We did mention inflation would fall...

As CPI inflation comes in at a “surprisingly” low level of +3.7% y/y in July, which basically means the majority of white shoe boy bank economists got it wrong again, here’s a reminder of our calls made over the past year or so on CPI inflation, interest rates, and the Rand.

This is not intended to be a chest-beating exercise.  The point of HA is to dispel common economic fallacies that have become ingrained in mainstream economic thought, in the process feeding the populace absolute economic gunk to keep them from understanding the theft of real wealth by government.

Inflation is one and perhaps the most important tool used by governments the world over to thieve from its people, in order to distribute wealth to itself and its private sector cronies.    In order to keep doing so, governments the world over have changed the definition of inflation and now have economists focus on the effects of inflation, rather than the cause. This is not conspiracy, it is the truth.  This is why your average varsity educated economist so often gets it wrong and has so many hands – and which is worse, why they all get it wrong at the same time.  As JM Keynes – the person who’s ludicrous policies have gotten the global economy into this poo storm of a mess – said about inflation:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
JM Keynes

South Africas 3 to 6 percent wealth destruction target
Nov 13, 2009

“Let’s break this down a bit further:  Suppose the quantity/supply of money in the SA economy remains stable (or roughly stable) in 2010.  In other words, the government does not print any new money next year.  Now, let’s suppose that Eskom raises its tariffs across the board by 45%.  Let’s assume that because electricity is such a necessary good, demand for electricity by households and companies only falls a little bit, and also that because Eskom is the sole supplier of coal-powered energy, there is no option to go to a cheaper supplier.

Let’s say this causes households to spend $20 billion more on electricity in 2010.  Let’s also assume that companies spend $50 billion more on electricity in 2010, and the particularly energy intensive producers want to pass these extra costs on to their customers.  Without an increase in the money supply, how will households keep paying for other goods and services with all these cost increases?  Once they’ve diverted income to their own electricity usage, and then diverted more income to those products that have now become more expensive, how much income will they have to spend on everything else?  Not much.  On those non-electricity intensive goods, prices will most likely fall and inefficient producers will be forced to liquidate until the market clearing price is reached.

The general price level on balance will be unchanged.

Folks, Eskom tariff hikes are not inflationary, they simply divert more resources to electricity, which if used inefficiently makes the entire economic system worse off, but if used most efficiently makes the system better off.”

Eskom tariff hikes are NOT inflationary
Dec 18, 2009

“We’ve said it before and we’ll say it again: The Eskom tariff hikes coming in 2010 are NOT inflationary.  If anything, higher electricity prices in a low-to-no money and credit growth environment will leave the general price level unchanged but many product prices will fall.

Unless money supply and credit growth get a kick in the pants soon, 2010 is going to see very low price increases, if any.  Definitely lower CPI increases than most expect, probably lower than 3%, and very possibly even price declines (often incorrectly called deflation).  Does this mean more rate cuts in 2010?  You bet.”

Eskomflation and FIFAflation are a myth
Dec 31, 2009

“So strong is the belief that Eskom tariff hikes and the FIFA World Cup will raise prices that we need to address the fallacy here, and we’ll keep doing so as 2010 plays out.

This is really a bit of Econ 101.  The first point to make is that the misunderstanding originates from a misconception of ‘inflation’ itself.  Inflation is not rising prices.  Rising prices are the result of inflation, which is the expansion of the money supply.”

Rand is setting up to surprise in 2010
Jan 12, 2010

“We foresee a high probability that the Rand runs to 5.50 or lower in 2010, but that at this point local industry and policymakers will be publicly wailing and gnashing their teeth, in the process providing ammo and authority to the SARB to step in and forecefully manage the value of the Rand weaker.”

QE2 and its implications for the Rand
Feb 26, 2010

“As we have mentioned before, we expect the Rand to strengthen against G7 currencies toward the end of this year. Along with this, we still expect the CPI inflation rate will surprise on the downside toward the middle and end of 2010 as base effects kick in and as FIFA 2010 and Eskom tariff increases have a deflationary effect on the CPI. The continued weak M3 money creation (+0.6% y/y in Jan vs +1.6% y/y in Dec) and the contraction in private sector credit extension (-1.1% y/y in Jan vs -0.8% y/y in Dec) will also be CPI deflationary. The CPI which tracks toward the lower end of the target band (3%) plus still weak job growth and stress in consumer spending owing to high private debt levels, may pressure the SARB into lowering the repo rate further, perhaps by another 100 to 200 bps.

A major structural issue that will further support the Rand – and something we have expected for some time now – is the resumption of QE by G7 central banks in Q2 but possibly Q3 2010 – the most likely candidates being the Bank of England, the Federal Reserve and the European Central Bank (more or less in that order).

As a result of these policies, we expect the Rand will appreciate strongly against the GBP, USD, EUR, and JPY once QE (debt monetisation) is resumed (begins in earnest). We expect this move lower could take place as soon as Q2 or Q3 2010. If uncertainty surrounding QE2 rears its head in March 2010, we expect there will be a sell-off in so-called ‘risk’ assets which would drag the Rand lower in the short-term, but this would only further increase the probability for QE2. Either way, we expect the Rand will hold its ground against the likes of the GBP despite weakness against the USD. Toward the end of 2010 the trend for the Rand remains stronger against these majors. While our target for an average USD/ZAR of 6.40 in 2010 might look a bit far-fetched at the present time, wait until you see the market’s reaction to the realisation that QE2 will be supporting government spending, not asset markets. We think it will be significant and lead to a significant re-pricing of EM currencies.”

The interest rate cuts that happened over the past two years (and that will still happen in Sep, Nov and 2011), and the government spending of borrowed money, IS the inflation that has been and is being created right now that will be reflected in much higher prices somewhere around 2012-13.  The best way to avoid your money from being thieved by this process is to own the monetary metals gold and silver.

Use it, don’t use it…

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