Inquiring minds are looking at the WSJ’s “Why You Can’t Trust the Inflation Numbers” and how so many people on Wall Street are saying exactly the same thing…”Don’t worry too much about inflation”:
After all, they’ll say, just look at the numbers. The inflation picture is incredibly benign. In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low rate. And when you strip out volatile food and energy costs, they’ll say, it’s even lower—a meager 0.8%.
It doesn’t stop there. Many economists will point out that wages are also rising by less than 2% a year. With so many people still out of work, goes the line, labor costs are going to stay low for a long time too. So what’s the worry?
If it was just all true and not an illusion, life would not only be much more simple, it would be so less painful. Unfortunately, we are in reality with the physical (or should it be ‘fiscal’?) and there is plenty to worry about.
As you battle to manage your own family’s finances, please be aware that there are three reasons why inflation must be on your radar screen.
First, the official inflation numbers should not be taken at face value:
Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It’s taken place under presidents of both parties. Each change in methodology has come with plausible-sounding justifications. But, as if by magic, each change has had the effect of flattering the numbers. Funny, that.
According to one rogue economist, John Williams at Shadow Government Statistics, if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when … Jimmy Carter was president. According to Mr. Williams’s calculations, if we counted inflation under the old system the official rate wouldn’t be 1.5%. It would be closer to 10%.
Using a piece of chicanery called “hedonics” the government says there is no inflation if steak prices soar because they figure you are buying hamburger instead.
Got that? If you are used to a great T-bone and baked potato dinner, the fact that you can only afford hamburger helper means there is no inflation.
Here is another example:
Or consider the case of Apple computers. We all know Macs are expensive. And we know Apple doesn’t discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?
Ha. Not according Uncle Sam. Using a piece of chicanery called “hedonics,” Uncle Sam calls this a price cut. His reasoning? You’re getting more for the money. Today’s $999 Mac is lighter, fancier and faster than last year’s $999 Mac. So the government calculates that the “real” price has actually fallen.
Who said government can’t be trusted?
The second reason to not believe the ‘official’ statistics is that they look backward. In other words, they show what just happened, not what’s about to happen next:
OK, so the prices of many things haven’t risen. Yet. But if the laws of economics mean anything, they will have to. Why? Because costs are rising.
Economists need to stop focusing just on labor costs. The world has plenty of surplus labor. But look at raw materials. Around the world prices are skyrocketing, from copper to cocoa. The United Nations Food Price Index has just hit a new record high. Oil’s back near $90 a barrel. Wheat prices have nearly doubled since last summer.
Soaring food prices helped spark the revolution in Tunisia. According to Alex Bos, commodities analyst at Macquarie Securities in London, other governments—especially in North Africa—have responded with panic buying of foodstuffs.
Algeria bought about 1.5 million tons of wheat this month (about triple its usual amount), Saudi Arabia is rushing to build up grain supplies, and corn supplies are as tight as they were back in the inflationary 1970s.
The third reason to not trust the government inflation numbers? The most simple reason of all…economics.
We are monetizing the debt, we are printing ‘electronic’ dollars almost as fast as the Federal Reserve can disseminate the money.
We are flooding the world with extra dollars. The Fed simply invents as many as it likes. In the past couple of years, to try to keep the economy out of a tailspin, it has more than doubled the size of the so-called monetary base.
A dollar bill has no intrinsic value. Dollars are only “worth” something because you can exchange them for a haircut, or a pair of shoes, or a book from Amazon.com. So if you drastically increase the number of dollars without a commensurate increase in the number of goods and services, each dollar must, by definition, be worth less. That’s another way of describing inflation.
So far, this inflation seems to have shown up in the unlikeliest of places. It’s like Whac-A-Mole. The price of vintage wines has skyrocketed 57% in the past year, according to the Liv-ex Fine Wine 50 Index. Real estate prices across China are in a bubble. So long as the Chinese tie themselves to the U.S. dollar, they are importing our inflation. But, once again, one wonders how this can be called benign.
Please remember going forward…the ten most feared words in the English language:
“I’m from the government and I”m here to help you.”
There is only one way out of the incredible debt trap that we have placed ourselves in…inflation.
With a true national debt between $100-200 Trillion, the only way to ever pay it off is to inflate the currancy. This means that we pay yesterday’s bill created with dollars worth more than today’s dollars, with tomorrow’s dollars that are worth less than today’s dollars…much less.
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