February 15, 2008 Russell question - What is the true rate of US inflation today?
Russell answer - If the rate of growth in the broad money supply was exactly equal to the rate of growth in the US Gross Domestic Product, there would be no inflation. The money supply would be in a perfect fit with the growth of the nation's economy.
Question - What constitutes the broad money supply, known as M-3?
Answer - M-3 includes all the savings account money, the CDs, negotiable certificates of deposit, bank repurchase agreements of more than one day, institutional money funds, plus Eurodollar deposits and deposits held in foreign banks.
It is estimated that M-3 is growing today at a rate of around 15-16%. Meanwhile, GDP in the US is growing, at best, at a rate of maybe 2%. Subtract the 2% from the M-3 growth of say 15%, and the true rate of inflation in the US is running at 13%. Of course, this is the reason why Alan Greenspan ordered the M-3 statistics to be discontinued. The Fed's excuse was that it was too difficult and expensive to come up with the M-3 statistics. The Fed today makes up its own inflation figures. If the true rate of inflation was announced, there'd be a march on Washington, or more specifically on the Federal Reserve.
So true inflation is running wild . It amounts to a hidden tax on every US citizen. Today it requires an increasing amount of fiat money to produce less and less in the way of GDP. What's happening today, I believe, is that in the face of a declining economy, the forces of monetary inflation are so powerful that they have been countering the slump in the economy.
Massive inflationary forces have been moving like waves from one area of the US economy to the next. Back in the 1990s the inflationary wave enveloped tech, and we had that enormous tech bubble in the stock market. When the tech bubble collapsed the inflationary wave moved into housing. When the housing bubble finally burst, the inflation wave moved into Wall Street and into equity funds and mergers and acquisitions. Then the banks went into shock as the sub-prime mess rose to the surface.
Most recently, the inflationary wave has moved full force into commodities with the prices of many commodity items like wheat and corn and soy beans and platinum and uranium and the base metals all heading skyward.
The markets are never still - money is always going somewhere. Meanwhile, gold and silver are quietly "warming up" and somewhere ahead the precious metals will reflect the enormous injections of monetary inflation which have been the signature of global central banks over recent years.
Today we find the tiny group of so-called gold-bugs waiting for gold to correct after its run-up of recent months. So far, the upward inflationary pressures have prevented much of a correction in gold.
Below I show a monthly chart of gold which takes the metal back to 1998. It's truly amazing, but people tend to see what they want to see. Here on this chart we study the early part of what could be one of the greatest bull markets in history, and all we hear about is "gold was up two dollars today," or "gold was hit by a big five dollar drop in late trading."
Somehow, under a blanket of orchestrated denials and ignorant comments, the great bull market in gold has placed blinders over the public's eyes. Show this chart to anyone, but leave off the identifying heading, and ask them what the chart might represent. They'll come up with all variety of answers. But see if anyone comes up with gold as an answer. "What's that? You say it's gold? I can't believe it. Nobody told me that gold was rising like that - and blah blah, blah." [Editor's note: There is a chart with the heading removed for you to print or send to your friends click here.]
The higher gold rises without attracting mass attention, the greater the potential for the gold bull market. After all, gold has risen this far literally without public participation. What happens when the public finally becomes interested?
On a much smaller scale, on a daily scale, we see that gold has advanced while forming a number of continuation patterns. Here, take a look at this daily chart below. As each little pattern is formed, amateur gold "experts" warn that "gold is ready for the big correction." Fine, let the warnings continue. They serve to allow gold to advance without any important public participation. The bull market in gold heads north with only a small number of Americans zealots aboard. That too will change.
Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.
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