Subscribe to John Mauldin's
FREE Publication:

Thoughts From the Frontline

Sign up for John’s free weekly letter and join 1 million of his closest friends.

We will never share your email with third parties

  • Editorials
  • In The News
  • -->

    Thoughts from the Frontline

    Any Bonds Today?

    July 21, 2013

    By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless….

    – John Maynard Keynes

    One of the more frequent and important questions I get asked when I travel is whether I think we will see inflation or deflation. My usual flippant answer is "Yes," and then I go on to explain that there is no simple answer. Over what time period? In what country? And by what means do you want me to measure inflation or deflation? Today we take a look at part of a white paper I am working on with Jonathan Tepper, the co-author of Endgame, on this topic. I think you will find it interesting reading on a summer's day. And I have to quickly mention the absolute disaster that is happening before our eyes in the labor market. Our kids are getting skewered (the polite word) by unintended consequences of the Affordable Care Act. We need a bipartisan fix quick, before we damage an entire generation.

    But first, let me call your attention to a dynamite conference at which I'll be speaking in October. It's "3 Days with Casey," the Casey Research Summit for 2013, to be held October 4-7 in Tuscon, Arizona. In addition to the indomitable, incredible Doug Casey, my friends Ron Paul, Lacy Hunt, Rick Rule, and Don Coxe will all stand and deliver, along with a bunch of other outstanding speakers, including Jim Rickards (author of Currency Wars), Paul Brodsky (I love this guy's stuff!), and Chris Martenson (author of The Crash Course). And of course you get the whole Casey research team. Thoughts from the Frontline readers can get a special early bird discount here. Come help me celebrate my 64th birthday!

    A Temporary Problem

    Back in 2010, a number of analysts (including me) noted an unintended consequence buried in the Affordable Healthcare Act (aka ObamaCare). Employers are not required to provide insurance for temporary workers, and a temporary worker is defined as someone who works under 29 hours per week. Many of us noted that this would result in businesses shifting workers from full-time to part-time. The answer from AHA supporters was that…

    Discuss This


    We welcome your comments. Please comply with our Community Rules.


    Page 1 of 2  1 2 > 

    Walter Stolber

    July 25, 2013, 6:54 a.m.

    Walter Stolber,
    Congratulation to Mauldin/Tepper for a fine piece highlighting pitfalls on inflation/deflation measurements.
    Regardless of which method applied, the ubiquitousness of the index almost by defintion is converting it to a contentious tool. The standard answer is ” faut de mieux”, we have to live with it and adjust the index according to socio- economic circumstances. Thus, making the door wide open to imagined and/or realistic conspiration theories. Fact is,  the admission that CPI is an average which cannot be tested by an individual`s personal experience, by definition is putting the index on a pedestal beyond control. An unsettling situation, especially for million of people whose real income development heavily depends on accuracy of index measurement.
    Do we have to live with a contentious index, be it CPI,PCE or any other,  eventually burdened with diminishing public acceptance as time goes on?
    Indeed, there must be a better way to come up with results more atuned to realities on the ground. For this to happen, the results ie, of the CPI index, will have to be submitted to and be tested by consumer representation.
    In a first step public opinion polling (marketing research) is providing tools to test the calculated index results. In a second round, a sample of the polling group will be confronted to the Delphi Technique -a standardized consensus seeking method.
    By following the two step approach , the method would minimise the so-called “public good`s problem” in Public Finance , the unwillingness of the consumer to reveal his true preferences; in this case, his unwillingness to reveal his factual price development experiences (inherent danger of overstatement). 
    This combined approach would have the advantage to link governmental measurements with the experiences of the consumer on the ground imbedded in a feedback mechanism.
    An approach to my knowledge never tried before, lets test it!

    John B. Robb

    July 22, 2013, 7:48 a.m.

    The logic of the chained CPI is that if, thanks to being eaten up by inflation, I can no longer afford steak, but must substitute chicken, then chicken becomes the new standard.  And if in a few years more of the 5-10% per year inflation we’ve been experiencing I can only afford eggs, then eggs is the new standard.

