The Great Inflation Lie Laid Bare

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“Official” statistics now put Consumer Price Inflation (CPI) at around 4.5% in the UK and a little under 4% in the US as measured by the CPI-U data. However no matter who you talk to they never can quite understand why these published figures never seem to match the relentless upward march in prices they see in the real world.

It is almost impossible to track how prices have changed over the years because successive Governments on both sides of the pond had continually tinkered with the figures, generally in the downward direction.

This is beneficial for the debt-laden Governments because they are able to hide real world inflation away from the masses while quietly inflating away their debt bubbles. This, as ever, rewards the profligate at the expense of the prudent and results in the purchasing power of fiat paper currency being eroded more rapidly than one would care to consider.

The Gold Standard

In order to clearly demonstrate how far we have diverged  from reality in the last 30 years then we merely have to look at precious metals such as gold and silver. These both had a big run up in prices in the turbulent 70s and only really perform well in times of inflation and uncertainty. Because of constant tinkering with the former and copious BS from central bankers making us think the latter was a thing of the past, these commodities basically flat lined until just a few years ago.

In fact the most famous indicator of the turning point was the sale of 395 tons of gold by Gordon Brown between 1999 and 2002. The price has never been lower since that time, and it also coincided with the Great Top in western stock markets.

Gold has recently made huge gains from the $250 – $300 an ounce Gordon sold for, and recently topped $1,900 an ounce. This has led many to say a new all time top has been reached, but in terms of inflation-adjusted real value is this actually the case? This is where a comparison between real and “official” inflation becomes so stark.

Because gold is priced in US$ I’m going to use inflation statistics of the US to indicate the point. Official figures for CPI (CPI-U) are available from the Bureau of Labor Statistics, but an alternative “real” CPI has also been produced by John Williams at ShadowStats.

ShadowStats basically takes the CPI as it was during Jimmy Carter’s tenure as president, and continues to calculate CPI in same way as it was done back then. No fiddling, no “adjustments”, just the same base calculations year on year. This allows us to compare where gold may peak if was to reach the same inflation adjusted price as it did in 1980, when it briefly hit $850 an ounce.

Where are we now?

If you take the official CPI-U figures from then to now you would arrive at a figure of around $2300 – $2400 per ounce. This is pretty near to where we have got to and certainly seems to back the calls for a top in the gold market. However when the ShadowStats CPI figures are applied to the peak gold price of 1980 it shows that today, to equal this record top in the price of gold, it would have to exceed $15,000 an ounce!

From this it is not hard to see where the purchasing power of your savings has gone, and is actually worth merely a seventh of even what the US Govt admits has been eroded away in the last 30 years.

So it’s not hard to see why houses have leapt from £10,000 to £200,000 in that time, and it does clearly show that deposits in a bank, whatever the headline interest, bleed away into the debt mountain the Govt creates over time. At the end of the day capitalism is designed for the few, to be paid for by the many.

All that Glisters…

Despite all the hype around gold perhaps the biggest move yet to be made is by its poor relation, silver. Silver also participated in speculation and in 1979 reached nearly $50 an ounce. It is unlikely that such an equivalent price would be reached again today as this was done on huge margin, and the resulting unwinding of the price in 1980 lead to the price crashing – wiping out the Hunt brothers in the process on Silver Thursday (27 March 1980).

However the price is currently sitting around $40 again, so on an inflation adjusted basis just how far COULD it run?

Well, based on CPI-U this would be around $130 to $140 an ounce – more than triple where it is currently – and on the ShadowStats index it would be approaching $350 an ounce.

So the “poor man’s gold” may yet have its day.

In conclusion

Never, EVER, believe predictions of deflation – unless it is consumer electronics or something similar that benefits from technological development and mass production. Deflation is an invented instrument used by central banks and governments to hide their practice of inflating away the ever increasing debt pile. Unfortunately even this scheme cannot last forever, and something really dramatic will be needed to dig us out of the hole we’ve all collectively stuck our heads in.

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One Response to The Great Inflation Lie Laid Bare

  1. georgie says:

    Well, as we say in Yorkshire – I knew ‘there’s duck in hedge’ when I applied the Bank of England’s Inflation calculator to some money spent in 1954 and 1991 – it did not make any sense – but think I will apply their method to my vital statistics and in a couple of years time I should be a size 8 … maybe less! Thank you for explaining what is going on – but on balance being in ignorant bliss was preferable x

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