(This is Part 2 of a series. Go back to Part 1.)
A vital statistic put out by the U.S. government is the Consumer Price Index (CPI). The reason it's so vital is because government and military pensions, Social Security payments and so forth are all adjusted for cost-of-living according to the CPI. Moreover, the American public —and markets and statisticians across the globe—rely on the official CPI number to ascertain how inflation is behaving in the United States. And I must tell you, the number is completely illusory.
The CPI number is manipulated to make inflation in the U.S. seem much, much lower than it actually is. That way, the government looks better and its various inflation-adjustment payments are much lower than they would otherwise be.
Elsewhere I've gone into some detail about how certain components of the Consumer Price Index are massaged, so that discussion need not be repeated here. But let me cite a few numbers:
The "official" CPI rate of inflation is currently listed as 2.2%. Yet when statisticians calculate the U.S. CPI according to how it was calculated originally a few decades ago—before the various manipulations—the real rate of inflation is four to five times higher, about 10% currently. (It's varying between 9.5% and 11%.)
Every U.S. administration for decades has made further adjustments to the CPI's calculation in order to make the number come out as low as possible—and make the government look as good as possible—so that today the official CPI number is completely offshore of reality.
Look at your own experience: Compare the prices you're paying at the supermarket or the gas station or in health insurance or college tuition with what you were paying a few years ago. The rise in prices has been dramatic. If the CPI is calculated as it used to be, the actual rate of U.S. inflation has been ranging between 8% and 11% since 1998.
In fact, the United States today is already in a virulent inflation that is going unreported. And the chances are very high that it will turn into a hyperinflation down the road, because the fundamental root cause of inflation—the creation of more and more money and credit—has been occuring since 1925, shortly after the creation of the central bank, the Federal Reserve, in 1913.
And it's been increasing. Particularly during Chairman Greenspan's tenure from 1987 to 2005, every financial crisis or potential crisis has been met with the creation of more and more money and credit. And now, when the Federal Reserve claims to be "tightening" and an "inflation fighter," it is increasing M3, the broad measure of the money supply, at a rate of approximately 9% annually. This will inevitably result in more inflation down the road.
As we've discussed elsewhere, inflation of prices is not caused by greedy businessmen, callous labor unions, rising oil prices or even war. In every inflation in history, inflation of prices has been due to the creation of excess money, or more recently, creation of excess money and credit.
In the absence of excess money creation by government and the financial system, for instance, a rise in the price of oil or some other vital commodity would leave less money to spend on other things and so other prices would fall. The net overall effect on prices would be neutral. It is the creation of excess money and credit that ripples through the economy, causing the prices of things from base metals to building materials to college tuition to rise.
Not one citizen in a hundred, including lawmakers, understands this. Thus as inflation gets worse it'll be blamed on all sorts of symptoms of inflation, and we'll hear cries from the media and the public for government to "do something." And it will. Eventually it will impose price controls, which have never worked before because they address the symptom and not the cause. And they won't work this time either. But that's down the road.
(This is the end of Part 2. Go to Part 3.)
—jim sloman, 11.7.06
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