    As for hedonic adjustments, for most of the things I buy the quality has gone down, in some cases way down.  The simple informal clothes that I buy, for example, which is all that I can afford.  Where is the dishedonic adjustment for that?  As for computers, the CPUs may get faster, but the operating system and other software gets slower, and the ultimate limiting factor is the speed of my own brain, so the PC I’m typing this on isn’t appreciably faster than the microcomputers I was using in the early 1980s, even though the basic hardware is 20-1000 times faster.  No hedonic improvements there.  Similarly, there are a lot of useless electronic gadgets on cars today, but my car is what I use to get from here to there, and if I didn’t need to do that, I wouldn’t spend all that money to buy and maintain a car.  The hedonic adjustments made in the 1990s, and the chained CPI being proposed now, are just blatant attempts to underreport inflation so as to screw seniors out of even more of the money they’ve been gypped out of by having to pay into the system high-valued dollars decades ago, and getting back now dollars that are worth quarters or dimes.

    Any kind of measure is useless for comparison purposes if the standard is manipulated and changed.  The CPI of 1967, and the CPI of 1982, were manifestly thought by most economists and ordinary citizens to be reasonable measures of inflation at the time or they would have been rejected.  And the basic categories of most people’s expenditures haven’t changed significantly, so there has been no reason to make significant changes to those indexes.  Take computers, for example.  Many people in the median income brackets don’t own a computer, or if they do they don’t make much use of it.  The internet has only in the last few years made owning some type of internet access gadget compelling for all, yet even now there are many tens of millions of Americans who rarely if ever use the internet, and when they do, it is mostly as a species of entertainment and no different from the TV they would have watched 30 years ago, or the radio of 50 years ago.  Therefore the proper comparison is to ask how much today’s smartphone, or PC, costs versus what a TV costed in 1970, or a good radio in 1950.  It will be evident that there has been massive inflation in that entertainment category, and is there any reason to think that people are more entertained now than before, whatever that might mean?

    The problem is that most economists, including yourself, live in a whole different financial world than the rest of us who are trying to live on the median family income of $50,000 a year or a little more.  And studies have shown that the salaries of the top 10-15% of Americans have gone up significantly faster than the doctored CPI, while those of the other 8590% have gone down, with the real incomes of seniors on fixed income now down by about 40% from what it was.  Since the massive aggrandizement of government, and the flood of money printing, American society has bifurcated notably into the haves and the have-nots.  Check out the charts in this article:

    Those with access to almost free government money, or those who make their living by catering to such people (like you), are the haves, and for them personally, inflation is not a problem.  However, all that government money that is puffing up their salaries and incomes has come out of the hides of the have-nots, including their have-not children and grandchildren, and the children unborn who are either going to have to live their lives in penury to pay off all the debt and obligations that have accumulated, or are going to be subject to the collapse of the US$ and the world financial system.

    It’s not that difficult to measure inflation in a way that most people can accept, because all but the richest of us spend most our money on the same basics thing: housing, food, energy, transportation, medical costs and/or insurance, household disposables, and to a lesser extent clothes, entertainment and the few modest luxuries that most of us are able to afford to indulge in.  All of these categories were adequately covered by the 1982 CPI and there has been no compelling reason to change that measure and thus destroy all basis for comparison with that earlier period, except to obfuscate the stagflation that is slowly sapping the heart out of most Americans - all but the government-connected, privileged few, such as yourself.

    Tony Evans

    July 22, 2013, 3:31 a.m.

    Trying to get out of the mess we’ve made of our government budgets and banking system without hurting the most vocal part of our countrymen has smartly led to these low interest rates. While big is now bigger with even more powerful voices, smaller is now smaller and can barely be heard. 28,000,000 part-time workers together with all of their might can’t make the noise equivalent of one Goldman CEO.

    Fairness has always been a pipe dream of the have nots reinforced by the haves who promise “your time will come”. History suggests that it takes centuries for a “wealth” re-balancing act of magnitude only to be shuffled in fewer hand within decades.

    While brains of every nation have long struggled with concepts of equality others have found ways to profit from their efforts. So this is the way we move forward hopeful the “new plan” will get it more right than the last.

    Ronald Nimmo

    July 21, 2013, 10:59 p.m.

    Reply to Matthew McNeelege: In some ways, it is good that we have gridlock in Congress. In other ways it isn’t. What you think is common sense it I might consider stupidity or insanity!

    Ronald Nimmo

    July 21, 2013, 10:53 p.m.

