An excerpt from The Privateer.

THE HIGHEST “INFLATION” SINCE 1973
On December 11, the Federal Reserve disappointed Wall Street by cutting official US rates – by only 0.25 percent. Given the rumblings from the Fed officials involved in this decision, up to and including Fed Chairman Bernanke, the US market “makers and shakers” had been hoping for and expecting something a bit more robust. The result, on the day, was not one which is “normal” for a Fed announcement of a rate cut. The Dow swooned by 295 points or 2.1 percent as “fear” displaced “greed” even more. Investors fled stocks for bonds, with the yields on US Treasury debt paper plummeting.

As discussed in the Global Report in this issue, the very next day, December 12, the Fed announced their “co-ordinated” central bank plan to flood the market with extra cash in a desperate attempt to prevent the current interbank credit freeze from totally derailing the US end of year accounts. US Treasury yields promptly soared while prices fell – by the largest one day amount in the past eleven years.

Then, over the last two days of the week just ended, came the reports of price movements in the REAL economy of the US, the economy that the credit freeze was supposed to have no effect on. This was led off by the startling announcement by the US Labor Department that wholesale prices rose 3.2 percent in November. That’s the biggest one-month rise since August 1973 – more than THIRTY-FOUR years ago!

By the end of the week, the entire price “scorecard” was out. Please note that these are year-on-year increases as of November 2007 in the US:

Consumer prices – up 4.3 percent
Producer prices – up 7.2 percent – the biggest rise since October 1981 (more on that later)
Import prices – up 11.4 percent
By modern “economic” definition, these numbers are inflation. By proper economic definition, by which “inflation” is correctly defined as an increase in the total stock of money, these numbers are ominous confirmation that the oceans of liquidity being pumped into circulation by the central banks are NOT easing the credit squeeze, but are bypassing the paper markets and flowing into the REAL economy.

Inflation – Invisible And VISIBLE:
The best way to make a phenomenon invisible is to define it, not in terms of its cause, but in terms of its effects. If you want to understand a hurricane, you do not define it as flattened trees and unroofed houses. You define it as a large storm which produces very strong winds. Inflation is a monetary phenomenon. Governments everywhere have a monopoly control of what is used as money. They do NOT want the rest of us, who are forced to use the money they control in our exchanges, to understand inflation.

So they have come to “define” inflation as rising prices. Not just any rising prices, but rising prices of REAL economic goods and services. This is the obfuscatory trick, the trick of “defining” by effect, and only one relatively minor effect at that.

This can’t be said too often: INFLATION IS AN INCREASE IN THE TOTAL STOCK OF MONEY!

When the stock of money rises, the purchasing power of a unit of that money falls. One of the results of that fact is that the exchange ratio between money and goods and services rises – more money must be offered in exchange for the same amount of goods. Prices rise. This has been going on at ever increasing speed ever since Gold and money were divorced in 1971 and all monetary discipline was jettisoned. But for the past 25 years, from mid 1982 until mid 2007, the prices that were rising were predominantly those for financial “assets”, not those for economic goods and services. This is now being reversed.

Camouflaged Inflation:
By ANY rational measure, the level of inflation in the period between 1982 and 2007 dwarfs into insignificance the level of inflation of the previous decade. Yet that decade is universally known as “the inflationary 1970s”. With “inflation” having been successfully re-defined as “rising prices” long before the 1970s, the reason for this is not hard to find.

In the 1970s, what was rising was the prices of REAL goods and services, notably precious metals. Between 1982 and this year, what was rising was the prices of paper financial “assets”. The “price” of Gold rose from $US 35 in 1971 to $US 850 in 1980. This was universally viewed as highly “inflationary”. The “price” of the 30 stocks on the New York Stock Exchange which constitute the Dow index rose from 776 in 1982 to over 14000 in 2007, this was not viewed as in any way “inflationary”.

