The REAL US Inflation Rate

The Real US Inflation Rate

By Bill Bonner | 3 November 2007

How could so many things be so expensive while consumer price inflation is so modest? How is it possible that the cost of living remains, according to the feds, under control? The answer is simple: the feds are lying. So concludes the Economist in this week's edition. It says that an average of all items is going up not at 2% or 3% per year as the US government claims, but at 16.7% per year! Food is going up even faster at 31.6%.

[ Normxxx Here:  Indeed, according to your government, not since the Eisenhower administration has the inflation rate been this low!  ]

Here’s the latest development:

"The US is committed to a strong dollar," said Treasury chief Paulson in India yesterday. What was he thinking? Maybe he spoke with a smile… at least the audience could have taken it for a joke. But press reports make no mention of anyone laughing.

No, dear reader, it was simply another monumental lie… the monetary equivalent of "weapons of mass destruction" and "I did not have sex with that woman."

After the Treasury Secretary affirmed his support for the buck, traders sensibly sold it. The dollar lost more ground against the euro.

Elsewhere in the financial news, the Dow lost a few points last week… oil closed over $96… and gold finally closed over $800.

But the big thing continues to be the decline of the dollar.

"You are either a contrarian, or you are a victim," says our old friend Rick Rule. Rick is thinking of the natural resource markets, where crowd following is always fatal.

But the idea applies to many other things. You do what everyone else does and you get what everyone else gets. If that is what you want, then by all means just think what your neighbours think and do what they do. In general, you won’t do any better… or any worse.

In the commodity markets, doing what your neighbours do will not be a very rewarding strategy. Because commodities are extremely cyclical. The price of wheat goes up… farmers plant more wheat… and then the price of wheat goes down. The crowd-following farmer sees his neighbours making money and decides to join them. He buys more land— probably at the very top of the cycle… and then the new supplies kick in and the price of wheat drops. Uh oh.

The length of the cycle, for most commodities, is fairly predictable; it is the time it takes to increase production. Famously, the hog cycle was quoted as 18 months in the old economics textbooks.

There are cycles for everything. And you can be contrarian… and take advantage of the cyclical moves… or you can be a victim and get whacked by them.

But what is the cycle of the dollar? And when you have answered that question, here’s another one: how does the dollar affect prices of commodities… stocks… and everything else?

Ah… there’s the rub again. We talk about cycles in commodities… prices going up and down… When you are on solid land, or reading an economics textbook, you can see them clearly. But what about when you are on bobbing up and down yourself— floating on a sea of paper money? Is the price of wheat really going up… or is the dollar going down?

Gold seems to be preparing for an assault on its old high— $835… a peak set 27 years ago. But what does it mean? Is this the gold cycle… or the dollar cycle? What are we looking at? What can we expect?

Our guess is that the Fed will want to pause… and to keep traders from selling off the dollar too fast. Already, the greenback is down nearly 10% against the euro this year— to a record low. Against the Canadian dollar, it is at a 33-year low. Against gold, it seems to be heading for a new record. Against oil, it is already at a record low.

Of course, we don’t get to read tomorrow’s newspapers any sooner than anyone else. But it wouldn’t surprise us to see the Fed stand pat here… and see the dollar bounce back…

…before falling again.

But what is a contrarian to do? Buy? Sell? Do nothing?

It is still a dollar-based world. Oil… gold… illegal drugs… tend to be quoted in dollars. And when bribes are handed out, everywhere in the world, they are still more likely to be in dollars than any other currency.

If it is a dollar-based world… most people are long dollars. So, we will be short…

Speaking about contrarianism…it is not always a good idea to go against the crowd. Sometimes, by dumb luck, the crowd is going in the right direction.

There are times, too, when you can go along with your neighbours and do fairly well. There are times when everyone seems to benefit— times of peace and prosperity.

But just as birth inevitably leads to death… so do peace and prosperity inevitably lead to crisis and war.

We saw in Argentina that most people did all right as long as things were going well. General prosperity helped people generally. But then came trouble. That was when you had to know when public officials were lying… and when it didn’t pay to go along with your neighbours. Only the smart… the fast… the well-informed… the few who really knew what was going on… came out okay. Everyone else suffered.

We recall that the dollar-peso exchange rate was fixed at 1 to 1. It was reliable, immutable, eternal, the government assured everyone. A few years later, it was history. Now, Henry Paulson tells us that the US will maintain a ‘strong dollar.’ Don’t believe him, dear reader. The US can’t afford a strong dollar.

How could so many things be so expensive… while consumer price inflation is so modest? Oil is over $96. Other commodities are soaring… hitting new all-time highs. Labour in China and India is rising at 10% per year. How is it possible that the cost of living remains, according to the feds, under control?

In other words, how could the dollar be so weak in the face of every major asset category we read about… but so strong in the face of general, consumer spending? The answer is simple: the feds are lying So concludes the Economist in this week’s edition. It says that an average of "all items" is going up not at 2% or 3% per year as the US government claims, but at 16.7% per year! Food is going up even faster— at 31.6%. "How can you tell if a public official is lying," asks an old friend. "Easy…see if his lips are moving…"

The sub-prime loan mess is a $900 billion problem, says Fortune Magazine. But there’s another problem just as big right behind it. It’s credit card debt. And it, too, is a $900 billion problem… or $915 billion, to be more precise.

Here’s the story:

As long as property prices were going up, consumers were able to borrow against their houses in order to pay off more expensive credit card debt. The credit card companies, meanwhile, were able to unload the debt on Wall Street, where it was packaged up— just like mortgage loans— into CDO derivatives and sold on to investors [[those famous naive German banks and pension funds...: normxxx]].

All was well until property prices stopped going up. Then, consumers could no longer easily increase their mortgage debt. This left them more reliant on credit cards, and less able to pay off their credit card debt when something went wrong.

Something always goes wrong. Disease, divorce, economic disaster— something always comes along just when you need it.

In Britain, the cycle is a little further advanced. Property prices rose faster than in the US. And households became even more reliant on credit. When the housing boom slowed, consumers were forced to turn to credit cards. Delinquencies on credit card debt have already risen 50% in Britain. In America, delinquencies are just beginning to go up.

[ Normxxx Here:  Not to worry; the housing crisis alone will be with us for several more years yet...  ]

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.