"What if the media reported the annualized number?"
That's what someone asked on the Prudent Bear board recently. It is a good question because while the financial media reported the CPI rate of 1.2% last month, they also gave equal time to the useless Core CPI numbers.
What the financial media didn't do is some math. Because if they had they could have had a story that would have really scared the public. Annualizing that number comes out to 14.4% price inflation. Inflation hasn't been that high since the bad old days of Iranian hostages and disco.
So what? After all, it was because of Katrina, right?
Wrong.
Last week an almost completely unnoticed event happened - the
M3 money supply reached $10 Trillion for the first time ever. The
M3 has literally doubled in less than nine years, from just $5 Trillion at the start of 1997.
To put it another way, the Federal Reserve has printed as many dollars in the last
9 years as the country has created in the previous
200 years.
So what does that mean? And what does this have to do with inflation? You might be asking yourself. It's actually quite simple. Look at the definition of inflation:
A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
In other words, there are twice as many dollars buying nearly the same amount of goods. Obviously this is where the laws of supply and demand kick in: Goods aren't getting more expensive, dollars are getting more worthless because they are being created faster than real wealth is being created.
It's an important concept to get your mind around because you can then understand why your own personal wealth is being destroyed and who is doing it - this government.
The financial media also neglected to report the inflation numbers for the quarter - 9.4%. So even when you include consumer inflation from the two months before Katrina you still get the highest price inflation since the band Asia was in the top 40.
The thing to remember is that price inflation doesn't happen overnight. Before it hits the CPI it shows up in the PPI (Producer Price Index). The PPI has been between 4.7% and 9.0% on a year-over-year measure for every month since April 2004. It was generally in the 4.5% - 8% range through all of 2003 as well.
It doesn't take much imagination to realize that manufacturers and commodity producers were eventually going to have to pass along those costs to the customer or go out of business.
The worst part is that the CPI is such a heavily flawed measurement that it disguises just how bad price inflation is. For instance
But the government changed the way it calculates the housing portion of the CPI back in 1982. If you use the old method, you would find that inflation is 5.3% today and even core inflation is 4.3%. This is a far cry from 2.2%. Can you imagine the 10 year bond prices if inflation was thought to be 5.6%?
As a little side note, using BLS statistics, health care costs are about 17.5% of consumption, but it is weighted much less in the CPI calculation. Healthcare is 4.649% of CPI; healthcare commodities are 1.484% of CPI. Healthcare is reportedly 15 to 17% of GDP. This presents a huge discrepancy in CPI weighting.
At this point it is worth noting the root cause: Guns and Butter policy by the government.
While most of us remember the price inflation of the 70's, it's root lie in the 60's. It was excessive government spending on the Vietnam War that led to:
- a commodities boom starting in 1966
- dropping off the gold standard in 1971
- oil prices skying in 1973
We are seeing much of this happen again for the same reasons. An economy of the size of America changes course very slowly, but once that course is set it is hard to change it back.
Monetary inflation has been in the system for many years now. This has led to
commodity and asset inflation, which only now is leading to price inflation. We are in the very start of a long-term trend. You should prepare yourself accordingly.