Their Inflation, and Yours

by Addison Wiggin – December 15, 2010

  • “No inflation here” says Uncle Sam… Why your real-world experience says otherwise

  • Inside the statistical sausage machine that spits out sham-tastic inflation figures

  • Euro alert: two surprise guests about to join the PIIGS

  • Motivated, results-oriented team player with extensive experience seeks to make resume readers scream in horror

  • Frontline reports from the “war against the zombies”… a cautionary tale about writing your congressman

Consumer prices rose 0.1% in November… and less than a percent over the past year. If you strip out food and energy — which government number crunchers do, because those prices are allegedly “volatile” — you still get a 0.1% increase.

That’s the “core” CPI, and that’s what the monetary mandarins at the Federal Reserve care about when drafting plans to buy Treasuries, control interest rates, goose employment numbers, order pizza, drink wine, play XBox 360 or any of the myriad other things they do during their FOMC meetings.

As a group, they can’t be pleased with the number. Over the last year, despite trillions of dollars in government stimulus and quantitative easing, core CPI has risen a scant 0.8% — far below the Fed’s “sweet spot” of 1.6-2.0%.

But whom are we kidding? Even the “headline” figure, the one including food and energy, is suspect.

Our friends at Casey Research put out this chart a couple months ago. The column in the far right — CPI-U — is actually lower now than it was then, all those other columns notwithstanding:

How does the government pull this off? We ask constant readers to indulge our newer ones as we revisit three of the most common tools the statisticians use…

  • Substitution. If steak becomes more expensive, and you buy hamburger instead, then the Bureau of Labor Statistics reasons your cost of beef has stayed the same — no inflation!

  • Hedonics. If the 2011 model of a car costs more than the 2010 model, but it also comes with more standard equipment, the BLS reasons you’re still getting the same value for your money — no inflation!

  • Geometric weighting. Nothing fancy here: If the price of something goes up, the BLS simply makes it count for less in the CPI relative to everything else. If the price comes down, it counts for more. Voila!

These changes started with the last round of Social Security “reform” under the auspices of Alan Greenspan in the early '80s. The idea was that if CPI were lower, Uncle Sam could pay out less in Social Security benefits.

You can see the end result over time maintained by our friend John Williams of Shadow Government Statistics. Mr. Williams calculates economic numbers the way they did back in the Carter era. The “official” CPI number is in red. The shadow stat is in blue:

In the meantime, the Federal Reserve statement issued after yesterday's meeting amounted to, “steady as she goes” on the ill-fated QE2. The Fed, looking at current "official" CPI numbers, sees “deflation”…

And so the plan to goose the system with $875 billion in Treasury purchases that started last month will continue to at least double the official rate from whence it sat while they were kibitzing over bagels before the meeting began yesterday morning.

Sooner or later, reality is going to catch up to the gamed statistics. Indeed, “an inflationary outbreak is very likely,” says Chris Mayer.

History is on our side.

”The dollar has done nothing more reliably than lose its value over time," Chris points out. "I think the future will be no different. People who worry about deflation — that, somehow, the dollars in our pocket will actually buy more in the years ahead, not less — will not only be wrong. They will be broke.

“Writer Jason Zweig points out that ‘Since 1960, 69% of the world's market-oriented economies have suffered at least one year in which inflation ran at an annualized rate of 25% or more. On average, those inflationary periods destroyed 53% of an investor's purchasing power.’

”That is why I believe that being prepared for inflation is the most important investment decision we have to face in the coming decade. If you aren't prepared, then the consequence is a mean hit to your wealth.”

Already, Chris has delivered powerful inflation protection this year to readers of Capital & Crisis. Not one of his recommendations has lost money, and the average pick is up 36%.

We’ll reopen subscriptions to Capital & Crisis very shortly. Meanwhile, if you feel adventurous, here’s a peek at one of Chris’s favorite speculations of the moment.

Stocks are up modestly this morning, the major indexes adding to yesterday’s gains. Traders are digesting the CPI numbers and a Federal Reserve report saying industrial production grew at its fastest clip since July.

Moody’s just issued a threat to downgrade the Spanish government’s debt, too. Trepidation over Europe's critical fiscal condition continues to out-jitter those affecting the U.S. That’s not so surprising. But perhaps this is:

Standard & Poor’s threatened yesterday to downgrade Belgium, home to a real estate bubble big enough to rival Spain’s. Austria, meanwhile, is home to a boatload of banks that got into trouble lending to neighbors like the Czech Republic and Hungary — where a credit bubble popped long ago.

But beyond those concerns, the private intelligence firm Stratfor sees Austria and Belgium in the same boat: “They are largely dependent upon external financing to manage their sovereign debt loads.” Just like Greece and Ireland.

“In good times, this is irrelevant," says Stratfor, "but when money gets tight and investors get scared, an investor stampede can crush a state’s finances overnight.” Especially if the state promises to bail out its banks, too… for also having made bad lending decisions.

Gold is taking every nugget in stride this morning and holding firm above $1,380. Last we checked, the spot price was $1,389.

