Fed's Ivory Tower Just Got Smaller

Peter Schiff
Posted: Jan 31, 2013 12:01 AM

Today's weaker than expected GDP report shows just how out of touch most professional economists remain with respect to the fundamental weakness of the US economy. After more than four years of nearly never ending monetary stimulus and more than $5 trillion worth of new federal debt, the economy remains stuck in a serious recession.

The report shows that federal stimulus and deficit spending can't create sustainable economic growth.

Although the tepid data shocked many economists, I was not surprised. I believe zero growth is consistent with the state of the real economy. The stronger growth numbers that we saw in the second half of 2012 were likely inflated due to pre-election hopes. 

The disappointing economic data takes on an even gloomier tone when considered against factors that will make recovery that much more difficult. Interest rates are making their first strong upward move in nine months. Yields on 10 year Treasury bonds are up 60 basis points since the end of July, and are over 2.00% for the first time since April 2012.

The dollar is falling against most currencies except the Japanese yen (it is down more than 11% against the Euro since July), and energy prices are rising (crude oil is approaching $100 per barrel). Although these conditions are not promising, the stock market seems blissfully out of touch. As of yesterday, the S&P 500 had advanced for 8 days in a row, its longest daily winning streak in eight years.

But the confidence seems to be confined solely to Wall Street and Washington. After hitting a five year high back in October of 2012, consumer confidence has plummeted in the last four months to its lowest level in 14 months. Given that official statistics concerning employment, real estate, and inflation, have improved over that time, what would explain the rising pessimism?

Interestingly, yesterday's consumer confidence data showed that consumer expectations for inflation are between five and six percent.

But today's GDP report showed inflation at effectively zero. If inflation had been reported slightly higher, today's GDP report would have showed the economy in deep contraction.

Is it possible that consumers, who are closely attuned to changes in prices, may be more informed as to the true levels of inflation than government statisticians who are analyzing processed data from the federal ivory tower?