A few weeks ago in Taking Stock I focused on a silver lining in world asset price declines. It signaled relief from final inflation entering the pipeline.
This morning a tiny sliver of it emerged from the other end. The BLS reported slightly better than expected October CPI up 3.2% over October of last year. In a typical fit of irony, markets responded by putting a fresh impulse of inflation in. The narrative is that the Fed has less inflation fighting work to do than it would have if the reading came out higher, that is, that the policy outlook is incrementally easier than it was yesterday. So stock and bond prices took flight.
The dollar was down.
Not only against foreign currencies (an over 1% loss), but against bonds and stocks. Also elementary commodities such as copper, gold, silver and platinum. It’s reported for example that platinum is “up” 2.62% as of this writing. But that’s only in dollar terms … wouldn’t it be at least as accurate to say the dollar is down in terms of platinum? Even more so, unless one can come up with a cogent explanation of how a government data release and anticipated action by the issuer of the dollar, the Federal Reserve, could possibly affect the intrinsic value of a chunk of inert metal?
As a reminder, one of our pet themes at Financology is that inflation is first evident in asset prices, later in consumer prices. The logic is simple: Total purchasing power of all the world’s stores of value is equal to the total body of stuff available for purchase. Take a moment to consider this statement. If it is not immediately obvious. It is a virtual tautology, true by definition, the logical equivalent of A=A. Yet conventional economics fails to even notice it. Securities, in the broadest sense – currencies, bonds, stocks – all represent claims on goods and services. The sum total of their purchasing power is unchanged by changes in their relative value. Why? Because it must.
Today the sum total of the purchasing power of all the world’s bonds, stocks, euros, pounds, yen, etcetera increased relative to dollars by some 1%-3%. But the number of loaves of bread, gallons of gasoline, hours of plumbers, electricians, doctors, truckers, homes, acres of farmland, did not. The inevitable conclusion is that the total purchasing power of the rest – dollars – decreased.
The proportions of the total aren’t actual data, but the following chart illustrates the concept. An increase in the share of purchasing power of any one or group of assets must necessarily represent a decrease in the remainder.
I hope it’s obvious that unlike most of economic thought, this is not a statistical argument. It is logic from first principles. Yet as it must be, it is also evidenced in empirical observation. The great asset price increases of the fifties and sixties were followed by great goods and services price increases in the seventies. The great asset price increases of the teens are now being echoed in goods and services price increases in the twenties. They were all the same thing … depreciation of the pricing unit.
Why don’t these changes in currency value immediately register in consumer prices? Why are there lags extending from days to weeks to months and years? Securities trade in real time auction markets and adjust instantly in real time. They’re also used to store value. And people use non-currency assets like bonds and stocks for longer term storage, and must covert them into currencies in order to exercise the purchasing power stored therein. So declines in currency values registered in the securities markets take time to work their way into consumer prices. And because economists and policymakers as a whole are myopically obsessed with goods and services prices, pretending asset prices live outside of the world of inflation, they remain chronically behind the curve.
Since late July we’ve seen the aggregate purchasing power of bonds and stocks and foreign currencies decline, meaning that the purchasing power stored in dollars rose. Today, we saw a just a bit of that show up in the latest consumer price data, admixed with earlier losses already in the pipeline. But today’s market reaction represents a decline in dollar value destined to be reflected in tomorrow’s lagging final inflation reports.
There is only one possible alternative. And that is that it’s reversed before the pig has made its way through the snake. We can confidently predict that either the asset price gains will stop or consumer inflation will be resurgent.
For now, the financial media are celebrating this development, making a value judgment that this is a Good Thing. As if we are all suddenly 1%-3% richer, because inflation is being brought to heel and asset prices have risen. But make no mistake.
It’s just a day of inflation.