Inflationary Pressures Building

The NY Fed has released its latest Empire State Manufacturing Survey. Here are the portions of greatest interest to me:

In response to a series of supplementary questions on prices, manufacturers estimated that the prices they paid for inputs rose by a little less than 6 percent, on average, over the past twelve months, while the median increase was a more subdued 3.0 percent (see Supplemental Reports tab). (The median and average increases differed so sharply because a few respondents reported price increases of 25 percent or more; these large increases boosted the average but had no effect on the median.) The median increase anticipated for the next twelve months was 4.0 percent, while the average expected rise was 4.6 percent. In assessing past changes in their selling prices, firms reported an average price increase of 2.9 percent and a median increase of 2.0 percent. Looking ahead to the next twelve months, firms predicted a 2.9 percent average increase in selling prices and a 3.0 percent median increase. Most of the price increases reported in this month’s survey were moderately higher than those reported in an identical survey conducted in May 2009. . .

Pricing pressures continued in May. The prices paid index inched up 3 points from last month’s elevated level, reaching 44.7, with 46 percent of respondents reporting that prices had risen over the month, and 1 percent reporting that prices had fallen. The prices received index, at 5.3, remained near the levels of the past several months.

As has been the case for quite some time, margin pressures on manufacturers have been intensifying. Stagflation is here. Meanwhile the U. S. government is spending vastly more than its income. This is creating a false sense of prosperity. If borrowing rates were to go to 5%, which is less than the average rise in input costs seen by the manufacturers in the above survey, what would happen to Federal debt service? How far are the Feds from the debt trap in which borrowing exists merely to service the debt?

Trying to put a "correct" price-earnings ratio on a stock market with this sort of existential threat to a government in what are more or less ordinary times -- no major war, plague, widespread drought, etc. -- is impossible. It is also necessary to look at real assets minus liabilities and then consider that AIG went under (more or less) despite a robust balance sheet. Neither the stock market nor the pricing of Federal securities has a margin of safety. The prices may rise but are speculative.

At least if one owns gold and silver, one owns durable assets that historically have always had a value, which has not been the case for paper "money".

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