A Little Inflation Good for the Global Economy:Soros

Didn't Peter Schiff says there was going to be a plunge in the stock market around Jan. 31st. and hyperinflation? :)


A Little Inflation Good for the Global Economy: Soros
Published: Wednesday, 26 Jan 2011 | 12:00 PM ET Text Size
By: CNBC.com

Higher commodities prices and rising inflation in China are putting the global economy in a better situation by cutting the potential for deflation, George Soros, chairman of Soros Fund Management, told CNBC Wednesday.

The combination of a fear of inflation with the reality of possible deflation "was a pretty bad situation to be in", but now the economy looks to be "resolving itself to the upside," Soros said, speaking at the World Economic Forum in Davos, Switzerland.

"Due to the [inflationary] pressure from commodities and the inflation in China, where wages are increasing at a pretty rapid tick, the cost of goods is going up," he said.

The stock market has been largely unaffected, because of quantitative easing, which has pushed real interest rates into negative territory and that's a "tremendous additional stimulus, particularly for the stock market," he said.

Europe Is Story of Winners and Losers

The European debt crisis has created a euro zone of "winners and losers," but on balance Europe "is not doing that badly," said Soros in something of a contrarian view.


"The winners are sprinting ahead of the losers" and Germany's relatively solid economy is pulling up some Eastern European economies like Poland and the Czech Republic, he said.

But Germany is also benefiting from the crisis, with the depressed euro helping exports, he added.

Still, the "difference between the winners and losers will have very negative consequences," Soros said.

Looking to the UK, he said contraction of the economy was almost inevitable and the government's policy of balancing their budge with such cuts will not "stand up."

Why You Can't Trust the Inflation Numbers

A surprising number of people on Wall Street will tell you not to worry too much about inflation.

After all, they'll say, just look at the numbers. The inflation picture is incredibly benign. In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low rate. And when you strip out volatile food and energy costs, they'll say, it's even lower—a meager 0.8%.

It doesn't stop there. Many economists will point out that wages are also rising by less than 2% a year. With so many people still out of work, goes the line, labor costs are going to stay low for a long time too. So what's the worry?

Clearly, a lot of investors agree. Inflation-protected government bonds, which people would buy to protect themselves if they were worried, have fallen in price in the past couple of months. Gold, another inflation hedge, is down. Ten-year Treasury bonds yield less—3.3%—than they did when President Eisenhower left office.

It's crazy. There is plenty to worry about. As you battle to manage your family's finances, be aware that there are three reasons why inflation needs to be on your radar screen.

• First, the official inflation numbers should be taken with a fistful of salt.

Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It's taken place under presidents of both parties. Each change in methodology has come with plausible-sounding justifications. But, as if by magic, each change has had the effect of flattering the numbers. Funny, that.

According to one rogue economist, John Williams at Shadow Government Statistics, if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%.

Mr. Williams is just one voice. But it makes sense to treat the government numbers with skepticism.

Under the official calculations, if steak prices boom, the government just assumes you buy cheaper hamburger instead. Presto—no inflation!

Or consider the case of Apple computers. We all know Macs are expensive. And we know Apple doesn't discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?

Ha. Not according Uncle Sam. Using a piece of chicanery called "hedonics," Uncle Sam calls this a price cut. His reasoning? You're getting more for the money. Today's $999 Mac is lighter, fancier and faster than last year's $999 Mac. So the government calculates that the "real" price has actually fallen.

How's that work in the real world? Try it. Go into your local Apple store and ask for 50% off thanks to hedonics. (If you do, please, please video the exchange and put in YouTube. We could all use a good laugh.)

Instead, the government is worrying about deflation, partly because of all the "cheap" MacBooks out there.

• The second reason to treat the official inflation figures with some mistrust is that they look backward. They register what just happened, not what's about to happen next.

OK, so the prices of many things haven't risen. Yet. But if the laws of economics mean anything, they will have to. Why? Because costs are rising.

Economists need to stop focusing just on labor costs. The world has plenty of surplus labor. But look at raw materials. Around the world prices are skyrocketing, from copper to cocoa. The United Nations Food Price Index has just hit a new record high. Oil's back near $90 a barrel. Wheat prices have nearly doubled since last summer.

Soaring food prices helped spark the revolution in Tunisia. According to Alex Bos, commodities analyst at Macquarie Securities in London, other governments—especially in North Africa—have responded with panic buying of foodstuffs.

Algeria alone, he says, has bought about 1.5 million tons of wheat this month—maybe triple its usual amount. Saudi Arabia is rushing to build up grain supplies. Corn supplies are as tight as they were back in the inflationary 1970s.

