CPI lies

Discussion
1

"ricochetboy" <philzberg@e...> wrote:

Since 1980 m3 had risen from
two trillion to 10 trillion, a 500 perce3nt increase. The definition of
inflation is more money.

Your "500% increase" is only a 6.6% compound annual rate of increase. The
definition of inflation is in fact more money chasing the same amount of
goods. When you subtract from that 6.6% the rate of increase in output, you
get an inflation rate that is quite close to the low CPI-based inflation
rate since 1982.

The Fed more than doubled the money supply
from it's inception until 1929 and there was no price inflation in
that era either.

Doubling in 16 years is only about a 4% compound annual rate. See above.

Energy increases have been flat out papered over,
see last weeks Mogambo Guru on kitco.com.

You mean http://www.kitco.com/ind/Daughty/aug032005.html, entitled "Go Make
A Fortune In Commodities" and posted on the site of a gold bullion dealer?
It's interesting that you see a conspiracy behind every Fed shadow, but
don't question the bias and credibility of a rant like this on a site that
is a) selling gold and b) trying to convince the gullible that gold is smart
to buy.

The rant says: "American Auto Association calculates that gasoline prices
have risen 21.5% since this same time last year. But the government swears
gas prices are only 6.9% higher over the year". The 6.9% figure is from
June 2004 to June 2005. The 21% figure is from early August 2004 to early
August 2005, and includes a 5% rise in the last month. The graph at AAA's
http://www.fuelgaugereport.com/ indicates a June 2005 national average price
for regular unleaded of $2.15, versus $1.85 in Sep 2004. The BLS city
average for regular unleaded on those dates are very similar ($2.17 and
$1.89), but in Jun 2004 the price was $2.04. So your claim of "flat out
papered over" is based on cherrypicking of data to leave out the Jun-Aug
2004 price decrease of 8% and the 5% increase of Jul 2005.

Once again, your data do not hold up, and your sources are easily
discredited. In these last four emails I've documented you making seven
demonstrably false or misleading statements:

* "debasement" of the dollar that is completely invisible in a quarter
century of the dollar price of gold;
* dismissal of the CPI notion of Owner-Equivalent Rent;
* cherry-picking equity prices from 1966 to 1982;
* calling 1966-1982 a "recession" when it saw a 53% increase in real
GDP;
* pretending the 25-year 500% increase in M3 constitutes more
inflation than the stated CPI figures which you say are lies;
* mis-defining inflation as any increase in the money supply;
* claiming the CPI "papers over" gasoline price increases in the last
year.

Correcting all this is too much work for one part-time volunteer. :slight_smile: I'm
going to radically cut my time budget for rebutting you, since it should be
clear to our audience by now that your empirical claims too often contradict
or distort relevant data, and your sources too often lack credibility. If
you (or anyone in the audience) would like to further subject your gold-bug
analyses to further criticism from a mainstream economic perspective, ping
me in a couple weeks and nominate what you think is the strongest piece
you've posted up to then.

Brian Holtz
Yahoo! Inc.
2004 Libertarian candidate for Congress, CA14 (Silicon Valley)
http://marketliberal.org/>
blog: http://knowinghumans.net/>
book: http://humanknowledge.net/>

2

MessageBrian,

We can certainly disagree over some of the interpretation, and perhaps some of the "facts".

Most alarming to me is the way you seem to poo-poo an inflation rate (using your own calculations) of ONLY 4%. Even if this number were "true", don't you agree that this amount of misapproriation of savings is immoral? This would amount to between two and three halvings of the savings one made early in ones career by the time one passed away. I.e., up to seven-eighths of ones early savings would be spent in the state's best interest (the state apparatus, the military industrial complex, and etc.) rather than for oneself.

Also, I don't see why you subtracted the increase in the amount of goods from the increase in the money supply in your calculation. This would seem to indicate you believe the government (and its closest friends) are somehow entitled to 'profit' from the general increase in productivity. I would say that the money supply should remain more nearly constant, and the benefits of increased productivity should accrue to the savers and investors in our society, by a gradual increase in the value of their savings. After all, these savings and investments are largely responsible for the increase in productivity, not the wasteful spending of The State.