    John has stated that longer term interest rates are the real measure of the level of inflation. Since the Federal Reserve is buying $85 billion of long term debt each month, how do we know where those rates would be if the Fed stopped doing so? One hint is that the 10 year note went up a full percentage point in one month at the mere speculation of tapering down the purchases! John says that the Fed could not buy enough bonds to significantly lower the interest rates on all debt, new and existing. But the fact remains that they are doing so and would not continue doing so unless they thought it was effective. It worked in the 1940’s and it is working now. I don’t think anyone, including John, believes rates would be as low as they have been, and still are, without QE3.
      My conclusion is that interest rates, especially longer term ones, cannot be considered a reliable indicator of underlying inflation in the US under present conditions. Wait until there is no more QE, and then we will know what the real level of interest rates actually is.


    July 21, 2013, 5:35 p.m.

    Mr. Mauldin should apply to himself the charges of economics conjectures he faithfully indict whom differ from his church.

    Interest rates of 10-year Treasury today are cited as evidence of “...that the methodologies used in 1980 and 1990 are visibly, patently, demonstrably wrong.” Well, but then why the 10-year Treasury interest rates and inflation expectation in the 80’s was so adherent on the measurements of those methodologies. Why the 10-year Treasury interest rates wasn’t much lower in the 80’s ? Are you supposing the world in the 80’s was delusional? You think it’s absurd to suppose delusional today but not in the 80’s ?

    Apart the incoherence and cognitive dislocation there’s is the non sequitur of the phrase itself “If you think overall general inflation is high, then you have to think the entire world is delusional.” No you don’t. The market today has a complex structure of incentives,regulation and legal constraints that make extant fundamentals like price and interest rate sometimes too much away from normal market equilibria matching the actual inflation expectation . Or better saying the long term equilibrium could be made unstable by the regulation complex. You don’t have to suppose delusions. Just constate the financial repression applied to the market machine whose programming language is the structure of incentives and regulations constraints that direct money management centers like funds, pensions and governments to following certain performance benchmarks even if, albeit with a possibility of relative gain, there’s sure absolute loss.

    About inflation measuring. It’s misleading to camouflage behind a barrage of adjectives and a “facial cream” of feign neutrality the ugly wrinkles of the very mechanisms of individual disenfranchisement. To boot and In regards of:

    1)Hedonics. it’s a practice to always consider as “quality gains” the deliberated marketing strategy of incremental changes in consumer products, mostly gadgets. These incremental changes, although concrete (but irrelevant in many cases) are at the same time only symbolic in regard of quality increase. The incremental concrete changes constituting a simulacrum of the process of increasing in quality.

    Also there’s a strong bias to favor “quality gains” vis-à-vis “quality loss”. Exempli gratia: Has the deterioration of food quality by pollution, pesticide and radioactive phosphate fertilizer been embed in the index as quality loss ? No.
    Has the time degradation of houses, physical construction or site, and the concomitant loss of living accommodation quality been factored systematically in the Owners’ Equivalent Rent? Nope.
    Has the programmed Obsolescence in consumer product “career track” type of marketing, where irrelevant incremental changes in lieu of improving quality are programmed to be performed ahead of time, been factored in as a real increasing in quality to reduce the index measurement of inflation. Oh Yes!

    2) PCE and the Chained dollars. Is clear that a increase in inflation degrade the basket that people normally would consume in the absence of the said increase in inflation. Then the Chained dollars methodology comes in and measure the prices changes on an ideal basket consisting in averaging this degraded basket with the normal basket thus sanctioning the degradation of purchasing power. Next period the same is applied “chained” recursively, that is the degraded basket will be considered a normal basket that would be averaged to a yet more degraded basket and so on.  The sobriquet “Chained” should more aptly be named the “entropic recursive estimator of inflation”. A case of “Reductio ad absurdum” could easily be made. The loss of power purchase recomposition resulting from measuring prices to a basket converging to nothing.     

    Why the ever social engineering propagandist allude, like Mr. Mauldin do here, to the pejorative concept of “conspiration theorists” to characterize those who oppose such a clear grab of wealth by the government and corporations ? To smear and stigmatize ? Shame on you!

    It’s a conspiration ? No. it’s just systematic, open, transparent and ample exploitation of the public oceanic economic ignorance.

    Paul Orme 33276

    July 21, 2013, 3:51 p.m.

    John thanks for your article.. you do a wonderful job… BUT I was really bothered by your article because I think the problem we have is EMENCE.

