Manufacturing Inflation (How Art Laffer Got It Wrong)

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

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If you’ve wondered where that inflation was, you might start seeing signs of it today.  Economic data released today are a great example of why inflation is a monetary consequence and not an economic one:

New York metro manufacturing activity slowed WAY less than expected:

Factories in the New York region unexpectedly expanded at the slowest pace in five months in December, indicating manufacturing may provide less of a thrust for the economy in coming months.

Wholesale prices jumped WAY more than expected:

The 1.8 percent increase in prices paid to factories, farmers and other producers was more than twice as large as anticipated and followed a 0.3 percent gain in October, according to Labor Department data released today in Washington. Excluding food and fuel, so-called core prices also exceeded the median estimate of economists surveyed by Bloomberg News.

Industrial production rose a tad, mostly from exports which may be a consequence of a weaker dollar :

Manufacturers are benefiting from rising demand overseas as the global economy recovers from the worst slump since World War II. A 12 percent drop in the value of the dollar from a four- year high on March 3 against its major trading partners is making American goods more competitive. Exports have risen for six consecutive months since reaching a three-year low in April.

What’s this all mean? It could very well mean that all this cheap money is starting to work its way into the economy…from the producers’ side.  If those producers can’t pass along the higher prices to the consumer, because of a paradigm shift in consumer demand, we’re going to see a lot more business failures.  That could lead to higher unemployment.

OR…it could mean something much worse; it could mean the feared currency collapse is underway.

Art Laffer once suggested that America’s “great export is our monetary policy” (VIDEO).  Since that utterance to Peter Schiff,   Laffer’s written a book admonishing the Government for the very strategy he endorsed.   Laffer’s lost credibility aside, it is instructional to note that we, as a Nation, have become overly reliant on foreign capital.  It looks like that party could be over.  If this isn’t a blip on the RADAR but the beginning of a trend, we’re headed to hyperinflation:

International demand for long-term U.S. financial assets rose less than economists projected in October as investors abroad sold agency and corporate debt, a Treasury Department report showed.

This “recovering economy” is built on sand.  The Fed has been trying to keep rates low,  through its mortgage-backed securities/Treasuries repurchase subsidy, in an effort to spur demand through more borrowing.  Sustainable recoveries however, are built upon savings, investment, and production…not cheap, borrowed money to buy HDTVs and Wii machines.

The Fed only has one bullet left in its six-shooter….

…and the foreigners ain’t supplying The Fed with any more ammunition….and Wall Street knows it.

PS:  I strongly urge you to watch the Laffer/Schiff video- it’s instructional.