Rich

3

MessageI would like to add that I disagree with the whole idea of a centrally-managed money supply. Don't misinterpret my remarks below to mean I favor a certain style of management of the money supply; rather, I expect that if the money supply were left to the free market it would likely behave more like I suggest below, and less like the current government-rigged system.

Rich

4

Richard et al:

When you say "This would amount to between two and three halvings of
the savings one made early in ones career by the time one passed
away." You seem to be making the implicit assumption that such savings
are just stashed away in cash under a mattress.

In reality, even a risk-free investment such as short-term T-bills
will have an interest rate that reflects expected inflation. So, the
two to three halvings isn't even close to accurate, unless someone
didnt invest the savings.

Ever here the one about the guy that took all his savings in 1981 and
bought gold bullion? He's got less than half of the value left today.

-Derek

5

The reason (I believe) Brian subtracted the increase in the amount of
goods from the increase in the money supply is that an increase in
money supply is not itself inflationary. It's only "inflationary" if
the supply of money outstrips the demand for money. A healthy,
growing economy needs an increasing money supply or else there will be
severe deflationary presure, which would be far far worse to our
economy than the very mild inflation (as shown in CPI price data) we
have had in the last 25 years

-Derek

6

Derek,

Increases in production would indeed make a more-or-less fixed money supply (such as gold) increase in value. I don't think it would be fair to equate this "deflationary pressure" with bad effects in the economy; they are, after all, due to a strong economy in the first place.

Also, this doesn't explain long periods where the gold standard (or something similar) was used with no ill effects.

The idea that a slow increase in the value of money due to productivity increases would cause recessions/depressions is a Keynsian myth. There are several notable instances where the monetary supply was decreased by a central planning authority, which did indeed contribute to severe downturns.

Rich

7

Richard:

I'm not questioning that a central bank decreasing the money supply
can contribute to severe downturns. It's almost surely what caused
the Great Depression.

I'm more in favour of a rules-based approach to increasing the money supply.

-Derek

8

Derek,

Everything you say is true. Don't forget, thought, that the government will also tax you on these "gains".

You seemed to miss one of my main points - I guess I wasn't very clear. Let me use an example. Let's say inflation (in prices) is 4% and some conservative (but taxable) investment is yielding 5%. (Remember, the government lies and says that inflation is only 2 or 3%, so this loan rate is 2 - 3% above the "official" inflation estimate.) Let's also say that productivity is increasing at 2%, and in this simplistic example the money supply (inflation in money) is increasing at 4% + 2% = 6%. All percentages are approximate.

The government is getting 6% on my money, basically by stealing, due to the inflation in money. In addition, they have the gall to tax me on my supposed 5% "gain" (which is only 1% more than prices rose). So, they take another ~2% for themselves (also by stealing). They get nearly 7%.

Where does this money come from? 2% comes from the hard work of the people and the application of _my_ capital (my savings) in productive uses, i.e., from the productivity increase. 4% comes from the higher prices _I_ have to pay for things with the money that comes back from my loan. 1% is paid by the borrower, who got a really cheap loan and got to use the money while it was still worth something. That 1%, and the remaining ~1% came from _me_ in the form of taxes.

I got the short end: net loss ~1%. The borrower did very good, and the government made out, well... like a bandit.

On the other hand, if the money supply were constant, prices would drop 2% due to the productivity increases. I might be charging 1% for the loan. Even if the government took ~0.3% in taxes (something for the Libertarians to still fight for), I would net 2.7% (including my 2% increased purchasing power).

The borrower would have paid a more realistic rate for the use of my money, and the government would only get a small share.

Note that the borrower and I shared the benefit of the productivity increases rather than the government. After all, it was my savings and his deployment of it that, in large part, made these increases possible. When the government gets the money, they probably do more harm than good to productivity with it; and they are not entitled to it in any case.

So, which scenario are Libertarians more in favor of?

