Friday, November 5, 2010

How Ben Bernanke Sentenced The Poorest 20% Of The Population To A Cold, Hungry Winter

Tyler Durden writes:

The following chart prepared recently by JPMorgan demonstrates something rather scary, and makes it all too clear how the Chairman's plan to "assist" the US population via some imaginary "wealth effect" due to QE2, is about to backfire. As is now becoming all too clear, the prices of energy and food products are about to surge, and in many cases have already done so, but courtesy of some clever gimmicks (Wal Mart selling what was formerly 39 oz of coffee as a 33.9 oz product for example) the end consumers haven't quite felt it yet. They will soon. There is a limit to how much every commodity can open limit up before it appears on the SKU price at one's local grocer. And while a marginally declining "core CPI" is irrelevant for this exercise as it measures only items that are completely outside of the scope of everyday life, what will be far more important to end consumers will be the push higher in food and energy costs. The problem, however, is that for the lowest 20% of Americans, as per the BLS, food and energy purchases represent over 50% of their after-tax income (a number which drops to 10% for the wealthiest twenty percentile). In other words should rampant liquidity end up pushing food and energy prices to double (something that is a distinct possibility currently), Ben Bernanke may have very well sentenced about 60 million Americans to a hungry and very cold winter, let alone having any resources to buy trinkets with the imaginary wealth effect which for over 80% of the US population will never come.

Here is how JPM explains the phenomenon:

When the Fed considers the possible consequences of a falling dollar resulting from QE2, it should perhaps focus on food and energy prices as much as on traditionally computed core inflation. First, the food/energy exposures of the lower 2 income quintiles are quite high (see chart). Second, the core CPI has a massive weight to “owner’s equivalent rent”, which suggests that the imputed cost of home occupancy has gone down. Unfortunately, this is not true for families living in homes that are underwater, and cannot move to take advantage of it (unless they choose to default and bear the consequences of doing so). Due to the housing mess, there has perhaps never been a time when traditionally computed core inflation as a way of measuring changes in the cost of things means less than it does right now.
In other words, because many homeowners are underwater, they can't move from their current digs. Thus, the low “owner’s equivalent rent”, which has a massive weight in the core CPI, is fiction for those who can't move. What most consumers need to be concerned about are food and energy prices, which are climbing, and appear to likely climb even higher, given soaring prices at the commodity level. And, food and energy are, amazingly, removed from "core prices"!

Thus, Bernanke will have an even longer time to print away and claim there is no inflation, while the masses will get screwed. 

1 comment:

  1. Bernanke and the US Government are stuck between a rock and a hard place of their own making. Foriegn investors have reduced their demand for US Government bonds (Toxic Debt?). QE2 is nothing more than the Fed stepping in as buyer of last resort. If Bernanke doesn't buy the debt, the government will go bankrupt because nobody else will buy this new class of junk bonds. QE2 is the proverbial Hail Mary Pass, nothing more. It is all over for the Fed, they've shot their last wad. This is the third time that Fiat currency was implemented in the USA by a central bank, and this is the third time it ends in utter ruin. Viva hard money advocates.