Tripping Over 11.5% Inflation
There was an interesting email from my friend Roger Reynolds who publishes the great (and free) email advisory "Shame on Your Federal Reserve"
"1)Fundamentals: In his book about commodities, JIM ROGERS, repeats supply/demand time after time. So, what is the supply/demand for dollars with the current oil costs and import/export deficit??? THE DOLLAR MUST SOMEWHERE GIVE GROUND---DOESN'T IT??? What about the supply/demand for gold/silver/copper/uranium/lead/zinc/moly---has demand not been greater than supply??? When China is supposed to produce millions more cars next year--how can demand fall very far??? ALSO, GOLD HISTORICALLY DOES WELL WHEN THE INFLATION RATE IS ABOVE THE SHORT TERM INTEREST RATE. WE ALL KNOW THE "REAL" INFLATION RATE IS 8 TO 10 PERCENT, DON'T WE??? "
If you have recovered from eggnog overdoses, you'll remember that I pointed out yesterday that gold has gone up this year more than the Dow and silver lots more.. And, if we count back from the March 15 area mentioned for about a year in predictive linguistics runs from www.halfpasthuman.com, the 55-days average from market peak to crash, then we could very easily be in the vicinity of all-time highs right now.
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It's with this in mind that we can scan the headlines and ask "Is inflation a really good thing, really bad thing, or about neutral?" Damn fine question. Warm up the coffee, this is a little complicated.
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Inflation is a bad thing - a very bad thing - if you are on a fixed income. Two classes of people are being screwed by inflation which is running so far above "official government rates" as to be laughable. The retired military and the retired social security pensioners. Also, people on pensions which are tied to "official" cost of living numbers.
Inflation is a good thing if you are a borrower, though. You borrow expensive money and pay back with watered down money - deflated money.
In a balanced investment strategy, you try to maintain the actual purchasing power you had at the time you made an investment, plus a little actual gain. Do that, consistently, and you're a genius.
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Government uses phony inflation numbers driven by specific measures of the money stocks (M1 and M2) but the broadest measure of the money supply, M3 was discontinued by the Federal Reserve back in March because it would scare the hell out of people.
The problem, monetarily, seems to me to boil down to this: Inflation (which you might estimate as being the relationship of the number of dollars in circulation compared with the value of available goods and services) is commonly thought of as having something to do with Gross Domestic Product versus cash money in circulation.
GDP
M1 = inflation.
The wholly fraudulent notion is that inflation relates to just cash. Of course, it doesn't. It relates to all effective money in circulation - and how fast it turns over and that fist number is M3 and the second is velocity.
Ignoring velocity of money to keep this simple, while M1 shows a very tame rate of increase lately, M3 is going through the roof, although you're not supposed to notice because the Fed knew this was coming and has hidden the numbers from public sight, lest we would all figure out the crookedness of the game.
Still, in the past few days, Bart over at NowandFutures.com has updated his (and John William's) work on M3B, a 99.9% or better estimation of what M3 would be if the Fed decided to be honest, and it show real M3.
Care to take a guess at what M3 inflation is running annualized right now? I'll make this easy for you:
11.5%
"Hmmm...that seems to be close to what my grocery bill has gone up, along with the power bills...how come government isn't telling us this?" Plausible deniability, pal.
Here's how the Big Con works. Say that you knew that money creation was slipping out of your control and that you could only influence how the economy developed by setting a few key interest rates. And suppose further than money is effectively created by non-government players who offer credit and creative financing to keep their games growing. "Are you talking about the housing industry, especially the sub primate guys and the big derivatives players who create loans out of air?" Duh. Yeah, the coffee is working.
OK, the second part of the Con is that most people have been slowly, but steadily renouncing the use of cash in favor of digidollars. Credit cards, etc.
Now, run up to the china board and write this down somewhere:
GDP/M1 = and approximation of government reported inflation. BUT
GDP/M3 (which is really digidollars) = an approximation of actual inflation.
See how this works? Government has deniability, as they would argue that they use M1, which would be fine if the real estate boyz and derivatives players weren't making money all day hand over fist through the process of loan creation. A splendid damn miracle. And government - having hidden M3 where it can't see daylight can argue "Ain't no measure of digidollar inflation...that's all speculative." Not in Texas, though. I see the proof at Brookshire's, Kroger's, Wal-Mart, Tractor Supply, just as you'll find it at Wynn-Dixie and Safeway.
So, now that you know that inflation (M3/digidollar basis) is going up 11.5%, how does the Dow look for the year? Let's pencil it out.
We start the year at call it 10,717 and we bump that up by 11.5% this week to just maintain purchasing power parity (PPP). That means the Dow's equivalent in digidollars at the beginning of the year could be argued to be in the vicinity of 11,949. Given the market's close yesterday and outlook for another run up today, let's say the Dow is really up for the year on a purchasing power basis about 3.9%.
On a PPP/digidollars basis, I'd argue that gold, starting from $516.60 would correct to $573.43 versus its $626.80 level at press time this morning. That's a 9.3% gain on a PPP/digidollar basis as of this morning.
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Somehow I got off track. Let me get back on it by telling you (as I have told Peoplenomics subscribers for several years) that while the last Depression was arguably touched off by competitive tariffs, today's Second Great Depression is being set up one level upstream from direct tariffs by competitive currency devaluations.
Now, let's haul out some headlines to underscore how (thanks to the media not differentiating between PPP/digidollar inflation and M1 cash inflation) we could almost get the sense that the US is doing better than the rest of the world in efforts to contain inflation.
We look first at Japan. The headline there today is that the inflation rate increased in November and jobless numbers hit an 8-year low. Sounds sort of familiar, huh?
South Korea's inflation rate has increased in December.
Vietnam's inflation for the year is 6.6%
Serbia's Central Bank says inflation is below 7% now.
Inflation in Russia is running at 8.2% year to date.
On the other hand, China is looking at a 3% inflation rate for 2007 - pretty damn tame compared with US actual rates.
What's key here (and for subscribers why we watch the Global Index of multiple markets so closely) is that there is a huge competitive global inflation underway and when you read about inflation in the oil-rich Gulf Countries (where rents in some have gone up 80% since 2005) you can see clearly why OPEC doesn't have a problem raising its price. They are feeling the impacts of inflation which is robbing them of oil revenue purchasing power. They're screwed, in fact in PPP, if they don't raise oil prices!
As long as the competitive devaluations continue, a sort of economic equivalent to the music continues in musical chairs, everything is dandy. But, as soon as predictability ends, the world's going to be in a heap-o-trouble and you'll want a portfolio structured to insulate you from real declines in purchasing power, which is what investing is all about. Wealth preservation.
When the market goes up and gold goes up in tandem, think "Global competitive currency devaluations."
urbansurvival.com
George Ure - this guy gets it, worth reading his site daily and even subscribing. He is one of the best independent internet writers out there.
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