Rich

9

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10

I'll readily admit that I feel over my head in this conversation; nevertheless, a few thoughts from the perspective of one relatively uneducated in the details of economic theory...

  It seems to me that if a modern economy were on something like the gold standard, various independent substitutes for scarce gold-based hard currency would tend to fill any unmet demand for additional money in the system. While not as universally negotiable as a government legal tender based on gold, everything from street drugs to store gift certificates could essentially function as money in the economy to a certain extent, taking up any deflationary slack -- no?

  And what about the currencies of governments not on a gold standard? Is it naive to presume that one or a few countries could switch to gold without forcing every government in the world to do the same? I would expect the value of strictly paper-valued currencies to decline precipitously, but not for such currencies to disappear entirely. Wouldn't they still rise in value as the gold-based currency or currencies fell, and vice-versa, as the dollar does now? Wouldn't their rise in value also help fill any demand for money, since the governments issuing them would presumably print as many such notes as they were able to safely do without inflation getting out of hand?

  If the federal government were to issue new dollar notes redeemable for an ounce of gold, and sold them at above market value (say $500 each) during a transition period during which old dollars could still be used by anyone willing to take them, what would happen?

Yours in liberty,
        <<< Starchild >>>

Richard:

A few points:

1. I disagree that a 6% increase in money supply is "inflation in money" at 6%. You need to also consider the demand for money, which could also be rising at 6%. I don't think it's accurate to say that the Government is getting 6% from you due to inflation.

2. I am sympathetic to the argument of the government taxing nominal increases in wealth, which are largely due to inflation. It's your strongest argument in my opinion.

3. I have noticed that gold-standard advocates seem to dismiss the negative effects of deflation too readily. Namely, I'm referring to the problem that with deflation, holding currency becomes the most attractive an lowest risk investment. This reduces consumer demand, reduces capital investment by corporation, and creates massive uncertainty about jobs and income. Furthermore, deflation raises real incomes, which are not necessarily tied to productivity increases. This makes employers very reluctant to hire new employees, and leads to increasing unemployment.

4. A predictable, rules-based approach to increasing the money supply (let's say 2-3% a year in line with the long term productivity increases in a mature economy would solve all these problems, and furthermore decouple monetary policy from the "government", since the increase in money is a matter of law, and not subject to the whims of central bankers.

5. I have seen estimates that if the world was to immediately convert to a full gold standard, that the price of gold would need to convert to around $4,000 in today's dollars just to support current economic activity in the world. This is one reason why the gold standard will never happen.

6. Finally, this board is the only place I could ever possibly be confused with having Keynesian sympathies. To the rest of the world, I'm a radical Chicago-school advocate. You and Berg always get me into the very uncomfortable position of arguing for the state!

-Derek

On8/12/05 , Richard Newell <richard@...> wrote:

Derek,

Everything you say is true. Don't forget, thought, that the government will also tax you on these "gains".

You seemed to miss one of my main points - I guess I wasn't very clear. Let me use an example. Let's say inflation (in prices) is 4% and some conservative (but taxable) investment is yielding 5%. (Remember, the government lies and says that inflation is only 2 or 3%, so this loan rate is 2 - 3% above the "official" inflation estimate.) Let's also say that productivity is increasing at 2%, and in this simplistic example the money supply (inflation in money) is increasing at 4% + 2% = 6%. All percentages are approximate.

The government is getting 6% on my money, basically by stealing, due to the inflation in money. In addition, they have the gall to tax me on my supposed 5% "gain" (which is only 1% more than prices rose). So, they take another ~2% for themselves (also by stealing). They get nearly 7%.

Where does this money come from? 2% comes from the hard work of the people and the application of _my_ capital (my savings) in productive uses, i.e., from the productivity increase. 4% comes from the higher prices _I_ have to pay for things with the money that comes back from my loan. 1% is paid by the borrower, who got a really cheap loan and got to use the money while it was still worth something. That 1%, and the remaining ~1% came from _me_ in the form of taxes.