Sooner or later this is going to show up in your supermarket, or at the mall, in higher prices.

Just ask McDonald's. Or paints and plastics giant DuPont. Or Kleenex and Huggies maker Kimberly-Clark. Or 3M. Or Coach. These companies, and many others, have warned in recent days that they're getting squeezed by rising costs. They'll either eat the costs, which will hit the stock, or pass them on. How is this not inflation?

• The third reason to be mistrustful of the inflation picture? Simple. Economics.

We are flooding the world with extra dollars. The Fed simply invents as many as it likes. In the past couple of years, to try to keep the economy out of a tailspin, it has more than doubled the size of the so-called monetary base.

A dollar bill has no intrinsic value. Dollars are only "worth" something because you can exchange them for a haircut, or a pair of shoes, or a book from Amazon.com. So if you drastically increase the number of dollars without a commensurate increase in the number of goods and services, each dollar must, by definition, be worth less. That's another way of describing inflation.

So far, this inflation seems to have shown up in the unlikeliest of places. It's like Whac-A-Mole. The price of vintage wines has skyrocketed 57% in the past year, according to the Liv-ex Fine Wine 50 Index. Real estate prices across China are in a bubble. So long as the Chinese tie themselves to the U.S. dollar, they are importing our inflation. But, once again, one wonders how this can be called benign.

Is inflation certain? I'm wary of any predictions. Casey Stengel once said, "Never make predictions, especially about the future." Mr. Stengel would have lasted three days as a Wall Street analyst. But he won five World Series in a row, and he knew a thing or two.

Maybe inflation really will stay tame. But I'm not counting on it. I'm not buying the conventional wisdom, and neither should you.

Write to Brett Arends at brett.arends@wsj.com

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

I know the second point is accurate as I have done nothing but work on price increases the last two weeks.

There is inflation and there is inflation. The point of the article i posted for this thread is about Soros and his statement that Inflation is low and its good for the global economy.

And then there is Peter Schiff who says on his website the stock market will collapse around Jan 31st and predicts hyperinflation.
Maybe you can tell us how he defines hyperinflation and when he thinks this hyperinflation will occurr?

Quote:

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Originally Posted by Havakasha

There is inflation and there is inflation. The point of the article i posted for this thread is about Soros and his statement that Inflation is low and its good for the global economy.

And then there is Peter Schiff who says on his website the stock market will collapse around Jan 31st and predicts hyperinflation.
Maybe you can tell us how he defines hyperinflation and when he thinks this hyperinflation will occurr?

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The point of the article I posted was that you cannot trust the numbers Soros is citing. I'm assuming you read the article? Today's 1.5% is really closer to 10% if the calculation hadn't changed. omg.

This is really simple to understand. I think. The dollar is the world's reserve currency. Foreign nations must hold US dollars to buy things like oil, and to trade with the US. Should the dollar lose it's status as the world's reserve currency (as some have suggested), those dollars will return to the US. With too many dollars chasing to few goods, you have inflation. Another alternative is that Chna and Japan stop buying US debt. We will in effect, stop exporting our inflation.

Now again, I disclaim this as fiat money appears to be governed by kaos theory of which I am not familiar (that's a joke). Clearly though, in the world of fiat money, things are a little different.

On Schiff, citing a specific day was silly. He called the housing market bubble that our government and policy makers didn't see. I think he was off a year or two, but it happened. He wrote Crash Proof in 2006.

Gold is denominated in US$'s. Look at the recent trend. http://www.goldprice.org/gold-price-...ear_gold_price

I read the article. My sense from everything I have read is that inflation is presently low.
Ok, so YOU believe our present inflation rate is 10% and that our present inflation rate is not good for the global economy as Soros believes. Correct?

What about Schiff on hyperinflation? When and how much?
Schiff seems to be one of those doom and gloom guys who is going to be right on occasion.

Quote:

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Originally Posted by Havakasha

I read the article. My sense from everything I have read is that inflation is presently low.
Ok, so YOU believe our present inflation rate is 10% and that our present inflation rate is not good for the global economy as Soros believes. Correct?

What about Schiff on hyperinflation? When and how much?
Schiff seems to be one of those doom and gloom guys who is going to be right on occasion.

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Not correct. I merely pointed out that the formula to calculate inflation has changed. Either it did or it didn't - right? As you might see, I've done a little research. Honestly, I don't know what to make of it. Inevitebly, something will come of it. Whether it be economic expansion, minor inflation, hyperinflation, riots or WW3, remains to be seen.

Low rate of inflation is best for economy and other business. High inflation decrease the
purchasing power and it reverse impact on the economy and economy collapse. Normally
5 % and below rate of inflation is best . Thanks for sharing information.
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