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Is the Frog Aware?

Is the Frog Aware?

February 15, 2017

The boiling frog story is a widespread cautionary tale describing a frog slowly being boiled alive. The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger until it is too late.  While this particular scenario has been disproved with respect to boiling frogs, incremental changes can remain hidden, especially when obscured by the 'big picture', and only brought to light, in hindsight, after major change has occurred. 

Milton Friedman, the father of Monetarism, said, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output" (Aziz).  Economists define inflation as "a sustained increase in the general price level of goods and services in an economy over a period of time" (Wikipedia). The definition of inflation is limited to consumer goods and services only; asset prices are excluded by definition.

Currently we are faced with the central bank printing money causing broad money (M2) to soar by 14% per year, and narrow money (M1) about the same, year in and year out since 2007. Yet the Consumer Price Index (CPI) is only 1.9% and the Producer Price Index (PPI) is only 1.4%. Money supply growth has been far in excess of what the economy could use with its embedded growth rate of around 2-2.5%.

Why isn't inflation 4% to 4.5%? The answer is that it is. It's well above that in some areas, such as health costs, education costs, and food costs. The economists’ definition of inflation excludes asset prices, so where radical and rapid inflation is occurring, it is invisible to the economics ‘priesthood’, to Wall Street, and to the mainstream media and pundit community.  Just as with the frog parable, being unaware of something doesn't mean it isn't happening.

Remember, inflation affects the Real Rate of Return on your investments.  See my blog posts Why Active Financial and Investment Planning Reviews are Critical and Clickety-Clack Along the Market Roller Coaster Track for an in-depth understanding of how this works.

Now that the Fed has engaged in an imaginary tightening, it will be interesting to see what effect that has on money supply growth. I call it an imaginary tightening because increasing the subsidy rate that the Fed pays the banks is hardly a tightening.

Charts produced 01/19/2017

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This is just for educational purposes, and I am not making any specific recommendations. This is simply a guide to assist you in thinking about your own personal position, how much risk you are willing to take, and what your expectations are.

Aziz, John. “Is Inflation an Always and Everywhere Monetary Phenomenon?” Blog Post. Azizonomics. John Aziz, 10 Mar. 2013. Web. 19 Jan 2017.

Wikipedia contributors. "Inflation." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 3 Jan. 2017. Web. 19 Jan. 2017.

Charts are for illustrative purposes and are not intended to suggest a particular course of action or represent the performance of any particular financial product or security. Past performance is not a guarantee of future results. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.