I got the short end: net loss ~1%. The borrower did very good, and the government made out, well... like a bandit.

On the other hand, if the money supply were constant, prices would drop 2% due to the productivity increases. I might be charging 1% for the loan. Even if the government took ~0.3% in taxes (something for the Libertarians to still fight for), I would net 2.7% (including my 2% increased purchasing power).

The borrower would have paid a more realistic rate for the use of my money, and the government would only get a small share.

Note that the borrower and I shared the benefit of the productivity increases rather than the government. After all, it was my savings and his deployment of it that, in large part, made these increases possible. When the government gets the money, they probably do more harm than good to productivity with it; and they are not entitled to it in any case.

So, which scenario are Libertarians more in favor of?

Rich

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11

Derek, and so there we have it, You favor rules based increases in the
money supply. Where do we get the people to make the rules. Right now
the Fed is populated by people appointed by politicians or by the
sharehgolder or member banks of the Fed. They attempt, like Stalin,
to understand the economic workings of billions of people and manage
those workings. They imagine thier crude measurements and
manupulations can work.They create money at a far greater rate than
humanity can extract recuous metal from the earth. They claerly have
removed onenatural aspect from what the market over the millenia have
shown to be an important characteristic of money, it's long term
value. There is absolutely no way to predict the long termvalue of the
US lollar within any reasonable multiude of ordrs of magnitude. I
suggest to you that even with massive dishoarding and manipulation,
precious metals are less volatile over the long run. The long run
value of precious metals will exert itself as the dishoarding and
manipulation cannot last forever. I just do not see where history has
shown us that political power can be trusted with setting rules for
money creation without disaster ensueing.

12

Phil:

I propose that each of the 10 largest investment US banks each
nominate a representative to control our currency*

Challenging whether or not political power can be trusted with setting rules for
money creation seems like a weak argument to me. Even a gold standard
currency would exist only so long as political powers allowed it to.

On another note, it's clear to me that by far the most important
reason why "fiat" money has value is that it is the only form of
consideration that the government will accept for payment of taxes. A
close second is that the market has confidence that the central bank
will not hyperinflate the currency. Just take a look at forward
interest rates and you will see that the market does indeed have this
confidence.

*Just kidding. I knew that would get you!

-Derek

13

People take dollars out of habit, convenience, and the force of the
legal tender laws. Bad money always makes good money disappear from
circulation. As for wether foreard interst rates indicate the markets
view of future inflation, that is the ond conventional view.But
interst rates are being held down by a flood af fiat , not only from the

fed but from the recirculation of our trade deficit by foreign central
banks into US paper .Remeber mdiscussion of zombie treasury buyers and
the trace I made of a hundred dollar purchase in wallmart. Besides
markets,especially markets heavily influences by bank traders whose
only connection to reality is the moral hazard of the whores on second
avenue, are subject to making very large errors, as group think and
mob thinking pushes them off a cliff.With the banks playing in every
market with no discipline from depositors, an only loose regulatory
discpline from number crunching bburaeucrts watching cunning
MBbrainiacs, with no senxe of the fat tail of history, an unexpected
exogogenous event, which can be guaranteed to come along, as they
always do, could causew secere proble-ms, requiring major infusions of
liquidity to smooth things over, one more time.--

14

Phil:

Arguing that the market is fooling everybody is not a particularly
strong platform upon which to base your thesis.

Eveen if what you say is true about these "zombie" buyers of
government bonds, one can also look to forward rates in a whole range
of hard and soft commodities, and forward rates of other currencies to
see that the entire global market, made up of millions of
participants, collectively holding far more information than any one
participant are all expecting future inflation to be under control.
This means that the global markets have confidence that the US dollar
will not be overly inflated.

If for some reason this confidence was lost, we would see it first in
these forward markets. And we don't

-Derek

15

Commodity prices accross the board are rising and from I have read
although I don't know how to get the charts, forward prices are rising
even faster, especially in the energy sector. Much of this must be
currency related as it the phenomena is in all commodities. How old
are you, I had parents who lived through the depression and I came of
age in the seventies. Younger folks have an illustion of stability
because that is all they have known.

