.

Bernanke was given good marks for his congressional performance.  The stock market rebounded and Diane Swonk, chief economist at Mesirow Financial in Chicago, said of Bernanke’s testimony, “Those worried that the Fed may end large-scale asset purchases prematurely should be reassured.”  But as I remember, those nice folks from Chicago were also very positive in November 2008 with the election of Barack Obama.

Wasn’t that right before the last financial crisis, where the stock market lost 50 percent of value and unemployment skyrocketed to more than 13 percent in California?

CHRISS STREET & PAUL PRESTON

Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.ustream.tv/channel/american-eceptionalism-news

Stay Connected on our Websites:  www.aexnn.com and www.agenda21radio.com

By Chriss Street

The  “Misery Index” is inflation plus the unemployment rate. For example, today the U.S. unemployment rate is 7.9 percent and inflation is 1.7 percent. So the “Misery Index” (rounding off) is 10 points.

Anything above 10 points is considered a tough time for the economy.

This measure of national pain peaked at 21 points in 1980, the last year of the disastrous administration of President Jimmy Carter, then trended lower under the next four presidents: Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush.

But the downward trend was broken in President Obama’s first administration due to $5.3 trillion of deficit spending; $3 trillion in expanded bank lending and $1.3 trillion in Quantitative Easing by the Federal Reserve Board as economic stimulus; and rising commodity inflation.

However, a major counter-trend was housing, as home prices crashed beginning in 2007. Because housing actually dropped in price over the last four years, the Consumer Price Index measure of inflation has been substantially understated. That has been especially the case in California, the epicenter of the housing crash.

Misery rising

With housing now leading energy, food and health care inflation, consumer purchasing power is shrinking and employers will be laying off workers as sales drop.  The Misery Index during President Obama’s first term rose only to 10 points. And in California, with an unemployment rate 2 percentage points above the national average, the Misery Index rose to 12 points.

But with deficit-spending continuing and a recession looming, the Misery Index is about to soar.

The last time America engaged in this type of government “stimulus” followed President Lyndon Baines Johnson’s 1964 declaration of the War on Poverty.  What began with the passage of the Medicare expansion of Social Security and the Elementary and Secondary Education Act morphed over the next 16 years through the Johnson, Nixon, Ford and Carter administrations into a smorgasbord of bloated social spending for powerful political and corporate cronies.

The resulting build-up of inflationary pressures and job destruction drove the Misery Index from an average of 7 points under Johnson to 16 points under Carter.  The Industrial Heartland of Midwest America was transformed into the Rust Belt. The inflation, especially to home prices, sparked the 1978 tax revolt in California when voters enacted Proposition 13, limiting property tax increases to a maximum of 2 percent a year.

The tax revolt continued in 1980 as disillusioned voters swept Ronald Reagan into office with a tough-love mandate that steadily drove down inflation over the next 28 years.

President Obama successfully advocated for a huge expansion of deficit spending on education and healthcare as an economic stimulus.  The Congressional Budget Office projects that, when he leaves office in 2017, over his eight years in office his administration will have engaged in $7.5 trillion in deficit-spending and the national debt will almost have doubled.

Obama’s formula of deficit spending and money printing stimulus is being copied by governments around the world.  The McKinsey Global Instiutute Commodity Price Index for food, raw material, metals and energy prices has risen over the last four years to historic highs, and continues to climb. 

During the same period in the United States, the price of a gallon of gasoline rose by 132 percent and has continued to rise for the last 33 days in a row.  Over the last two years, the accelerating costs of food rose by 8.1 percent.

Raging inflation has not been reported by the media, because the Consumer Price Index over-weights the cost of housing as 41 percent of the Index.  The Obama Administration’s Misery Index is only up to 10 points, because housing costs actually fell by 3 percent.

New housing bubble

But cheap money from the Federal Reserve is beginning to fuel a new housing bubble.  The year-end CoreLogic Residential Property Report found: “December marked 10 consecutive months of year-over-year home price improvements, and the strongest growth since the height of the last housing boom more than six years ago.” CoreLogic predicts home price will rise by 8.6 percent this year.

That’s great for California homeowners happy to see lost equity be restored. But it’s not so happy for new homeowners or renters.

The last Federal Reserve Board Open Market Committee minutes demonstrate that several members are concerned that if the Fed had to push up interest rates by selling some of its bonds to stop inflation, there might be “significant capital losses” that “distort financial markets.”

Few Americans are aware that the Fed’s massive bond purchases not only drove interest rates down, but also pushed up the value of the Fed’s bond holdings.  The U.S. Treasury made an “$88.9 billion  Portfolio Profit” last year from the Fed.

If the Fed needs to push up interest rates by selling bonds, the U.S. Treasury will suffer hundreds of billions of dollars of “Portfolio Losses” and the financial market will panic.

With inflation about to force the Fed to raise rates, the Misery Index is about to soar well above 10 points. And it will be even higher in high-unemployment California.

CHRISS STREET & PAUL PRESTON
Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.ustream.tv/channel/american-eceptionalism-news

Stay Connected on our Websites:  www.aexnn.com and www.agenda21radio.com