It’s difficult not to be sardonic when professionals… educated folk who are supposed to have diligently proven their ability to reason in order to earn a diploma… put so much emphasis on numbers that are completely useless. The government figures for CPI and PPI are as useless now as they were in the 1920s when they convinced a previous generation of supposedly educated folk that inflation was non-existent.
The primary reason so many people have been snookered into following these useless numbers is that they don’t know what inflation is. Price increases themselves are not inflation. Price increases are a by-product of inflation. Even so, if we were to use price increases to estimate inflation, we would need a reference point: we would need to know what prices would have been if the market had been unfettered. There is no way to know this on a case-by-case basis, or even on a basket of goods, because of the complexities of price inter-relationships. Furthermore, the “basket” model of measuring inflation is flawed because, by definition, it covers only a limited portion of prices in the economy. Therefore, we can only measure inflation by one mechanism… the same mechanism by which prices are manipulated: money supply.
There is only one way to measure inflation: real money supply growth.
Today, as in the roaring Twenties, inflation is being hidden by the fact that the inflated asset classes are not included in the baskets being measured. In addition, the government weights the basket components to its stated goal of maintaining a stable price level. (as a side note, the biggest suckers of them all are purchasers of TIPS… “Hey, buddy. I’m gonna sell you a bond whose yield is based on a number that I get to invent.” Sign me up!).
The pursuit of a stable price level, instituted to grand failure by Benjamin Strong and his cronies in the Federal Reserve in the 1920s and revived by Alan Greenspan and his cronies in the Federal Reserve in the 1990s, is farcical. It amounts to nothing more than price manipulation. In fact, in a natural (read “free”) market environment, a healthy economy tends to decrease the general price level through competition and efficiency gains.
The whole concept of stable prices slaps the economy’s collective invisible hand and distorts resource allocation in capital markets. Furthermore, such a fallacious policy can only be pursued through inflationary mechanisms and causes grand bubbles in various asset classes, most commonly real estate and capital goods markets (via the stock market). These bubbles inevitably end in dramatic collapses. That we now have a national real estate bubble in conjunction with a new stock market bubble should be terrifying to anyone with a brain and a dollar-based income.
The horror doesn’t end there. We have yet a third bubble, unprecedented in our modern world, coinciding with the two aforementioned bubbles: the bubble of consumer debt. Consumer debt, apart from short-term bridge loans and loans for necessary big-ticket items like cars, is pure foolishness. (I emphasize ‘necessary’ only to make this point: that so many people squander their wealth in the name of pretentiousness when purchasing big-ticket items). There is only one prudent use of debt, and that is for capital investment. Entities, including people, should only pay for money in an attempt to earn more on the money than they are paying for it.
In light of all these factors, I expect the dollar to continue its long-term slide and expect precious metals to keep rallying (at least in dollar terms). Although money inflation can lead to a weaker currency, only one condition causes a currency to lose value: when sellers of the currency outweigh buyers of the currency. We’ve seen this process manifest itself for the passed two years, and I believe the only thing holding back the flood gates of selling is the speculative value of dollar asset classes. When the bubbles burst, smart money will rid themselves of their dollars, and it will fall faster than you can imagine.
(If this kind of analysis excites you, as it does me, you will thoroughly enjoy Murray Rothbard’s book, America’s Great Depression. This text reveals how the Great Depression unfolded from the misguided policies of Federal Reserve directors and the politics influencing them.)