Tuesday, July 5, 2011

Insidious Inflation

The CPI (consumer price index), measures inflation from the viewpoint of the consumer. It is made up of a basket of goods and services which are weighted according to certain buying habits.  It is supposed to ‘iron’ out vagaries so that it measures a similar basket of goods each year for comparison.

The term 'inflation' is often used to describe rising prices, for example, the inflation rate is 4% this year. But the term 'inflation' means the increase in money supply that translates into higher prices. Think of this equation: Money divided by goods and services = price. So the higher the money base, the higher the price of goods and services.

Then there are the methods of measuring inflation, or in this case, the rise in prices. Since the 1980s, the method has changed considerably, so much so that we cannot now compare the way they measured it then with the measurement now.

Once again, though, Politicians have their sticky hands in the statistical pot. In the USA, unfunded liabilities (money the US Government owes that doesn’t exist), is a cool $60 trillion dollars, or thereabouts. This includes retirement payments to public service workers and those oldies on social security. A perfect way of  reducing the amount that is paid out from this ‘fund’ and what is paid into it, is to fiddle with the way the CPI is calculated.

You see, the retirement benefits are tied to the CPI (as they are here in New Zealand) and any way that the CPI can be reduced means less money paid in and less money paid out. As usual, this is pitched to the fool populous as necessary and given a fancy-pants phrase to describe it, but in any book, it is a broken promise and theft.

Here is such an announcement from the UK Government just last year.
The UK Government has announced that it intends to change the measure of inflation used for working out statutory minimum increases to pensions from defined benefit occupational pension schemes. Instead of basing these increases on the Retail Prices Index (RPI), in future it will use the Consumer Prices Index (CPI). The change will apply to revaluation in deferment as well as increases to pensions in payment. In practice, the CPI has tended to show a lower inflation rate than the RPI…

Inflation is also a stealthy way of defaulting on debt. How? Well, if your debt is, say $1000 and the inflation (the increase in money supply) is around 4% then your debt will lose value. The US is currently on this path. The Federal Reserve has created over $2 trillion dollars out of thin air since the first global crisis in 2008. The Federal Reserve's balance sheet is now $2.89 trillion. Note how the US dollar is losing value against other currencies and how commodities and gold, have increased in price to match the printing.

Poor Greece, they can't inflate their way out of debt, they are tied into the euro. Message to Greeks: leave the European Union and bring back the drachma. Be like Iceland.

Excessive inflation is bad. It is caused by Central Banks intervening in markets, trying to stimulate economies and keep the illusion of growth going. But inflation is a tax by stealth. The Banks print it and prices go up and you pay for it out of your savings.

It is that simple, it is that insidious.

Gold in New Zealand dollars: $1803.60 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $40.91 per oz
Previous all time high: $48.58
per oz

The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001

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