Curiously, the big gold ETF, GLD, saw its holdings fall to 1,287 metric tons as of yesterday — the lowest figure reported since Nov. 29. Yet the spot price has remained buoyant.

GLD is the No. 6 holder of gold in the world, after the Federal Reserve, the German central bank, the International Monetary Fund, and the central banks of Italy and France. Owners of GLD may be unloading shares, but gold’s still hanging in there.

The tiny gold miner Byron King likes right now just announced it’s partnering up with another company to develop “King Alexander’s mine” (as Byron has labeled it).

“The re-opening of the mine is planned for February 2011,” Byron wrote his Energy & Scarcity Investor readers just yesterday. “That's about three months from now, which is lightning-fast in the world of mining.”

Byron says it’s still not too late to take advantage of this play’s potential to make you nearly 30 times your money.

To the list of indignities facing small business owners — new regulations, onerous Form 1099 requirements — we can add this today: “Results-oriented” job candidates touting their “extensive experience.”

The website LinkedIn — a career- and business-oriented Facebook — just issued a list of the 10 most-overused buzzwords people use to describe themselves in their profiles on the website.

And you just know if this jargon is on their profiles, it’s on their resumes too.

What’s interesting is which buzzwords are No. 1 in other countries. Canada and Australia, like the United States, is saddled with people touting their “extensive experience.” But Brazilians and Indians go overboard with “dynamic.”

We suspect that says a little something about who are the rising economic powers in the world and what they value most.

“Have you ever sent an email to your congressman (senator, president)?” writes a reader, addressing the fellow who wrote yesterday suggesting our readership stop kvetching and do something by emailing Congress and the White House.

“You receive a generic letter back that says, 'Dear (insert name), thank you for your email, I value the input of my constituency, BUT YOU DON'T KNOW JACK S*&%. Blah, Blah, Blah, I will continue to look into this matter. Thank you for your support.'

“They don't care what you think. And dumb Johnny Public keeps voting them back in, because in the public's simple brain that it's the other guy's congressman or senator that is the problem, not mine! Isn't it funny how the approval rating of congress is in the teens, but the majority of them get re-elected.”

“I had the unfortunate experience of e-mailing my local congressman,” writes another, “concerning a vote on a bill of high importance to me. I received a generic response saying something to the effect that he would research the bill and give my input serious consideration.

“Lo and behold, the bill was defeated by the narrowest of margins, and it just so happened that my congressman's vote was the deciding one! Not only was I thoroughly disgusted, but it started an avalanche of e-mails from his office to my inbox requesting contributions for his re-election!!!

“Those idiots not only don't care what you and I have to say about changes and solutions, but they only care about retaining their power, which, of course, takes money. Threats and/or suggestions are just a waste of your time.”

“I've just finished a four-year tour in the war against the zombies as president of an active and effective local taxpayer group. The job included some e-mails to public officials (largely useless wastes of time), as well as frequent public comments at city councils, transportation authorities, emergency services committees, county commissions, etc.

“We had some significant victories, defeating several tax measures and even getting one tax repealed. But the zombies wear you down. Scores of them keep coming at you in their $1,000 suits with their six-figure salaries. Every time you beat one down, elected officials use your money to hire two more to come after the rest of your money.

“Under the current system, you can't win; you can just fight till you drop — or drop out, as you suggested, which is what I'm in the process of doing now.”

“You missed the point,” writes the reader who launched this discussion, “but that’s OK, because you made up for it with your 'drop out' comment! Great idea, and one that even the sheeple can get behind.

“But let’s improve on it. Let Uncle Sugar purchase pot, at actual wholesale prices, from licensed growers. Add a couple of percent for admin costs and then pay Social Security benefits in kind with wholesale value of weed, instead of cash. Issue Social Security recipients a license to legally sell the pot on the open market at free market prices.

“Bingo!! Social Security obligations paid for at a discount; Social Security recipients get a raise by selling at market (even after doing diligent quality assurance); users get a break on prices at free market, instead of prohibition, pricing; and everybody happily dances naked at the airports, instead of griping about scope-and-grope!

"Lots of problems solved! Hey, 5, you guys really are on the ball!"


Addison Wiggin

The 5 Min. Forecast

P.S.: We’re off to the Pacific Frontier tomorrow, early. We're hosting our third Reserve-Only Chill Weekend at Rancho Santana. After we spend a couple of days touring the nearby colonial city of Granada, ogling volcanoes and taking in the breathtaking views of the various "neighborhoods" at the ranch, Bill Bonner will join us for dinner at his home there on the final evening. It should prove both fun and relaxing.

If you've been experiencing the deep freeze along with most of the rest of the United States… you'll take comfort in knowing the average temperature for the next several days at the Ranch will be 89 F.

[Ed. Note: If you're a Reserve member and would like to join us for our next weekend excursion on Feb. 15-19, 2011, by all means drop a line to Marc Brown. He’ll get back to you right away. But don't wait. I believe there are only two spots left on the February trip.]


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