Wholesale Prices are Up and Indicate the Beginning of Difficult Times Ahead

Borrow Forever? Prices Will Soar Forever!
Borrow Forever? Prices Will Soar Forever!

Wholesale Prices Have Begun Their Rise

Wholesale prices are up as reported on Bloomberg. The report states that wholesale prices in the United States have risen  0.6 percent which is the most that they have risen in more than a year. There is conjecture that this is being caused by demand, which is partly true. This increase has been preceded by other increases prior to this and for some this means an end to the fears of deflation, which is also probably true.

However, what this price increase signifies more than anything else is that years of stimulus and years of unjustified low interest is finally catching up with the US economy as prices can no longer be contained no matter what anyone tries to do.

Prolonged Low Interest Creates High Price Potential

It is a very easily established fact that each time the Federal Reserve lowers the interest rate by more than is justified, as it has been doing now for years the net effect is to increase general liability on the economic system as a whole. Thus if a loan is given out at a percentage that leaves the lender liable for a hundred dollars at the end of the loan, the system in general will be held liable for that hundred dollars no matter who collects the loan, or even if the loan is collected at all(that is in the case of default where the loan is never collected at all.)  The overall consequence of that is a rise in prices in the general economy.

Thus if loans are made at less than what is optimal interest rate, the economy in effect becomes liable for that shortfall in interest recovery and the only way to make that up is by having prices rise in general wherever and whenever it is feasible or possible.

Therefore, though prices may be kept artificially low by incessant low interest rates there will be an underlying Potential for price increase embedded into the economic system in the long run. After years of low interest rates, the pressure now is huge and if given the chance it will show up.

Contraction Now is now Inevitable

The argument of course is that if not given the chance then these price increases can be kept in check. However, the only way to do that is by keeping the economy in a perpetual contraction. So what we are saying is that if the economy ever recovers, we will see an immediate and unnatural spiking of prices due to all the years of unnaturally low interest rates. This is little mentioned in the main stream media, but it is now at a point where it will be unavoidable. The implications are that any time there is an uptick in the economy, it will be followed by abnormally high increases in prices and therefore will stymie any increases in economic vitality.

The only real solution is either to pay the high prices, or to  increase interest rates, and taxes. Unfortunately these remedies lead right back to a negative pressure on the economy. In the end there can be no prolonged recovery under these circumstances, and sooner or later all the debt accrued will bring the system to a critical level from which not even the Federal Reserve will be able to extricate it, as the Fed itself sees its own balance sheet become clearly liable.

The Government will Increase Borrowing

The Federal Reserve will no doubt attempt to lessen this impact by delaying any reporting of its own liabilities but then this will have to made up by the Federal Government which will have to borrow excessively in order to make up for losses in the Federal Banking system.

The government has of course passed the Infinite Borrowing Bill which allows it to borrow any amount necessary to meet its obligations. However, sooner or later even this will reach severe limitations as the money borrowed will have to be either paid for with large increases in taxation, extreme cuts in service, or increased interest rates. In either case there will begin a negative economic progression from which it will be impossible for the Federal Reserve or Federal Government to extricate itself.

We are now seeing the first signs of this phenomenon and by the end of summer a new and formidable economic momentum to  the downside should begin without interruption. It is doubtful that the economy will be able to stay stable from here on out.  If nothing else, interest rates will probably begin rising to critical levels.

Economic Principles