Yet inflation was constant in both periods, and constantly accelerating. In 1971, the entire funded debt of the US government was a bit more than $US 400 Billion. By 2002, the ANNUAL real US budget deficit was higher than that. Prices did indeed soar. But WHICH prices? Stock prices, bond prices, option prices, derivative prices – the prices of PAPER assets. The prices of real goods and services were quiescent because that was NOT where the additional stock of money was going. And precious metals prices, THE “inflation indicator” of the 1970s, were quiescent throughout. Even the Gold bull market of the past five plus years has not quite brought the$US “price” back to where it was in January 1980, despite the fact that inflation (properly understood) is increasing at multiples of the levels it reached in the 1970s and despite the fact the US Dollar has plumbed new all time lows for the past three months.

For the vast majority of people (the ones who have accepted the definition of inflation as being “rising prices”), the rampant inflation of the past 25 years has been camouflaged very effectively. To them, rising prices in the paper markets (including the paper markets for mortgages) were a sign of “prosperity” and “economic growth”, they had nothing to do with inflation. To those people, what has happened since the global credit freeze showed up in August is inexplicable. But what they CAN see is the prices of real goods and services exploding upward all around them. The camouflage is being ripped asunder.

Stagflation Redux?:
The term “stagflation” was actually coined by a UK Chancellor of the Exchequer to describe the state of the British economy in 1965. It came into use in general to describe the situation in the 1970s, a period of rising goods and services prices combined with increasing unemployment and falling economic “growth”. This was a combination of events which Keynesian economists had held to be impossible for decades.

As witness the November 2007 year-on-year increases in US prices, prices of goods and services are again rising at rates not seen since the 1970s. With economic “growth” being defined as the amount of borrowing and spending taking place in the economy, the interbank lending freeze is prompting talk of an imminent and official US recession. And despite the best efforts of the statisticians, unemployment is now inexorably on the increase in the US and across the west.

But while the economic situation is similar on the surface, the depth of the current problem is vastly different from what was faced in the 1970s. The 1970s was the first decade of the global fiat money system. The consequences of the inflation unleashed were readily visible to everybody. Although the Fed certainly tried, official interest rates could not be manipulated in anything like the same manner as they are now, because the consequences were too readily visible in the REAL economy.

Today, we live at the end of a 25-year period during which the consequences of much more virulent levels of inflation have been hidden in the prices of paper assets. The ethos of saving and investment has been replaced by the ethos of borrowing and spending. To call what is presently happening “stagflation” implies that the problem can be “solved”, just as it was in the 1970s. That is NOT the case today.

It’s Too Late For 1970s “Solutions”:
At the beginning of the 1970s, the US government had a choice. They could either stop inflating or renege on their pledge to redeem US Dollars with Gold. They chose inflation. At the end of the 1970s, they had another choice. They could either let the US Dollar utterly collapse or give up, for a while, their control of interest rates. They chose the Dollar and US market rates spiked above the 20 percent level.

Please note this carefully. According to official figures, in November 2007, US wholesale prices rose at the fastest monthly rate since August 1973. August 1973 was a few short months after the beginning of the global fiat currency era, a time when the sudden ending of fixed exchange ratios between currencies led to an explosive upmove in prices and rapidly rising interest rates. In November 2007, year-on-year producer prices rose at their fastest pace since October 1981. In 1981, market interest rates in the US remained at or above the 20 percent level for the entire year, reflecting a “risk premium” sufficient to lure the world back into US Dollars as the “reserve” underpinning the global monetary system.

Today, the world again faces a “systemic” crisis at the core of its monetary system, just as it did in 1973 and 1981. But today, we are at the other end of a quarter of a century during which monetary inflation has been constant and constantly increasing. It was the abandonment of SOUND money which started this sequence of events. At the end of 2007, there is only one thing left which can “solve” the problem. That is a return to SOUND money

©2007 – The Privateer
http://www.the-privateer.com
capt@the-privateer.com
(reproduced with permission)

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