Legislating Inflation

“Inflation is taxation without legislation.”

-Milton Friedman

Since one of America’s chief champions of free-market capitalism, Milton Friedman, died in 2006, we’ve had Ben Bernanke running the US Federal Reserve. Bernanke has never raised interest rates. Never is a long time.

The Bernank’s fans (most of them get paid by inflation) will tell you that, in the short-run, Legislating Inflation is what we need to stop The Deflation (i.e. free-market prices falling). In the long-run, I think that conflicted and compromised policy for the few will be dead.

It’s a good thing President Obama is considering a cut in the US corporate tax rate today – because Bernanke’s 2014 cheap money policy is imposing a Consumption Tax on the 71%.

Back to the Global Macro Grind

The way that my Keynesian Economics professors at Yale taught me to calculate US GDP Growth is as follows:

GDP = C + I + G + (X-M)

C = Consumption. That’s 71% of US GDP. Genius calculus will reveal rising “export/manufacturing” doesn’t budge the GDP number.

So, if you have a Policy To Inflate via US Dollar Debauchery, you are putting a Consumption Tax on the American People. Most human beings who drive to work, pay for their kids to go to school, and feed their families get this.

Yesterday, the US Dollar Index was down another -0.45%.

At the same time: 

  1. Oil was up another +2.5%
  2. Gold was up another +2.0%
  3. Energy Stocks led SP500 advancers at up +0.7% 


On the day, the SP500 barely closed up (+0.07%).

So, this whole Legislating Inflation thing that is occurring both fiscally (no budget yet; no deficit discipline either) and monetarily, is only good for the US stock market to a point.

This revelation, of course, is not new. Almost the exact same thing happened to commodity and stock prices into the highs of February 2011. All the while, Obama’s central planning advisors (David Axelrod, Larry Summers, Tim Geithner, etc) couldn’t believe that US Growth slowed like it did in Q1 of 2011 (down to 0.36%!).

How? Who? Why?

After you calculate the C + I + G + (X-M), you have to subtract what we call the “Deflator” from the GDP number. As inflation rises, the deflator gets bigger, and yes, sorry, real economic growth (adjusted for inflation) gets smaller.

This is why we are so intensely focused on the marginal relationship between Growth and Inflation. Since everything that matters in Global Macro is priced on the margin, this is what we need to solve for within the aforementioned GDP equation.

My call here is as crystal clear as it was at this time of last year. From this time and price, Inflation Expectations Rising Will Slow Growth sequentially (as in month-over-month). Markets typically don’t like that.

Where’s the Inflation Rising data? 

  1. Hong Kong’s Consumer Price Inflation rose to 6.1% in JAN vs 5.7% DEC
  2. India’s Consumer Price Inflation rose to 7.7% in JAN vs 7.5% (WPI) DEC
  3. Italy’s Consumer Price Inflation stayed sticky at 3.2% JAN vs 3.2% DEC 

Where’s the Growth Slowing data? 

  1. Germany’s manufacturing PMI stopped improving in FEB at 50.1 vs 51.0 JAN
  2. Japanese Exports plummeted to -9.3% y/y in JAN and Japan printed their largest monthly trade deficit ever!
  3. Taiwan Exports were down -8.6% y/y in JAN (lowest demand reading since 2009) 

*Some obvious points about all this data: A) its Global Macro data, not Greek, B) there’s plenty of January data here instead of February and C) the inflation data (causal in slowing real growth) has only accelerated to the upside here in February.

So, do we suspend all disbelief and chase 3-year highs in US Equity prices because the Dow is approaching a big round number? If I’m paid to do it with other people’s money, I might roll the bones on that. Then again, I might not.

Until we stop Legislating Inflation to cheer on stock and commodity markets (David Axelrod), we won’t A) stop seeing shortened economic cycles and B) amplified market volatility.

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1, $118.72-121.78, $1.30-1.33, and 1, respectively.

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Legislating Inflation - Chart of the Day

Legislating Inflation - Virtual Portfolio