How bad is inflation rate?

According to Morningstar writer Bill Bergman says it's "bad and getting worse," both the BLS consumer and producer rates. For the last six months, "the average annualized change in the PPI has been 13%--and the highest rate for any such six-month interval since mid-1980," Bergman says. The annualized rate for the CPI is "also coming in north of 10%."

Libertarian novelist - journalist Vin Suprynowicz, basing his calculations on the coin collector's guide the Krause, estimates "the Fed has been creating new 'dollars' at an annualized rate of 15 to 17 percent all year."

We'd have a better idea, of course, if the Fed still published M3, which they discontinued in 2006.

Why does government consistently report inflation low? In other words, why does government lie to us about inflation?

Suprynowicz:

First, they’re locked into all kinds of “Cost of Living Adjustments” for government workers, Social Security recipients, etc. If they admitted inflation was 16 percent, they’d have to give everyone a 16 percent raise this year, another 16 percent next year, a third 16 percent raise in 2010 – which adds up not to 48 percent, but to 56 percent, compounding even more in the fourth and fifth years.

Bankruptcy would suddenly look much closer.

But there’s a far more important reason. If you believe inflation is 5.6 percent, choosing between a “low-risk” bank savings account that promises a 5 or 6 percent return, and a “higher-risk” stock market investment promising an 8 or 9 percent rate of return (remember, “Big Oil” is demonized today for earning “outrageous, windfall” 7 percent profits), seems like a reasonable exercise.

But faced with a 16 percent rate of inflation, such choices are a joke. Either “choice” will net you a hefty annual loss – most of your buying power will be gone in 10 to 15 years. At that point, the only kinds of “investments” that still make sense are those that offer “returns on investment” generally associated with drug dealing and playing the Megabucks.

In such a climate, what sense does it make to invest in any dollar-denominated paper instrument – or even to open a new business? Not much.

Prices up, economy down

If the Fed raises interest rates, the economy will get worse. There's an election ahead, so raising rates is not a choice. If the Fed doesn't raise interest rates, it will sit and watch prices rise.

What are we faced with now? According to a Reuters report,

Wholesale prices shot up in July at the fastest year-on-year rate since 1981, while home builders cut back on construction as they worked through a glut of unsold homes, government data showed on Tuesday.

The reports offered little solace to the U.S. Federal Reserve, which is hoping that a slowing economy will cool inflation so that the central bank can hold off on raising interest rates.

Stefan Molyneux has written:

Many times throughout human history, certain societies have come to the valid conclusion that an institution can no longer be reformed, but must instead be abolished. The most notable example is slavery, but we can think of others as well . . .

Yes, we can.

Gold Plunges

Five months ago gold broke the $1,000 mark. Last week gold bullion declined more than it has in 25 years, plunging as low as $777. Oil and silver also declined sharply on Friday, driven by a 5 1/2 month high in the U.S. dollar against the Euro and what many believe is a coming global recession. As globeinvestor.com reports:

Gold is down nearly 5 per cent so far this year, on track for its first annual decline in seven years. New York Mercantile Exchange gold futures dropped 8.4 per cent for the week, the biggest retreat since 1983.

"The debacle was so swift that conventional terms like 'oversold' no longer apply," said precious metals analyst John Nadler at bullion dealer Kitco in Montreal. He said the rout will not likely end until the metal's price drops to "between $680 and $730."

What has happened is that speculative institutional funds that had flooded into gold, and particularly into exchange-traded funds for the metal, have decided to take the money and run, Mr. Nadler said.

That's because developments such as the U.S. credit crunch have failed to do as much damage as expected - thereby keeping gold's price moving up - thanks to intervention by the U.S. Federal Reserve Board and other central banks.

But if intervention is the key to warding off disaster, the economic history of the world would be much different. Interventions take time to play out. They often achieve what appear to be stunning results short-term, such as an investment boom triggered by cheap credit, but we can count on them to fail. And even though the prices of gold, oil, and silver fell sharply last week, they're still high compared to what they were a year ago or earlier this year.

Headlines at a glance

As seen on Saturday, August 2, 2008:

From the WSJ:

GM Swings to Loss
Auto Sales Continue to Slide
Jobless Rate Hits Four-Year High

From Kiplinger personal finance:

Growing economy continues to struggle

And at MarketWatch:

U.S. Stocks Look to Fed for Direction

Quoting from the latter:

As the first anniversary of the crisis arrives this coming week, the Dow Jones Industrial Average is down 14%, U.S. economic growth has more than halved, financial institutions have suffered $350 billion in write-downs and fired chief executives and thousands of workers, while house prices have slumped as much as 40% in some areas.

And the solutions?

Experts are looking to The Fed, the institution responsible for the crisis.

Or they're giving serious consideration to Obama's planned attack on the oil companies:

Sen. Barack Obama has proposed a revised, speeded-up version of his $50 billion economic stimulus plan, saying a tax on oil companies’ profits should be levied to fund rebates of up to $1,000 for families.

Or they're looking at Bush, who's about to sign an emergency relief bill for homeowners:

One of the highlights of the housing bill waiting to be signed by President Bush is a tax credit of up to $7,500 for first-time home buyers. But read a little closer and it doesn’t seem quite as appealing for buyers: that credit has to be paid back.

Isn't it amazing how basic economics seems forever beyond the grasp of the world's best-educated people?

Commodity money good for blind and sighted

Ron Paul, in a statement before the Subcommittee on Domestic & International Monetary Policy, Hearing on Examining Issues Related to Tactilely Distinguishable Currency, July 30, 2008, pointed out that

Anyone who has ever felt the heft of a gold or silver coin, noticed the variation in size and design among different denominations of precious metal coins, or examined the different types of reeding, incusing, and other edge designs, recognizes that coins are far superior to paper bills in terms of their ability to be distinguishable solely by touch.

Furthermore,

If we had a truly free market in currency, private currency producers could produce coins or bills that are tactilely distinguishable, with bills incorporating different sizes, shapes, raised geometric patterns, etc.

What prevents us from establishing a distinguishable money? Guess.

Through a multifaceted legal barrier consisting of legal tender laws, anti-counterfeiting statutes worded to prevent the private issue of notes and coins, and punitive taxes on precious metals that would form the backing of a commodity-backed currency, the government has ensured that alternative currencies, such as the Liberty Dollar, have to face an often insurmountable legal hurdle.

Governments have always known the difference between sound and unsound money, and how they can benefit from the latter by seizing monopoly control of it.