Over time, any economy that's based on a paper (fiat) currency will see its medium of exchange depreciate and lean toward hyperinflation. It doesn't matter if the economy is large or small, emerging or industrialized.

When someone says inflation is dead, show them the following …

• A postage stamp in the 1950s cost 3 cents; Today, it's 41 cents: That's 1,266% inflation.
• A gallon of gasoline at full-service stations used to cost 18 cents; Today it's $3.25 for self-service: That's at least 1,705% inflation.
• In 1959, the average price of a new house was $14,900; Today it's $220,900: That's 1,382% inflation, despite the recent price dip in the real estate market.
• A dental crown used to cost $40 in the late 1970s; My dentist just quoted me $1,400. That's 3,400% inflation.
• In 1970, seniors paid $5.30 a month for Medicare insurance. Today, they pay $93.50 a month. That's 1,644% inflation.

So, no inflation? That's hogwash! We all know prices are mostly going up.

Shame on Washington For
Trying To Tell You Otherwise

The ultimate destiny for inflation wouldn't be so bad if a country's leaders — not just in Washington, but all over the world — leveled with their citizens on how and why currencies ultimately depreciate and why inflation has virtually nowhere to go but up.

Instead, governments like to tell another story, that inflation is virtually non-existent and not a problem. They love to try and brainwash you. It works for a while, but over time it fails.

Sooner or later, the average tax-paying citizen wakes up to the truth. That's when it really gets tricky, and when a country can go into complete turmoil. But until then, the government is happy to keep lying to your face.

One of the ways the U.S. attempts to pull the wool over your eyes is through the phony Consumer Price Index (CPI) they propagate. And over the last 15 or so years, the way Washington manipulates these figures has become downright criminal, in my opinion.

They make their adjustments sound fancy, with complicated terms like "hedonic regression." But here's what that really means …

Officials aren't just using nominal prices. If they believe that a product is better today than it was last year, they say the consumer is getting more value for his or her money. Thus, they'll claim that the real inflation rate is less because the consumer is allegedly getting a better product. Here's a real-world example …

Let's say a new, fully-loaded Buick was $12,000 in 1984, and today it would cost $36,000. The price has tripled in 23 years, right?

Not according to the pundits in Washington. They'll say that for your $36,000 today, you get better power windows, climate control, front and rear airbags, traction control, ABS brakes, a better stereo, better tires, and more. In other words, you're getting much more for your money than you did back in 1984 so the inflation rate is much less.

That sounds good in theory. And to be sure, some advances in technology have allowed you to get more for your money.

BUT …

There are also products that are inferior today. There's cheap plastic instead of real wood. There are rubber bumpers instead of chrome. There are more disposable items than ever before, which means fixing things isn't generally an option today. Throwing them out and buying new parts is seen as more cost efficient. But is it really?

Moreover, try buying something the way you'd like it, instead of the way it's offered. Suppose you wanted to buy a car without power windows. You just don't care for them … don't want to pay for them … and feel you can do just fine without them.

Can you find a new car without power windows today? It's not easy. Instead, you're forced to pay for the item, no matter what.

That "cost" is not factored into inflation, whereas other so-called "quality adjustments" are. So, in the end, all these hedonic adjustments are just subjective determinations made by folks in Washington.

Some 30% of the items in the CPI are lowered for hedonic adjustments! Plus …

The Government Has Other
Ways of Manipulating the CPI

First, perhaps the biggest scam of them all is that the CPI does not include the cost of taxation. Not one dollar of taxes — federal, state, or local — is counted. Nor does it include property taxes or usury taxes. Since when are these not part of your cost of living?

Second, Washington manipulates the CPI by playing with the cost of housing. Some years ago, when housing prices were inflating faster than rents, the government substituted home prices with the slower growing rental rates. The calculation remains that way today, and it is significantly understating inflation.

Third, government officials don't put much weight on oil, gas and food prices. I have yet to get a straight answer on why this is. Perhaps it's because they don't drive cars, heat or cool their homes, or eat — at least not at their own expense.

I hate to say it, but it's only a matter of time before Washington's shenanigans blow up in their faces. And when it does, it will be ugly, very ugly. Expect to see …

• The value of the U.S. dollar plummet like there's no tomorrow.
• Inflation jump even higher, from what I already estimate is 8% or 10% a year to 15%, 20%, or more!
• A stampede out of the U.S. bond markets, forcing interest rates here to rocket higher.

Another consequence will be that demand for natural resources … real, tangible assets … will go through the roof.

These commodities are already under intense pressures due to rising demand from places like India and China. So I have no doubt whatsoever that you will see $150-a-barrel oil … $5-a-gallon gas … and, eventually, gold at more than $2,000 an ounce.

Former Federal Reserve Chairman Alan Greenspan was right on in 1967, when he wrote, "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."

So if you're a Real Wealth Report subscriber, hold all recommended positions!

Best wishes,

Larry

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-- Posted Thursday, 31 May 2007 | Digg This Article