Our Government Is Lying About Inflation

Our Government Is Lying About Inflation

Our readers will remember that we have long warned that the CPI numbers are politically “cooked” to the downside and that stealth inflation has been stalking our economy for many months. Now, stealth inflation has gotten so bad that even the mainstream media are talking about it.


Today, the government announced that the producer price index (PPI) for March rose more than 1 percent on top of a rise of 1.3 percent in February!

Combined, that translates into an annual rate of around a staggering 13.8 percent. That is about the same rate that we have constantly forecast for stealth inflation.

This shockingly high inflation rate appears, so far, to have been absorbed largely by corporations, who have been prevented, by global competition, from passing it onto the consumer — so far, that is.

That is why we call it “stealth” inflation. It is in the “pipe”, and poised, ready to flood into our unsuspecting economy.

Sadly, facing a recession, our economy is more than vulnerable to inflation, because an increase in interest rates will drive any recession deeper.

By hiding the true rate of inflation and keeping interest rates unrealistically low, our government has done us a grave disservice. For now we face not just recession, but stagflation.

This news has already caused yet a further slide in the dollar (now forecast to test the major resistance level of $1.3665 to $1.3705 to the euro). In London, gold has risen yet again.

Meanwhile, our Treasury stays mum.

Our Treasury has a political interest in keeping the official inflation rate as low as possible. Interest payments on Treasury debt and Social Security payments are keyed to inflation. Low CPI figures means cheaper debt and lower social security payments by our Treasury.

The Federal Reserve Board, on the other hand, has a far more difficult position to balance.

Unlike most central banks, our Fed has a “dual mandate” to keep inflation low and to encourage economic growth.

The “dual mandate” is tough enough. BUT, today, the FED HAS an additional “informal” mandate — defense of the dollar.

In recent years, our government has injected massive liquidity into our economy in order to avoid risks of an economic slump.

Money supply has increased so fast that in 2006 the Fed, looking for some vestige of camouflage, ceased publication of M3, the internationally recognized main measure of money supply.

Yesterday CNBC announced that American M2 (a more restrictive, narrower measure of money spending than the old, more accurate M3) had increased by a whopping 17 percent in the past year (March to March).

The massive spending upon what many Americans see as a disastrous war in Iraq, the piling up of huge, off balance sheet Social Security obligations and of a gigantic trade deficit have not escaped the notice of international money mangers and traders. The dollar is near an all-time low, as measured by its international currency index.

Gold has risen by 6.5 percent in just the first 15 weeks of this year.

And, as we have said before, a weak dollar is inflationary.

Only last month, Germany displaced America as the biggest exporter to the world. Yesterday, CNBC announced that China had now pushed America out of second place and into the third position.

All this unleashes downward pressure on the greenback. The Fed is therefore faced with this new, “unofficial” mandate — to defend the dollar.

Clearly, the Fed is acutely aware that an increase in interest rates could turn an economic recession into a slump, or worse — a depression.

The Fed has therefore allowed the dollar to continue falling, in the face of interest rate increases by competing central banks, most notably the European Central Bank (ECB), which administers the (intrinsically flawed) euro, now the currency with the widest circulation in the world.

Worse still, the Fed, although conscious of stealth inflation, has downplayed, even withheld from the public, both the true level and the risk of inflation combining with recession to ferment a stagflation — an even worse economic ill.

On Wednesday, Bloomberg ran an item exposing the fact that, as former Fed Governor Lyle Gramley said, “What the Fed is telling us in these minutes [of the FOMC March 20/21 meeting] is that it really has no thoughts at all about easing interest rates at the moment.”

This observation flies directly in the face of the Fed statement issued on March 21. That statement removed a reference in the Fed’s previous policy statement refereeing to the bias in favor of tighter credit.

The new Fed minutes contained nuances that unfortunately amounted to weasel words, “Further policy firming might prove necessary to foster lower inflation. … But in light of the increased uncertainty about the outlook for both growth and inflation, the committee also agreed that [their] statement should no longer cite only the possibility of further firming.”

As we have often said, our government has charged the Fed with a most difficult task.

The sad thing is that the Fed's words are weasel words, when what we need desperately are the strong words of leadership, if we are to avert the stagflation that now threatens America.

Worse still, these words give a wrong, benign impression of the stealth inflation which has stalked our economy for the past year.

The Fed appears, in an effort to avoid panic, to be covering up, or even lying to us about the acute risk of both inflation and a plunging (inflationary) dollar leading to stagflation.

In short, it appears that the Fed has effectively “banned” meaningful mention of inflation.

Sadly, we believe that, in these most difficult economic times, our readers should treat statements by our Treasury and our Fed as highly political and to be wary of adjusting their investments to their politically charged words.

Our readers should weigh very carefully any statements from our Treasury and Federal Reserve Board, in light of the pervading “economic reality” around them.

We continue to urge our more conservative readers to remain patient rather than greedy. They should retain heavy asset allocation weightings to cash; high coupon, high quality, short-term bonds/CDs; and gold.