    The Emancipation Proclamation was signed 150 years ago but today we basically have slavery.. economic slavery ... you touch on it for the youth. But it is much started with the Great Society which Johnson announced at the U of Michigan graduation. At that time a GM worker could send his or her child to college and have a cottage on a lake in Michigan.

    But since then the working person in the United States has been shafted.. In his book The Great Deformation David Stockman states on page 68 the $50,000 median household income has grown .3% annually after adjustment for inflation.  And real hourly wages have declined 25% since 1979. While the top 1% share of net worth has grown from 20% to 35% since 1979 and share of income has doubled to 25%.. How can you have a country with those statistics?

    Productivity is up but the workers are not getting more… recent PBS show noted that Walmart is coming to Washington DC and does not want to pay a living wage. An there is an argument about raising the minimum to $9.50 when based on inflation it should be $16.50.

    Again the top 5% hold $40 trillion in net worth a $32 trillion gain of $8 trillion they held in 1985. The bottom 95% are just $8 trillion higher so the top 5% grew 4 times faster.

    Something is wrong.. we have 22 million out of work, we have corporate profits at all time highs, we borrow 40c of each dollar we spend.


    The top 5% want economic slavery for the 95. We want to collect date on them and have their health records so we can CONTROL THEM.

    We want two classes Haves and Have Nots and we have a Congress bought and paid for and the president does the bidding of some powerful forces…

    So what is next… well looks like ECONOMIC COLLAPSE, UPRISING OF THE PEOPLE, and then CONTROL via ___________________ (fill in the blank).

    USA is on a hopeless pass that the powers that be are letting happen and yet I can only think that the debt and promises in Social Security and other benefits will never be paid because we don’t have the funds and may not have the people.

    Hey John, ask the defense department folks whether the Chemtrails you will see when you go outside for a break are part of a ULTIMATE SOLUTIONS… TAKE A LOOK UP.. THOSE ARE NOT CONTRAILS. YEA… CLIMATE ENGINEERING.





    ronald blake

    July 21, 2013, 2:03 p.m.

    Hi John

    Do you think that you could give us the name of the product or service that you talk about in your thoughts from the front line.

    Like the smartphone you talked about for $20.00 a month.

    I see way to many people doing what you have done in above. It’s like your all afraid of being sued or something.

    Thanks     Ron Blake

    Nicholas Ah Kun

    July 21, 2013, 12:43 p.m.

    John, i think you’re missing the point.

    Alternative (non-mainstream) economists, financial analysts etc do not look at the 1980 CPI methodogy as a ‘religion’. The only reason one should look at it, in spite of its flaws, is to get a like measure. In the mid to late 70’s everyone was complaining about stagflation. High inflation. How then can we compare todays inflation number if its calculated differently?

    It’s like comparing a car’s MPG fuel efficiency from 40 years ago to todays, but increasing the size of the gallon from the US gallon to the imperial gallon and then proclaiming fuel efficiency has gone up?

    Hardly the thing to make sound financial decisions on. As an alternate, us ‘religious folk’, would also be happy if someone calculated late 70’s cpi using todays methodology. I’d then also like to speak to all financial analysts and economists who complained there eas inflation in the 70’s when clearly the 21st century cpi measure proves there was none.

    July 21, 2013, 7:47 a.m.

    Thanks for the entertaining and informative article.  50 push-ups may be a bit many even for a young 64 year old.  Here are a few of my favorite quotes:

    “The market can stay irrational longer than you can stay solvent.”
    —John Maynard Keynes

    “When the facts change, I change my mind. What do you do, sir?”
    —John Maynard Keynes

    “... a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.”
    —John Maynard Keynes

    “In the long run we are all dead.”
    —John Maynard Keynes

    “If you owe your banker a thousand pounds, you are at his mercy. If you owe your banker a million pounds, he is at your mercy.”
    —John Maynard Keynes

    “There is nothing so disastrous as a rational investment policy in an irrational world.”
    —John maynard Keynes

    “Outside of a dog, a book is man’s best friend. Inside of a dog it’s too dark to read.”
    —Groucho Marx

    “If stupidity got us into this mess, then why can’t it get us out?”
    —Will Rogers

    “If you find yourself in a hole, stop digging.”
    —Will Rogers

    “Don’t gamble! Take all your savings and buy some good stock and hold it ‘till it goes up, then sell it. If it don’t go up, don’t buy it.”
    —Will Rogers


    Page 1 of 2  1 2 >