(This is Part 2 of a series. Go back to Part 1.)
The interest-rate markets have peaked or are peaking now in this timeframe from 2000 to 2005, and will most likely decline for many years as inflation and interest rates rise.
In contrast, commodities have likely begun long-term bull (rising) markets during this transition period. For instance, gold has risen from $255 in 2001 to $435 currently. Silver has increased during this time from $4 to $7.40.
Other examples: Crude oil has risen from $12 in 1998 to $54 currently. Wholesale gasoline has risen from $.33 to $1.50. Copper has gone from $.60 in 2001 to $1.49 now. Soybeans bottomed in 1999 at $4.02 and are now $6.30. Wheat bottomed at $2.23 in 2000 and is now $3.36. Get the picture? Countless other examples could be given.
Though they've already risen strongly, these bull markets in commodities are, in my opinion, just beginning and will probably continue for a decade or more into the mid-teens of this century. But that's commercial commodities and precious metals. What about your own experience as a consumer?
Look around you: prices are rising everywhere. Go to the supermarket or the drug store. Buy some gas at the gas station. Look at your electricity bill. Buy some medical insurance. Pay your child's college tuition. And so forth. Inflation is all around us.
Yet U.S. government statistics show that inflation is still "minimal". The CPI rose "only" 3.3% last year (up from 2.2% the year before). How can that be when your own experience tells you that prices are rising more strongly?
The plain fact is the CPI number no longer reflects reality. It is being manipulated in at least three ways: First of all, housing prices are systematically understated because the government uses rental prices instead of purchase prices.
As more people buy houses (because of historically easy credit), the pool of renters is proportionately smaller, so that rental prices have actually declined in some markets while purchase prices for houses and condos have been skyrocketing. Yet this rental figure represents "housing" in the CPI and is fully 30% of it.
Second, the government makes "hedonic" adjustments to the CPI. What are they? Let's say you buy a computer this year for $1000. And let's say it's twice as powerful as the computer you bought a year ago, also for $1000.
Because of this increase in power, the government makes an "hedonic" adjustment and says that you bought the computer for half as much as last time. This is widely applied to various technological products and also heavily minimizes the CPI.
Third, the government excludes strongly rising food and energy in its so-called "core" inflation figure, a figure which must be of particular interest to those of us who don't eat, drive or heat our homes.
Thus, the "core" inflation rate last year was calculated to be only 2%. What good news! Meanwhile, people who make it their business to look into these things estimate that the true rate of inflation last year was about 7-8%.
Actually, to call rising prices "inflation" is a misnomer, because rising prices are a symptom of inflation rather than the phenomenon itself.
Inflation is properly defined as an increase in the supply of money and credit. This phenomenon is brought about by governments because it seems—at first—to be such a pleasant solution to their fiscal problems.
(This is the end of Part 2. Go to Part 3.)
—jim sloman, 03.04.05
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