Pay No Attention to the Man
Behind the Curtain
Jul 13, 2006
In recent weeks, as the word "stagflation" has made
a few appearances on the national media stage, many bullish skeptics,
such as CNBC's Steve Liesman, have downplayed the current "mini"
stagflation with contrasts to the "real" variety of
the 1970's and early 1980's. Such confidence however fails to
recognize that we now measure economic activity and inflation
with very different yardsticks than we did when Disco Duck topped
the charts and Jimmy Carter wore sweaters. In reality, changes
in the methodologies mean that the statistics bear as much resemblance
as an 8-track to an iPod, and only serve to obscure the genuine
threat we now face.
In the 1970's and early 1980's, "core CPI" included
housing prices, and the basket was neither altered to reflect
substitutions (in which stuff that had gone up in price is replaced
by stuff that did not), nor were prices hedonically adjusted
(a 5% increase transformed into a 3% decrease based on a subjective
assessment of quality improvement). Similarly, changes have hit
GDP assessments. For instance, 25 years ago GDP was calculated
using a more honest deflator; business fixed investment expenditures
were not hedonically adjusted ($5 billion spent on computers
recorded as $50 billion, as computing power increased by a factor
of 10 over the benchmark year), and phantom payments were not
included (imputed income on owner-occupied housing counted as
rents, or free checking accounts recorded as interest payments).
In addition, comparisons using "core" inflation numbers,
which was the case in Liesman's example, leave out energy prices,
which have been particularly effected by the current round of
inflation, and food, which in my opinion is about to follow in
energy's footsteps. In fact, as I write this commentary, crude
oil prices are up almost three dollars per barrel today alone,
hitting a new record high just shy of $78 dollars a barrel. In
the last five years, crude oil prices have risen more than four-fold,
with no end to the rally anywhere in sight.
Over the years, the government has managed to "solve"
economic problems merely by changing the way they are measured.
By re-jiggering the manner in which CPI and GDP are calculated,
the government misrepresents the true health of the economy,
making it easier for incumbents to be re-elected. President Bush
demonstrated this to perfection in his televised speech earlier
this week. Despite a building sense among the population that
the economy is shaky, the President was able to effectively say,
"What are you complaining about, look how good you have
it? Inflation is just 2.5% and the economy is growing at 4% per
year. Why back in the seventies and eighties people had to struggle
with 8% - 10% inflation and 1%- 2% growth." The reality
is that today's generation is experiencing similar struggles.
Despite the rosy numbers, today the typical American family pays
for groceries with a Visa card, utilities with a home equity
loan, has a six-year loan on their SUV, has no savings, and has
both parents working just to keep the family one-step ahead of
its creditors. With all this supposed non-inflationary economic
growth, why do Americans borrow to pay for everyday necessities
which used to be easily financed from incomes, and why has a
nation of savers been transformed into one of debtors?
From the government's perspective, all the misrepresentations
are part of a giant confidence game that it meant to keep all
the marks, most of them foreign, from wising up. A fiat-based
monetary system only functions as long as confidence is maintained.
The minute it's lost, the whole scheme implodes. Since confidence
is the only thing holding up the U.S. dollar, and by extension
the entire U.S. economy, maintaining that confidence is the government's
highest priority. If elected officials and central bankers have
to obfuscate a bit to do it, so be it.
Don't be taken in by the government's con. Protect your wealth and preserve your
purchasing power before it's too late. Discover the best way
to buy gold at www.goldyoucanfold.com, download my free
research report on the powerful case for investing in foreign
equities available at www.researchreportone.com, and subscribe to
my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.