The Govmnt Ly'in about Inflation : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Does anyone believe the Producer Price Index and Consumer Price Index figures that the Labor Department released this week? How can oil be going through the roof and yet there is little or no inflation? Look at the prices that you are actually paying. Mine have gone up at least 5% in the past year.

The Reagan, Bush, and Clinton administrations have so adjusted the calculations of those indexes as to to render them a fraud. I think that even the sheeple are awakening to this lie. The stock market has only just begun its huge fall.

-- Mr. Adequate (, February 18, 2000


Gotta agree with you on this one. Definitely sounds like the numbers are being massaged for 'public consumption'.

-- nonbeliever (, February 18, 2000.

I wish I had a link to something authoritative rather than just posting hearsay. But I was told this by someone I consider very knowledgeable. Maybe someone else out there can confirm this.

The reason there is "no inflation" is because, in order to sustain the appearance of economic well-being, our esteemed President arranged to have removed from the PPI and CPI a few key components, such as petroleum products and food. I hear your question, "What else is left to base a consumer price index on?" Beats me. But that's why you can be spending tons more money on basic necessities than you were a year ago, but there's no inflation.

-- Markus Archus (, February 18, 2000.

If you are anything like me, you are growing increasingly perplexed by the price action of the financial markets. This past year the Dow Industrial Average was up nearly 25%, yet two-thirds of the stocks listed on the New York Stock Exchange were down! In fact, over 30% of the stocks on the NYSE hit their 52-week lows during the week of December 17th.

Additionally, the NASDAQ composite index was up an unbelievable 86%, yet virtually the entire move was accounted for by only four issues (Microsoft, Intel, Dell, and Cisco). Again nearly half of the stocks listed on the NASDAQ were down for the year! According to Media General Financial Services, a Richmond, VA market data company, the 1999 figures for the three major stock exchanges are very sobering. They reported that 4186 stocks declined in value, while only 3397 rose in value. Furthermore, if the interest and high tech stocks are removed from the equation, the stock market performed horribly last year.

Why then do investors seem to have such a peace about their stock portfolios? I believe we have been massively distracted from what is really going on. The news media is reporting only part of the story. Our attention is continually directed toward the indexes (like the Dow), toward the price action of the Internet stocks, toward the high flying IPO's (Initial Public Offerings), and toward the latest and largest takeover mergers. All these elements give the illusion of success, well being, and growth. But what is really going on?

For the vast majority of stocks, there is an ominous story developing. Stock yields, as measured by dividends are at historical lows (less than 2%). Price/Earnings Ratios (P/E ratios) are absurdly and historically high. Why aren't investors responding differently to the fact that 63% of the stocks listed on the NYSE are in a market decline?

I have been warning our readers of these facts while trying to make sense of some of the other financial markets. Long-term bonds, for instance, turned in their worst performance in over 20 years! 30-year bond values dropped nearly 25% from December 18, 1998 to January 12, 2000! During that 13-month period, interest rates soared from 5.0% to just over 6.7% (a 34% increase!). This jump in rates has actually devastated the market value of the 30-year Treasuries. How can investors remain so complacent in light of such grim results?

What is actually behind the rise in interest rates? What is causing this enormous shift to take place in the markets? I believe the answer lies in what the Federal Reserve has been doing while we were all being effectively distracted in other directions. Last year, the Fed embarked on the very perilous course of rapidly expanding the monetary base. So rapidly, in fact, that we now face some serious repercussions. We remember all too well the painful consequences of double-digit inflation in the late 1970's. But how many remember the reason for that inflation? The inflation that we experienced in the latter half of the 1970's was a direct result of the monetary expansion that took place in the preceding years.

The definition of inflation is an expansion of the money supply. What we term "inflation" generally refers to the rising prices of goods and services that we "see" and "feel." Yet rising prices are the result of inflation, not the cause. The problem is caused by excess dollars in the system vying for or chasing the same number of goods and services. In a perfect economic model, the money supply should only expand as rapidly as the growth of the economy, only as fast as new goods are created. But this isn't what has been going on.

The Fed has been on a "drunken binge" recently. According to the U.S. Financial Data published by the Federal Reserve Bank of St. Louis, the following increases have taken place. The Adjusted Monetary Base for the last two months of 1999 was up 48.1% on an annualized basis. For the entire year it was up a full 16%. Adjusted Reserves were actually up 41.8% for the year with an annualized rate of over 100% for the last six months!

The Financial Times of London reported in their January 10,2000 issue that in the three months ending January 3rd, the consolidated assets of the U.S. Federal Reserve Banks surged an annualized 64.3%!

These are huge increases. In their attempt to insure liquidity for our financial markets, I fear the Fed is on a collision course with inflation. The decade of the 1970s should serve as a cruel reminder of what happens when the restraints are removed from monetary expansion. It was a time when the government "ran the printing presses." Double-digit inflation ravaged the average investor. It only subsided with Paul Volker finally and decisively cut credit and raised interest rates to astronomical levels. (Remember interest rates between 18-21%?)

The Fed has only two choices now:

1. To cut back on liquidity, raise interest rates, and stop credit expansion; or

2. To continue to expand the money supply at an ever increasing rate to maintain and prop up the financial markets.

If they do the former, the U.S. could be thrown into a severe recession/depression. Stock prices would collapse and the current "prosperity" would come to an end. If they choose the latter, we could literally be heading towards runaway inflation. Neither choice is easy - both could end very badly.

What about the gold market? Of all the economic and world events that can affect the price of gold (ie., currency devaluation, economic uncertainly, military action, a rush to liquidity, Central Bank selling, etc.), inflation clearly stands out as the most dominant influence. In the same decade of the 70s, while the money supply was expanded and interest rates rose, the price of gold soared. Gold initially jumped from $35/ounce to $197/ounce before retracing to $102. From there gold continued its meteoric rise until it hit $850. Although gold's performance has been lack luster in recent years, it is worth noting that it still trades at eight times higher than it did in the early 1970s. Remember too that the purchasing U.S. dollar has lost 85% of its purchasing power since 1972.

Gold has always served as the world's "safe haven" for money. If we indeed are entering a period of inflation, we would all be well- advised to hedge against rising interest rates, lower corporate profits, falling bond prices, and a continuing decrease in the purchasing power of the U.S. dollar. The best insurance I know of for an economic portfolio is gold. Because economic trends today tend to be global in nature, I would expect world demand for gold to increase significantly over the next 6-18 months.

During a single day of trading last year, gold jumped $44.00. This was during a period of reasonably secure and normal markets. It was announced that the Central Banks might cease their gold liquidations. However, what would happen in a day or in a week if panic actually set in? There would be little or no time to act or react. I continue to encourage our investors to purchase gold now in quiet markets while it is still vastly under-priced. No one waits to buy fire insurance until the flames reach the second story at their house. Please don't wait to protect your portfolio until it is far more expensive to do so, or until there are too many others trying to do the same thing. I encourage you to read the information throughout this site carefully. I believe it will prove to be very helpful in preparing for the uncertain times ahead.


Don McAlvany

-- Hokie (, February 18, 2000.

Testimony: I had more "spendable" income, in the early 1980's, than I do today. In the 80's, my gross as maybe 15K, today it is 45K. I have no car payment, very few (2Kbal) credit cards. My standard of living dropped off dramatically last spring when I moved to the hills, LOL. But it really is much nicer here, no boom box car speakers from hell. Just sounds of Nature. Commute sucks! Oh well, give up one for another. Speed..

-- No Millionaire (, February 18, 2000.

What is absolutely amazing is that the 'powers that Be' keep telling us that the inflation values outside the 'core index' aren't relevant. WHAT, WE DON'T EAT OR DRIVE, EH??? The results are a joke.

-- robert gridlock (, February 18, 2000.

I was reading and wondering who was able to so concisely lay the current scenario out so well in such a short space. Thank you, Don, for offering your wisdom.

-- John Gess (, February 18, 2000.

What's funny (but not ha-ha funny) is that not even Greenspan buys it anymore:


-- I'm Here, I'm There (I'm Everywhere@so.beware), February 18, 2000.

Totally fascinating and excellent article.

-- Mara (, February 18, 2000.

Try this link for more information about the major indices...

-- Brooks (, February 19, 2000.

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