Just as U.S. senators are saying publicly that the government has lied to
them over Iraq, yesterday's Barron's contains an interesting article saying
that, "The U.S. government has an inherent bias in its reporting: Inflation is
understated and growth is overstated."
Our readers know that our sister publication, Financial Intelligence Report,
has long reported that the government inflation figures are misstated to the
down side.
Mr. Barry Ritholtz, of Ritholtz Research & Analytics, writes in Barron's that
when the Fed first cut rates to half-century lows, "first we reflated, then we
inflated."
We agree.
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Ritholtz goes on to point out a worrisome example of what we have described
as "the great inflation lie." He quotes that our government thinks that, "rising
oil prices are not considered inflationary, but falling oil prices are somehow
deflationary."
Last week, I interviewed Lou Dobbs of CNN. I asked him what he thought of the
government's cooked books on key statistics, like inflation. He replied, "I
think you couldn't be more correct. We worry about what we don't know. I have no
faith in the CPI numbers. I have no faith in the unemployment numbers. My faith
has been shaken by the insistence on government not to reveal what our officials
do know . . . this is something that should concern all of us."
[Editor's Note:
The government is manipulating inflation data. Find out
how to protect yourself and profit.]
Such commentary from a widely renowned economic TV host should concern us
deeply.
In November 2006, we devoted the lead article of FIR to this very topic: "The
Dirty Little Secret: Stealth Inflation."
In that article, we examine the five major tricks that the government uses to
hide the true inflation rate. These include such absurdly dishonest practices
as:
- Excluding those price rises that are considered "too volatile" or
"statistically disruptive"
- Reducing actual prices to reflect some arbitrary "increase in quality"
- Ignoring quality decreases
- An amazing assumption that as prices of certain items rise, consumers will
turn to alternatives, so allowing for such "awkward" items to be excluded from
the calculation
- The exclusion of government subsidies from certain prices
If all that does not add up to a cooked book, I do not know what does.
Sadly, the one result of a false government inflation figure is that our
interest rates are set unrealistically low. This cheap money fuels massive
borrowing.
The borrowing creates massive liquidity and a buying boom in such items as real
estate, stocks, commodities, and consumer items. All these items rise in a
dangerous price bubble.
The economy looks good for a time, but the day of reckoning starts to appear as
the U.S. dollar gets hit increasingly hard in international currency markets.
In addition to cooking the key inflation measure (CPI), our government has
ceased publication of M3, a popular measure of money supply that economists use
as a gauge of future inflation.
Government figures have been "doctored" for many years, under Presidents
Kennedy, Johnson, and Carter. The former President George H.W. Bush began
efforts to lower the reported CPI systematically. Clinton set the stage for a
new and lower inflation CPI.
So, our present government is not content to cook just the CPI. Their inflation
lie is spreading to other statistics as they try to keep the lid on the real
inflation rate and to expand on the inflation "cooking" expertise of President
Clinton.
[Editor's Note:
A 2007 global recession is in the cards. Here's how to position
yourself now for monster profits before the panic headlines begin.]
It is not just commentators such as Lou Dobbs and us who have expressed major
concerns over stealth inflation.
As we have often reported, former Fed chairmen bankers, who are not known to
rock the boat, such as in Paul Volcker and Alan Greenspan, have expressed their
concern in public.
Even senior bankers, such as Gerald Corrigan of Goldman Sachs, and successful
fund managers, such as Rudolph-Riad Younes of Julius Baer, have shared their
growing inflation concerns.
Last week, the Bank of England raised its key rate to curb what it felt were
early inflationary signs within the United Kingdom.
In the meantime, the Federal Reserve remains inactive and merely, "concerned"
about inflation within the American economy.
So, as we have said many times before, beware of stealth inflation when planning
your investment strategy.
Editor's Notes:
