|
Another criticism you have of CPI reporting is the separation of core and total data. How should core data be properly reported?
The Federal Reserve touts core inflation [the reporting of the CPI or other inflation measures excluding the effects of food and energy], which we consider to be a pure gimmick. It has no relation to anything meaningful. It was invented by Fed Chairman Arthur Burns, during the Nixon administration, as a way to avoid looking at oil price inflation. Over the short term, it is legitimate to consider the effects of short term volatility. But over a full year it is not appropriate – in fact it is absurd -- to take out the effects of food and energy inflation. Everyone consumes food and energy. Once you take out the expensive items, of course you end up with lower inflation. Shame on Mr. Bernanke for pushing this concept! It is part of the Pollyanna story being painted for Wall Street.
You have also been critical of the reported employment data. Can you discuss these biases?
The government’s gimmicking of unemployment rates began in the 1960s. The popularly followed statistic is known as U-3, which was published on Friday, is today one of six levels of unemployment currently published by the Bureau of Labor Statistics. The broadest current measure, U-6, showed 9.2% unemployment in April instead of the 5.0% U-3 number. Under the Kennedy and Johnson administrations, the government created and implemented the concept of discouraged workers. These workers met the qualifications of being unemployed, but they had stopped looking for jobs because there were no jobs to be had. Nonetheless, they were counted in the broader unemployment measures of the time, which went up to U-8.
This accounting held in place until the Clinton administration, when discouraged workers were redefined so as to be included only those workers who had been "discouraged" for less than one year. That reduced the broader number of unemployed by approximately 4.5 million workers, and the number of reported unemployment measures was reduced from eight to the current six. Without these adjustments, we would have seen a broad unemployment rate in April of about 13.1%.
How would you assess the actions taken by the Fed so far, with respect to the economy, and the options available for stimulating future growth?
If Bernanke had not done what he did we would be in a 1930s-like situation now. There would have been a significant collapse of the banking system, including an implosion of the money supply. Bernanke is still doing what he has to do. I expect he will keep the system afloat, but there is a cost. That cost is inflation.
The government stopped reporting the money supply statistic M3 in March of 2006, purportedly because it was too expensive to track and had no relevance. We still track it, because we believe the broadest measure of money supply is the best indicator of future inflation. M3 now is growing at 17%, the highest since 1959, which is when the Fed began these calculations. The closest historical parallel is when M3 hit 16.4% in June 1971, before Nixon closed the gold window and instituted wage and price controls. The current growth in the money supply suggests higher inflation towards the end of 2008.
Oil prices also are high enough to add significantly further to inflation over the next 6 -12 months. This is how long it takes to work its way through the other components of the system.
Based on oil, M3 and the still unfolding impact of a weak U.S. dollar, we will see double digit inflation, as reported in official CPI data, by early 2009. Due to the government's extreme fiscal improprieties, hyperinflation could show up as early as 2010 or as late as 2018. This is a large range, but people should be thinking about this now.
The economy likely will evolve into a depression, with a peak to trough swing of greater than 10%. We are currently down 5% since the last peak, according to our measurement. By the government’s numbers, the worst post-World War II recession was in 1974, when the GDP was down 5% from peak to trough. We are about parallel to that, so far. I hope I am wrong as to the longer range outlook, but I do not see any way out.
Our overriding fiscal problem is the deficit created unfunded liabilities from Social Security, Medicare, and Medicaid. The combined effect of this is staggering, and it is the result of mismanagement by our government. The government's own GAAP-based financial statements show the circumstance to be beyond any practical containment. There are only three options for resolving this. The government can slash benefits severely, which is politically unfeasible. Otherwise the government ultimately can renege on its debt or print money to meet its obligations. Historically, bankrupt governments tend to opt for the money printing presses and hyperinflation.
Over the much shorter term, there will be heavy selling pressure on the U.S. dollar, which is bad news for the U.S. financial and Treasury markets that have been so heavily dependent on foreign capital for liquidity. As liquidity is squeezed domestically rates could soar, or the Fed could buy Treasuries, monetizing the debt, which would lead to the early stages of the hyperinflation.
I do not see any way out of this, short of a friendly alien (as in extraterrestrial) invasion. A hyperinflationary depression is in the cards, and our political system will not resolve it.
People will go through extreme financial pain. Higher inflation is very bad for those on a fixed income.
Personally, I would look at holding some assets outside the dollar and in physical gold.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to
. |
