McDonald’s and Wal Mart Warn of Inflation Because Big Banks Use Trillions of Taxpayer Money as Gambling Chips for Speculative Commodities Plays

The signs for inflation in food and basic consumer goods are widespread.

McDonald’s is warning of inflation in food prices:

McDonald’s Corp forecast higher prices for beef, dairy and other items and said it would cautiously raise prices to keep attracting diners, who are grappling with higher grocery and gas bills.

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McDonald’s and other restaurant operators are getting squeezed by accelerating food costs and must figure out how to raise prices without scaring away already skittish diners.

Similarly, the American head of Wal Mart – the world’s biggest retailer – is warning of price hikes across the board:

U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday.

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Inflation is “going to be serious,” Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY’s editorial board. “We’re seeing cost increases starting to come through at a pretty rapid rate.”

CNBC reported yesterday:

The combination of rising gasoline prices and the steepest increase in the cost of food in a generation is threatening to push the US economy into a recession, according to Craig Johnson, president of Customer Growth Partners.

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Of course, at lower income levels, these percentages are much higher. One sign of the stress some consumers are already feeling is that some AAA offices have already seen an increase in out-of-gas service calls, as motorists try to put off filling their tanks or drive around trying to seek out the gas station with the least expensive price.

And as the New York Times notes, food producers are selling smaller portions for the same price, due to cost – push inflation:

With prices for energy and for raw materials like corn, cotton and sugar creeping up and expected to surge later this year, companies are barely bothering to cover up the shrinking packs.

While it’s tempting to say we’ve got inflation, things are not so black-and-white.

As I wrote in January:

Debates about inflation and deflation paint with too broad a brush, or too narrow a focus …

Too broad a brush because the economy is not a monolith … different asset classes can move in different directions at the same time.

Too narrow a focus because you can’t analyze what’s happening in the U.S. in a vacuum in a highly global economy.

MixedFlation

As I noted in 2008:

Some people think that some prices will go up at the same time that others go down.

For example, Dominic Frisby writes:

Are we going to see rising prices or falling prices? Of course, it depends on the asset class – and in what currency you are measuring.

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Falling prices in assets associated with debt [like houses] and rising prices in things which you buy with cash – food, energy and some imported goods.

Adam Hamilton of Zeal LLC agrees:

Anything typically financed by debt is likely to see its prices plunge dramatically, like houses and cars, as the ongoing Great Bear bust continues to destroy the gross excesses of debt via higher long rates. Conversely, anything not typically ‘paid for’ with debt, including groceries and general living expenses, is almost certain to rise in the coming years. We are staring down a brutal environment of widespread inflation marked by various sectors witnessing falling prices as debt leverage implodes.

So we may very well experience both inflation and deflation.

I wrote in July 2009:

You know from experience that when you’re in a national park, movie theater or some other contained place, prices are higher than elsewhere.

Basically, the stores in such places know you can’t go somewhere else, so they can charge you what I call “got you” prices. In other words, you’re a captive buyer, and they’ve “got you”.

I’ve noticed the same thing with health care costs. My family’s health care premiums increased 6% last year – on top of the 6% increase the year before.

This is “got you” prices. The health care industry knows that Americans are desperate for health care, and that if they raise prices, people will pay.

I’ve previously pointed out that inflation versus deflation is not necessarily an all-or-nothing proposition: we can have inflation in some asset classes and deflation in others.

So my current theory is that we will have deflation for some time in most asset classes, but inflation in the “got you” classes of basic necessities that everyone needs – food, energy, and health care.

In a tough economy, companies that can squeeze broke consumers for more money will do so

I reported in September 2009:

Jeffrey Saut – Chief Investment Strategist and Managing Director of Equity Research at Raymond James – is now confirming that theory:

Inflation, or deflation, the argument rages; yet on CNBC last Thursday I opined that we are currently experiencing both… It appears to me that the country’s top quintile of wage-earners (the folks with the most assets) are experiencing deflation as their home prices have collapsed, their 401K’s are substantially below where they were in October 2007, their bonuses have been “whacked,” and the list goes on.

Meanwhile, the lower-income households are experiencing inflation with their heath care costs rising, food prices escalating, insurance premiums climbing, etc.

Saut thinks inflation will eventually win out:

Our “bet” is that the inflationary forces will eventually win out because that’s the way it has always played since the Great Depression.

But that is not controversial. Indeed, even the greatest advocates of the deflation theory say we may eventually get inflation. For example, David Rosenberg says that deflationary periods can last years before inflation kicks in.

Well-known financial analyst Dian L. Chu wrote in June 2010:

Despite the seemingly tame headline inflation numbers, consumers never seem to see price declines in certain categories like education and health. For instance, prescription drug inflation escalated to 5% from less than 3% in 2007 and 2008.

So, it is pretty obvious what we have here–biflation–instead of deflation. Biflation is a state of the economy where inflation and deflation occur simultaneously.

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The price increase of commodities is caused by the increased money flow (via loose monetary policy) chasing them. On the other hand, the growth of economy is tempered with high unemployment and decreasing purchasing power. This has resulted in a greater amount of money directed toward essential items (inflation) and away from non-essential items and things required credit to buy such as house and cars (deflation).

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While all of that money Federal Reserve pumped into the system could in theory cause inflation … weak banks and slack in the economy would weigh against that. Indeed, it is likely that crude material price increases could begin to move down the supply chain; however, end markets are still too weak to allow a full price increase.

So, in the near term, biflation could be around through possibly 2012 with pockets of inflation seen in certain sectors such as energy and feedstock chemicals, and deflation/low inflation in other sectors, netted to a moderate headline inflation number.

[We've got] rising food, commodity, energy and healthcare costs. But housing is double-dipping, and wages are declining. And see this.

So despite what die-hard inflationists or deflationists might say (and I respect both camps), things are actually mixed.

Moreover, as I pointed out last year:

Given that speculators drove up the price of oil last year, it is possible that – especially in a stagnant economy – speculators could drive up the prices of some asset classes and drive others down.

And see this.

And this.

Of course, instead of directly helping the American people, the government threw trillions at the giant banks (including foreign banks; and see this) . The big banks have – in turn – used a lot of that money to speculate in commodities, including food and other items which are now driving up the price of consumer necessities. Instead of using the money to hire Americans, they’re hiring abroad (and getting tax refunds from the government).

Ironically, the financial system is in worse shape than it was in 2008, according to Standard and Poors:

Additional fiscal risks we see for the U.S. include the potential for further extraordinary official assistance to large players in the U.S. financial or other sectors, along with outlays related to various federal credit programs. We estimate that it could cost the U.S. government as much as 3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie Mac, two financial institutions now under federal control, in addition to the 1% of GDP already invested (see “U.S. Government Cost To Resolve And Relaunch Fannie Mae And Freddie Mac Could Approach $700 Billion,” Nov. 4, 2010, RatingsDirect). The potential for losses on federal direct and guaranteed loans (such as student loans) is another material fiscal risk, in our view. Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008 ….

In other words, the government has thrown trillions at the big banks, but instead of using those funds to shore up their balance sheets and return to prudent banking practices, the big boys have used the money as new gambling chips for speculative commodities plays … which are hosing the American consumer at the grocery store, Wal Mart and the pump.

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