Tuesday, August 18, 2009

Time Bomb

Yesterday I commented that central bankers are loath to pull back on their support for the financial system before it's clear the economy has staged a stronger recovery.

More importantly, the US Federal Reserve has a long and painful history of ignoring asset price inflation.

The current stock market boom is clearly another asset bubble. None of the market fundamentals support the astonishing gains the market has made since March 9, 2009. Stimulus money has fueled this mini-boom.

Yet the Fed is not taking any action. Through it all we are told the Fed will remove the stimulus before the funds find their way into general circulation and fuel inflation. "Trust us", we are told.


Look at this chart (click on image to enlarge):

The official rate of Consumer Price Index shows that inflation currently stands at -2.01%. Officially, inflation is non-existant and in negative territory.

No need to remove the stimulus... right?

Not so fast.

As faithful readers will recall, I posted this piece in July which outlined how the method for calculating inflation was changed by the government in the 1990s.

How would the chart above look if we calculated inflation using the same formula in place from 1872 to 1990? Would we still be looking at a negative (-2.01) rate?

Shadowstats.com has produced this graph which makes that comparision (click on image to enlarge):

Calculated using the same method as the that used in the late 1970s reveals that inflation is, in fact, proceeding at 5.44%.

Inflation is here. And the US Federal Reserve is ignoring it.

So how can you have faith they will withdraw the stimulus before it triggers a similar period of 22% plus mortgage rates?

The short answer... you can't.

Inflation is already here and the US Federal Reserve has failed to act.

Now we have a giant bomb on the verge of igniting. How long before it triggers a huge run-up in rates?

Tick, tick, tick.


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  1. The shadow stats make a lot more sense according to my experience - the lower the level of income, the food prices become even more important. After reading up on how much the CPI has been 'improved' I don't see how it can be a reasonable measure of the inflation we see in daily costs year-over-year. It's almost like the index has been deliberately changed to minimize the measured inflation, and not just the volatility. Just because the price of something is volatile does not mean it is not real. And how can housing costs be ignored - house price inflation was rampant during the bubble.

  2. Fred Kaifosh,in his analyis of the Consumer Price Index controversy says, "investors could use the official CPI numbers, accepting the government reported figures at face value. Alternatively, investors could choose (the older, unofficial) measure of inflation, implicitly accepting the argument that the officially reported figures are bogus. Therefore, it is up to investors to become informed on the topic and take their own stance in the issue."

    I couldn't have said it better myself.