Saturday, August 25, 2007

Rain, rain, go away, and why is the Federal Reserve telling big fat lies about inflation?

It has been wet here at Maple Leaf Gardens for the last couple of weeks. This is the tail end of the hurricane watering our grass for us. The water falling on us was recently the Gulf of Mexico.

All this water makes it not so much fun to dig my trench to run the utilities out to the shop. The bottom of the trench has turned into a morass. Well really, it's more between a morass and quicksand. It has ripped my boot off a couple of times and makes the most peculiar sucking noises as I slog around in there. Maybe I'm just lazy, or perhaps the conditions have legitimately dampened my enthusiasm. It's hard to get motivated and excited about working in the cold wet, or hot wet mud, depending on the day. Plus, the constant moisture has produced a bumper crop of voracious mosquitos which adds considerably to the work place ambience.

Despite the hindrance, we continue to make slow progress. I got to chisel a hole in my basement wall for the electric and water lines using my new jack-hammer. What guy wouldn't want to play with a jack hammer? I purchased a 250' roll of 3/4" PEX piping(cross linked polyethylene. Same stuff as plastic milk jugs, but 100 times stronger and more durable) to run water out to the shop. PEX is becoming very popular these days since copper has become the new precious metal. In the last three years, copper has gone from $2,700 per metric ton, to about $8,000 per MT. That small part of my brain that believes in an eminent catastrophic shortage of numerous basic resources like petroleum and metals thinks, "Mmmmmm, ominous." Basic commodity prices should not triple in three years.

An equally exciting explanation for the phenomenon could be an artificially high price induced by the grossly irresponsible actions of the Federal Reserve over the last 30 years. They have watered the U.S. dollar down so far through the magic of the printing press, that prices are getting silly on a lot of things. Oh, they regulate the process so it happens slow enough that not too many people get too alarmed all at once. And the official inflation rate sounds downright tame. Inflation was so "under control" a year or two ago that they were "worried" about deflation. This is all poppycock. The official inflation rate gets laughed at by most people that know anything about how they calculate this number.

I know this is somewhat off topic, but hey, it's my blog so you'll just have to put up with my didactic tendencies. It might save you from eating Alpo in your retirement though...

Back in the day, the Fed (as they are so affectionately known) did a fairly honest assessment of inflation. They took a sample of numerous representative items, from ketchup to gasoline to real estate, and measured how much the price went up over time. They used the same list over and over, so they were literally comparing apples to apples. Pretty simple right? The difficulty was that petroleum was getting pretty expensive pretty fast. This also made food go up really fast, since agriculture is heavily petroleum dependent. The resultant high inflation rate made the sitting administration look, well, bad. It also cost the government a humongous pile of money, since many government pensions and entitlement programs were(and are) tied to the official inflation rate.

What to do, what to do? They came up with a clever, if nefarious plan. It was a language trick. They produced a new inflation indicator, which they named the "Core Inflation Rate". Well, the "Core", that has to be the most important part right? The core inflation rate really means the regular inflation rate, but with petroleum and food taken out because they were too "volatile".

Volatile my ass! Excuse my vulgarity, but this dishonesty amounts to theft on the part of government. Every time you hear that term "core inflation rate" on the news, you may know with certainty that they are lying to you.

Let's say you get a cost of living raise of 2% to "keep up" with "inflation". But the real inflation rate is considerably higher than that. Gee, too bad for you. Your CD's (certificates of deposit) may pay 2.2% interest, which almost keeps up with the official rate of 2.5% inflation, but in fact is losing money since the real inflation rate may be double or triple that.

If you were planning on having $500,000 tucked away for retirement, you now know it won't be nearly enough. Whatever you thought was enough, you should plan on double or treble that amount. That's assuming that you will actually need food and gasoline, and all the other things affected by petroleum.

They also do many other creative and amusing parlour tricks to make inflation look better than it really is. It would be downright funny in a novel about how the clever government pulled the financial wool over the entire population for decades. Well, funny if you were the government.

But I am not a professional economist. I could just be some crackpot who doesn't entirely trust the Gub'ment. Allow me to introduce you to a guy name Jim Puplava.

He does this for a living. He is a very smart guy, and he is unbiased in the sense that telling the truth won't cost him billions of dollars like the Federal Government. Please read his article concerning the real inflation rate. Jim does an excellent job of conveying the Alice-in-wonderland methods currently used to compute the inflation rate. I dare you to read it and not be irate at the end.

I suppose Jim could just be a professional crackpot too. There are certainly enough of those out there. If you don't find Jim convincing, do a google search for "real inflation rate" and do an hour's worth of reading.

Aside from being interesting in it's own right, true inflation could easily and quietly suck your retirement resources dry without you being aware of it. For you Christians out there, this is a stewardship issue that we all need to be aware of. For Christian and non-Christian alike, this story is almost exactly like, "The King Has No Clothes". If enough people realize what amazing/stupid/dangerous stunts the government and the Fed are doing, we might get some rational fiscal policy out of Washington.

I am SUCH an optimist.

By the way, did you know that the Federal Reserve is not a governmental agency at all, Federal or otherwise? It is a private and independent corporate entity of the banking industry.

Finest regards,


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