Thursday, March 11, 2021

The best reality-based analysis of US inflation I've yet read


We've discussed inflation in these pages until I'm sure some readers are sick of it.  Nevertheless, it's a growing reality, and one that's going to hammer us all in the not too distant future, unless I miss my guess.

Matthew Piepenburg of GoldSwitzerland has written an excellent summation of a major reason why the "official" US inflation rate is so out of touch with reality, and why it can't be trusted.  I think this is an extremely important article, highlighting many of the issues we've discussed in recent months.

The blunt answer is that the Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports consumer inflation as honestly as Al Capone reported taxable income.

In short: The Fed has been lying about (i.e. downplaying) inflation for years.

As we’ve shown in many prior reports, the Consumer Price Index (CPI) scale used by the BLS to measure U.S. consumer price inflation is an open charade, allowing the BLS, and hence the Fed, to basically “report” inflation however they see fit—at least for now.

If, for example, the weighting methodologies hitherto used by the Fed to measure CPI inflation in the 1980’s were used today, then US, CPI-measured inflation would be closer to 10% not the reported 2%.

Concerned about by rising consumer costs, the Fed simply tweaked its CPI scale for measuring the same, effectively downplaying rising costs like a fat-camp scale which downplayed the significance of say… beer, chocolate or pizza.

In short, the Fed didn’t like the old CPI scale for measuring inflation, and so they simply replaced it with one in which 2+2 =2.

. . .

The Fed, in deep need of keeping its IOU-driven (i.e debt-driven) façade of “recovery” in motion, has no choice but to invent a respectably controlled (i.e. LOW) CPI inflation rate in order to make US Treasury bonds look even moderately attractive to others.

After all, the US lives on those IOU’s. They need to look pretty.

If, however, the more honest and much higher 10% inflation rate were honestly reported on an honest CPI scale, the inflation-adjusted yield on the US 10-Year Treasury would be negative 8%–which hardly makes it a pretty bond for the world to either admire or buy.

That’s a problem for Uncle Sam.

And so the Fed invents a CPI inflation number that is less embarrassing than reality. It’s just that simple.

. . .

What the Fed has been doing ... is very clever yet extremely toxic, as well as openly duplicitous.

Specifically, the Fed now prints over $120B per month (to buy $80B in unwanted Treasury bonds and another $40B in unwanted, toxic MBS paper) with no apparent inflationary effect (despite the fact that inflation is defined by money supply) beyond its 2% “allowance.”

Such extreme money creation openly dilutes the USD to inflate away US debt with increasingly diluted dollars, now a desperate as well as deliberate Fed policy.

But by simultaneously and dishonestly mis-reporting CPI inflation as they dilute the dollar, the Fed can inflate away US debt without having to make the inflation-adjusted yields on Treasury bonds appear too embarrassingly ugly (i.e. grotesquely negative) for circulation and consumption.

Such open fraud, of course, allows the Fed to have its cake (debased currencies to inflate away debt) and eat it too (by under-reporting the otherwise disastrous CPI inflationary consequences of such a desperate policy.)

In short, by putting lipstick on the pig of what would otherwise by highly negative real yields on an openly bogus Treasury bonds if the CPI inflation rate were accurately reported, the Fed can continue to live on more debt, more IOU’s and more dishonesty.

. . .

The Fed may play for a while, but eventually there’s a natural market and currency-killing bullet aimed at its head.

That is, the only way to postpone a fatal rate spike is for the Fed to print more fiat dollars to buy more unwanted bond debt.

By extension then, the only way to keep bond and debt-soaked markets alive is to destroy the nation’s underlying currency by “over-printing” the same.

In short, the inflated markets may live under a [Yield Curve Control] blade, but the currencies, well..they die by the same sword.

. . .

... the entire inflation-deflation discussion, as well as data reports and projections, are ultimately meaningless if the very scale used to measure the CPI inflation is itself as bogus as that 42nd Street Rolex to which I so often refer.

And so, let the madness continue, let the creative writing, clever math and the equally distortive projections and pundits spin their tales about inflation “data” as we simply stare at the rising costs of health care, education, housing, stock and bond valuations or even the tolls on the George Washington Bridge.

In other words, if you want to see honest inflation, just walk out your front door—it’s everywhere, except that is, the open joke that is the CPI inflation scale.

There's more at the link.  I highly recommend that you click over there and read it in full.  The author is in the business of buying and selling gold, so he has a visible bias in that direction, but it's easy to make allowance for that - and it doesn't affect the truth or the reality of what he says about the Fed.

There's another reason for the Fed deliberately under-reporting inflation.  That is the index-linking of some entitlement programs (e.g. Social Security) and pension systems.  They're supposed to increase their benefits every year according to the inflation rate, so that the real purchasing power of their payout isn't eroded over time.  However, the government doesn't have, and can't borrow, that much money;  so, rather than report the true rate of inflation, it reports a much lower rate, and uses that to adjust benefits.  In so many words, it's deliberately cheating recipients, because it can't afford to pay them what they should be getting.

I repeat the warning I gave last Tuesday.  It dovetails neatly with Mr. Piepenburg's analysis.

We're facing a combination of some or all of the following three factors over the next few years:

  1. Asset value deflation (from their present, stratospherically inflated levels, which may rise even higher in the short term before reality bites);
  2. Consumer price inflation (due to too many dollars chasing too few products);
  3. Dollar depreciation (as the rest of the world realizes we're printing worthless currency, and seeks economic refuge elsewhere, the dollar will de facto see the decline of its international reserve currency status).
. . .

The powers that be are going to have to cope with this - and there is no practical way to cope with it except to inflate the dollar to the point of almost complete worthlessness.  That's the only way in which our massive debts can ever be paid off.  Weimar Germany did it, as we saw a few weeks ago - and that gave impetus to the rise of Adolf Hitler and the Nazi Party government within a few years.  Precisely and exactly the same economic - and, possibly, political - effects can be expected here in due course.  Remember, over 40% of all the dollars ever created were generated last year, out of binary 1's and 0's in the Federal Reserve's computers.  They had no economic reality backing them up, just the "full faith and credit of the United States" - and that isn't worth nearly as much as it was.  We're on track to deficit-spend up to $5 trillion more during 2021, and possibly even more than that - all of it "created" out of thin air by the Federal Reserve.  That simply can't go on:  and, as economist Herbert Stein famously said, "If something cannot go on forever, it will stop."

Sooner or later, those economic chickens are going to come home to roost.

Again, more at the link.

Friends, I can't say this strongly enough:  we're steaming full speed ahead into an economic minefield, and there is no way - I say again, NO WAY - we can avoid some of those mines.  They're going to blow up, and if enough of them do, they may sink our economic ship.

Prepare now for what's coming.  One simply can't prepare in every way, unless one's got millions to spare, but one can:

  • Free oneself of as much debt as possible;
  • Do what one can to put money into a store of value such as precious metals and other commodities that will hold their value in a high-inflation environment;
  • Lay in a basic stock of essential foodstuffs and supplies while one can still afford them;  and -
  • Try to set up multiple streams of income that can help offset the loss if one or more of them shut down.

(Some argue that if one expects higher inflation, one should actually load up on debt as much as possible, to pay it off in future using inflated, lower-real-value dollars.  There's one fatal flaw to that approach:  it assumes you're going to earn more of those lower-value dollars, so that you can afford to pay off your debts.  However, if your income doesn't go up, you're still stuck with the bills - but increasing inflation will demand more of your income to pay for other necessities, leaving you less to pay off the previously-incurred debt.  Therefore, I strongly recommend against that approach unless what you're buying is an asset that will appreciate in value to keep pace with inflation - and even then, make sure it's within your present and probable future means, and that you're likely to have enough money to keep up the repayments.  Anything more is a bonus, but can't be relied upon in an uncertain economic environment.)

Also, establish relationships with those around you, and look for barter and self-help opportunities to assist each other, rather than pay tradesmen to do them.  (For example, "My son will cut your lawn ten times if you'll help me fix my plumbing problem", or "I'll swap this rack of ribs for fresh vegetables," or "I'll cook supper for your family in return for your help weeding my garden".)  The more we can trade with each other on a value-received-for-value-given basis, instead of relying on an over-depreciated and increasingly worthless dollar, the better for all of us.  This will also teach us who's trustworthy among our neighbors, and who isn't - never a bad thing to know, irrespective of inflation.



McChuck said...

Don't blame me, I voted for Ross Perot! ;)
He laid all of this out back in 1992.

SiGraybeard said...

What McChuck says is very important in one aspect:

The government has been lying about the consumer price index since at least the '80s. The CPI doesn't include your food and fuel costs because "they're too volatile" as if that isn't part of your cost of living. This story is important, but it's like telling people that smoking will kill you and has almost been around as long.

You've covered it before. I've covered it before. But there's always someone who needs to know it.

We could joke about "the government is lying! What a surprise!" but the wild card this time is that the World Economic Forum (all unelected globalists) seem to be pushing for the dollar to be collapsed and removed as the world's reserve currency. The new thing here is the international push to destroy the dollar, not the Federal Reserve's.

Aaron said...

One of the worst problems with this situation is that even as the government inflates away present debts that it can't otherwise pay, it still takes on trillions in more and new debt - thus erasing any possible advantage that could be had from inflating away the old debt.

More and more this seems to be a tiger by the tail scenario that is not going to end well.

Sam L. said...

As long as the Dems are running/ruining things...
And the GOP is "The GO Along To GET ALONG with the Dems" Party...

Kristophr said...

Those aren't even IOUs anymore.

No one wants that toxic paper, not even the fed. The banks making up our private central bank, the Federal Reserve, had no faith that the bonds would be actually guaranteed by Forest Service and BLM lands, as promised ( good assumption, any politico who handed them over would be lynched ), so they demanded the US Treasury buy the paper back from them, with Federal Reserve authorized money printing.

The US Treasury is paying for EVERYTHING by electronically printing money. Treasury bonds are a sham. They all are forced back on the US Treasury.

We are entering the Wiemar Republic endgame.

ruralcounsel said...

There's another reason for the Fed deliberately under-reporting inflation ...'

A lot of tax credits and deductions, and their assorted phaseout amounts, are indexed to the chained-CPI. It keeps taxes higher than they otherwise would be.

Kentucky Packrat said...

We've been lucky so far that most of the government money flow has been absorbed into the "rich people's economy" (paintings, nice houses, the stock market, etc.), or the Fed's books, both of which will start evaporating when the excrement hits the air moving devices. That's why I told Milady that I didn't care if a painting was now worth $20 million instead of $10 million; at least that meant that my food might not cost twice as much tomorrow, while the rich guy still can't eat it.

Much of the debt in the US (Treasuries, etc.) are practically part of the money supply already. If the US nationalized state and local debt, and then defaulted on the Treasuries, the money supply might well shrink rapidly, and create a massive deflationary spiral internally while the dollar devalues for essentials. Pure hyperinflation isn't the worst thing that can happen to us; you don't want to bet the farm solely on it.

Short rule: don't go into debt for anything that's not essential (food, shelter, first gun and ammo, etc.). Hold some dollars, some precious metals, some barter materials, and plenty of food that you will eat and that you can hide easily.

The Freeholder said...

In case it hasn't been mentioned, ShadowStats is your friend.

Mad Jack said...

ShadowStats is expensive.

A few things that aren't mentioned or emphasized, and in whatever passes for my mind are important:

The Federal government has been spending like there's no tomorrow, and this juggernaut is completely unchecked. At times it's completely legitimate for the government to go into debt - WWI and WWII come to mind, as does the Great Depression. What we have today are none of those.

The segment of our population that remembers the Great Depression is gone. The number of people who actually understand the causes and what could have been done to prevent most of the damage are few, and this number is dropping every day.

What was once referred to as 'good common sense' is disappearing as the older population dies off. Middle aged people actually believe that the spending bills being passed are gloriously good and are the only thing to do - and not one of them can explain why, or where the money comes from and where it's going.

The news media is owned by 15 billionaires. The media publishes what these people want said.

Few people are alarmed by any of this. No one can tell me how the staggering, unbelievably astronomical national debt will ever be paid off, and why it might be a good idea to do so.

Eventually the U.S. economy will turn into a slow motion train wreck. People will go hungry and homeless, and if you want violence all you have to do is fail to feed your population.

BladeRunner1066 said...

People worried about inflation are fighting the last war. They are going to be blindsided by the new threat, deflation. Right now we have a lot of assets, whole cities, and nobody knows what they are worth. The shock of that revaluation will last for generations.

This is interesting, worth an hour.
MACRO ANALYTICS - 03-04-21 - Coming Deflationary Tsunami - w/ Charles Hugh Smith