16

Phil:

I can only conclude that you must believe there are massive arbitrage
opportunities in all sorts of commodity and currency markets.

I'm 33. I don't buy your premise that one must not live through
periods of time to be aware of economic causes and effects.

-Derek

17

You are correct. My largest position is a molybdenum junior explorer
on the road to becoming a producer. Molybdenum, or moly has gone from
2 to 30 dollars a pound over ther past few years. The property has 300
million pounds of moly. the sweet spot that will be mined for the
first four years has about 4 pounds a ton, and woll cost a buck fifty
a pound to mine and something less than 4 50 a pound to mill. Any way
they will pull out 1.5 billion bucks worth of moly in the firsfour
years of mine life. the mangement is terrific with proven history, and
an offtake agreement is being negotiated with traxys, europes largest
metal trading firm. the government deems to be on board as are the
natives. meanwhile the company has a market cap under 30 million. I
got in at 12 cents and it's at 50 cents. Not selling any till 3 bucks
and most till 10 bucks. Then tere is suncor, which I have leaps on,
tar sands in athabasca canada, 18 billion net barrels of proven
reserves, cost them around 10 bucks a barrell to make sweet crude.
Market cap of 25 billion comes out to less than a buck fifty a barell,
with plenty of blue sky exploration potential, and a price sales ratio
under 4. then i have Cardero resources, a spec with a hugh potential
iron copper gold depositin Mexico joint ventured with anglo and
potentially containing tens of billions of dollars of minerals, plus
an iron sands project in peru, that could make them them the absolute
cheapest iron suplier to the world, along with a dramatic price
advantage in titanium and vanadium. the metttalurigical work on the
sand has been reported by Sumitomo as very promisingj. The deposit is
astronomically large and could propel cardero from a slwwpy 100
million dollar market cap to google proportions.Ima exploration also
around 100 million has a mountain of silver. When silver is
remonitized the returns will begood. Waren Buffet and Bill Gates are
invested in silver.Unlike gold, silver stockpiles have been largely
consumed. When silver resumes it's historical monetary role, IMa will
prosper. The supply demand picture in Uranium is also changing, rising
from 7 to 30 dollars apound. UEX has the prime wxploration properties
in the Athabasca region, with a market cap of 350 million, it
marepresent in the low single digits. FXX mines two million ozx of
gold and a whole buch of copper. It has a price sales ratio under 3
and is considerable leveraged to the price of gold. the copper
leverage is scary, but copper just keeps pushing higher. It takes
about 600 pounds of copper to take achinese peasant and make him
middle classs, wlectric wiring, refrigerator coild , air conditioning,
plumbing etc. Thats a lot of copper. Hybrid cars also eat copper. I
have lots of leaps on FCX. Nova gold has 22 million ozs of gold at
decent concentrations in Alaska and BC. It is on the road to
construction with joint venture partner anglo on the alaska propery.
Nova gold only costs around 30 bucks on ounce of gold, with a whole
buch of copper and silver thrown in for free. This is my second
largest position.Gold has climbed grom 250 to 440 over the past five
years and the glod bugs index the HUI is up over 600 percent in that
time. Gold has and the jui has started to wake up after a two year
long running correction, and should shortly make new 20 year highs. I
also have a position small in the only company licensed in the Us to
cetrifuge U, it's a government contractor, plus it has some mills, I
fugure it's got an inside track with Bush and the boys. And I have a
small position is n explorer developer of coal bed natural gas in
Alberta. the manage has a proven track record from a prevuous company.
Waiting for well pressure results. My top watch list wanna be is
acompaby with a a good exploration propery for rare earth minerals
Ytrium and the like, that would be almost a high tech play, as the
rare earths are high prices and essential in many technologies. So you
are correct, I am in all the waay on precious metals, oil sands,
uranium, moly and iron ore.

--- In lpsf-discuss@yahoogroups.com, "Derek E. Jensen "
<derekj72@g...> wrote: