The above chart
shows a growing divergence between the Consumer Price Index and what
it would be if the method of calculation had remained consistent.
Beginning in 1983 the government changed its method of calculation to
show lower inflation by excluding food and energy, claiming they were
too volatile to be reliable indicators. The result is the so-called
“core inflation” CPI, which is a favorite of the Federal Reserve.
The latest figure for the CPI reported by the Bureau of Labor
Statistics is 0.4% (for August and also July), but if calculated by
the method used in 1980 the inflation rate would be 7½ percent, as
shown by Shadow Government Statistics (ShadowStats.com).
The chart shows
the difference in the inflation rate only from the change in 1983.
The divergence would be even greater if the effects of several later
adjustments were also included. For example, a reconfiguration of
this statistic by the 1995/96 Boskin Commission made the CPI an even
worse indicator of the cost of living for most Americans. It has
been estimated that from 1996 to 2006 this adjustment reduced by over $680
billion what the U.S. Government would have paid in cost-of-living
increases in salaries, social security, federal employee pensions,
and other benefits.
It seems no one
attempted to objectively determine the real cost of living without
the influence of the flawed government model. The Chapwood Index
sought to remedy that. Its founder, Ed Butowsky, said it is “our
attempt to help people understand why they feel like they aren’t
keeping up and why, as they get older, they feel as though their
money does not go as far – even when they’re following the rules,
working hard and supposedly beating inflation.”
The Chapwood
Index reports the
unadjusted actual cost and price fluctuation of the top 500 items on
which Americans spend their after-tax dollars in the 50 largest
cities in the nation.
The latest average price increase of the 50 cities is 8.9%. Not a
single one of the cities was even close to the near zero (0.4%) inflation of
the CPI reported by the U.S. Bureau of Labor Statistics. The lowest
of the 50 cities in the Chapwood survey was Tucson, Arizona, at 5.7%.
http://www.chapwoodindex.com/
Butowsky
notes that routine salary increases and corporate pensions are often
keyed to the CPI. “The
middle class has seen its purchasing power decline dramatically in
the last three decades, forcing more and more people to seek
entitlements when their savings are gone. And as long as pay raises
and benefit increases are tied to a false CPI, this trend will
continue.” The Chapwood Index shows where people actually spend
their money. The CPI is not a true indicator of the cost of living
since it excludes food and energy, which are not only necessities but
for many people their largest expenditures.
Like
the inflation numbers, the unemployment statistics have been
manipulated by the government to present a more favorable picture.
Notice
that the most complete measure of unemployment (SGS) places today's
unemployment rate at 23 percent. That is not only worse than in the
recession of 2007-09 but comparable to what occurred in the Great
Depression of the 1930s. The
so-called recovery from our recent recession has been the weakest
since World War II despite the most massive effort in history to
promote economic growth and employment with the stimulus of
“quantitative easing,” which is simply a scholarly-sounding term
for printing money.
In
addition to the above charts, there are many other indications that
quantitative easing has not benefited the economy. The labor
participation rate (those working or looking for work) fell in
September 2015 to 62.4%, the lowest level since 1977. Wages have
increased by the slowest rate since the 1980s, and median household
incomes are still falling, down 1.5% in 2014 from 2013, according to
new census data available mid-September 2015.
Small
businesses account for most new jobs and employ about half of the
private workforce. But small business deaths now exceed births for
the first time since the Census Bureau began keeping records more
than 30 years ago.
The
September jobs report was a jolt. It said only 142,000 new jobs were
created, compared to economists' forecast of 206,000. The numbers
for August and July were revised downward by 59,000, showing an
average of only 167,000 for the third quarter. That's down from the
monthly average of 198,000 for all of 2015 so far, which is down from
260,000 a month in 2014. (Previously, April and May were revised
downward by 54,000 jobs.) And of the 142,000 jobs created in
September, only 118,000 were in the private sector. Some 350,000
Americans left the labor force in September. An all-time record of
94 million people are not employed or actively looking for work.
Obama's
$787 billion (later adjusted to over $800 billion) stimulus program
was a failure of the Keynesian idea that government spending produces
a multiplier effect as dollars would be spent again and again
throughout the economy, multiplying wealth. Franklin Roosevelt tried
the same thing. Didn't work then—in fact, prolonged the
depression. Didn't work for Obama either. Keynes' biographer Hunter
Lewis says, “There is just no evidence” that spending ever cured
a recession, and Keynes “wasn't much interested in evidence.”
Harvard economics professor Robert Barro has written, “What few
people know is that there is no meaningful theoretical or empirical
support for the Keynesian position.” I discuss this subject at
greater length in my book, but here is a convincing admission about
it by Roosevelt's treasury secretary before the House Ways and Means
Committee on May 9, 1939: “We are spending more than we have ever
spent before and it does not work....After eight years of this
Administration we have just as much unemployment as when we
started....And an enormous debt to boot.”
Here
is a more recent statement, in July 2015, from a paper by Stephen Williamson, economist and vice president of the St. Louis Federal
Reserve Bank: "There is no work, to my knowledge, that establishes a
link from QE [quantitative easing, i.e., bond-buying to increase the
money supply] to the ultimate goal of the Fed—inflation and real
economic activity. Indeed, casual evidence suggests that QE has been
ineffective in increasing inflation....Indeed, mainstream monetary
theory and the experience of Japan for the last 20 years tells us
that extended periods of ZIRP [zero-interest-rate policy] lead to low
inflation, or even deflation. [emphasis added.]"
Japan
is now in its fourth recession since 2008. Annual growth has
averaged 0.85% since 1992, and Standard & Poor's just downgraded
the ratings on its massive national debt, which the other two major
ratings agencies had already downgraded.
Shinzo
Abe was elected prime minister by campaigning for a more aggressive
version of the monetary stimulus policies that have failed Japan for 20
years. He said, “Countries around the world are printing more
money to boost their export competitiveness. Japan must do so too.”
That was his prescription for a degree of “needed” inflation to
bring the country out of economic stagnation and avoid the growing
fear that deflation was now a greater threat than inflation. On
October 31, 2014, Japan's central bank and its main government
pension fund said they would pump trillions more yen into the
long-stagnant economy, now growing at 0.2%. The bank of Japan would
expand its asset-buying program by as much as 33 %. It would now buy
at the market more than twice the amount of new bonds issued by the
government, and it would buy not just government bonds but stocks,
ETFs, and real estate funds.
The
European Central Bank is engaged in a QE policy of buying 60 billion
euros ($67.5 billion) per month in hopes of raising inflation by
increasing the money supply and reducing borrowing costs. That
program, which amounts to more than a trillion euros ($1.1 trillion),
is scheduled to end in September 2016; but on September 3, 2015 ECB
President Mario Draghi said he is prepared to expand the program. He
previously said he would do “whatever it takes” to save the euro.
Deflation could stifle consumer spending and make it more difficult
for European governments and businesses to repay debts. In response
to Draghi's comments, the euro tumbled 1% against the dollar.
Jean-Michel Six, Standard & Poor's chief economist for Europe,
said he would not be surprised if the ECB's program extended into
2018 and reached 2.4 trillion euros, twice what was initially
committed.
“The
next stage for both the Bank of Japan and the ECB is more easing; they’re
going to keep putting fuel on the fire, but at some point the fire’s
big and there’s nothing left to burn -- What do we do?”
said Philip Moffitt, the Asia-Pacific head of fixed income at
Goldman Sachs Asset Management, which oversees about $1 trillion
globally. “So your immediate response to that would be a huge
sell-off in risk assets.”
The stock market is poised for a huge sell-off of risk assets. Stocks are terribly overpriced in view of the economic weaknesses I've cited.
Since
2008 the combined balance sheets of the world's five largest banks
have increased by a staggering $9 trillion. This has inflated
financial assets just like excess credit inflated the stock market
bubble in the 1920s and the housing/mortgage bubble in the 2000s.
Today's stock prices have also been inflated by companies buying back
their own stocks with near-zero interest rate borrowing. And those
same low interest rates have led many people to withdraw from
traditional savings and shift to riskier investments such as the
stock market in hopes of higher returns—and very likely also
because of concern about the future value of the dollar. What is the
point of saving for the future when interest on savings is so low and printing vastly more dollars will surely make the currency worth less in the
future? If central banks achieve the 2% inflation they now view as
optimal, nearly half the principal of today's savings accounts—43%—will
disappear in 25 years. Do you want to settle for that or roll the
dice for greater return? With those two bad choices, gold becomes more attractive.
With
all the fiat money being printed by central banks, it should be no
surprise that people all over the world have been turning to gold.
As
we have pointed out in previous writings, there is a global shift of
gold from the West to the East and increased demand for physical
possession of gold. The Shanghai Gold Exchange has become the
world's largest gold market, and here we are talking about physical
delivery. According to the China Gold Association Yearbook, China in
2014 imported at least 1,250 tonnes and domestically mined 452
tonnes, for a total of 1,702 tonnes. In the week ending September
25, 2015, the Shanghai Exchange delivered over 65 tonnes of gold,
making a year-to-date total of 1,958.7 tons—an annual rate of
nearly 2700 tonnes, which represents about 90 percent of world's gold
mine production this year.
The
remaining 10 percent cannot possibly meet the demand. Indian demand
is conservatively estimated at 950 tonnes, and there is little
variation in this since it is determined largely by cultural and
religious factors. Some of this demand will no doubt be met by
smuggling and recycling of “scrap” gold, but those cannot
possibly make up the difference. Nor have we included here any
demand from other Asian countries, the Middle East, Europe and the
United States, which collectively usually account for up to 50% of
global demand. Most likely China has grossly understated the amount
of gold it produces domestically, but in any case only a far higher
price will determine how newly-mined gold
is rationed to world demand.
President
Franklin Roosevelt outlawed private ownership of gold in the 1930s,
but there remained one final link between the dollar and gold.
Foreign central banks could still exchange dollars for gold until
1971, when President Nixon ended that policy.
When
Deng Xiaoping ascended to power in China, he made many far reaching
market reforms that transformed the rigid, backward communist nation
into an economic powerhouse. Through its exports to the U.S., it
accumulated trillions of dollars. Some of these were used to buy
U.S. Treasury Bonds—in effect, recycling China's trade-surplus
dollars back into the U.S. There were benefits to both sides. China
could use the dollars for investment in developing the country and
paying wages for its workers, and the U.S. government needed a buyer
for its bonds to pay for its huge deficit spending.
It
seemed that both sides were “trapped” in a relationship that
neither wanted to give up nor could see a way out of. But
China grew increasingly uncomfortable about accumulating greater
amounts of dollars whose future value would be eroded by the
expansion process it was financing. China was fearful that U.S.
printing of money would lead to inflation and a hard fall of the
dollar, which would seriously reduce the value of China's holding. In
2009 Zhang of the China Gold Association stated:
“In
view of the declining US dollar value, it is paramount that China
steps up gold reserves. How to do this is the only question that
China is debating these days. The possible steps include opening up
new gold mines, aggressively going for gold mining, buying gold from
the open market etc. All said and done, it is imperative that China
needs to buy more gold,”
China
has done all the things Zhang recommended, and more. For instance,
the government takes out ads on television urging people to buy gold.
It has established gold stores throughout the country. They look
like jewelry stores but exist to sell gold. Any person can walk into
any such store or bank and buy gold for cash. No questions asked.
It's all part of the goal of “storing wealth among the people.”
Meanwhile,
China's currency, the yuan, has climbed in stature. It is now in
fourth place as the most-used currency in cross-border payments,
having surpassed the Japanese yen in August. As recently as 2012, it
was in twelfth place. It is now behind only the U.S. Dollar, the
euro, and the British pound. The volume of foreign exchange trades
in yuan reached more than a million in a single month in August,
rising 50% from the same period last year. More than 1,000 banks in
100 countries can now use the yuan. According to a Bank of England
survey, trading in the yuan rose 25% in the six months to April this
year while trading in other currencies fell 8% on average.
The
London Metal Exchange, the oldest futures exchange in the world, in
now owned by the Hong Kong Exchanges and Clearing Ltd., which has
launched yuan-denominated futures contracts for some industrial
metals.
China
is no longer “trapped” into buying U.S. treasuries to finance
U.S. profligate spending. Although China and other countries can no
longer exchange dollars for U.S. Treasury gold, they can instead
exchange their dollars for gold on the Shanghai Gold Exchange and
other exchanges.
The
New York Comex is the leader in gold futures contracts, accounting
for 82% of the world trade in them. But the overwhelming majority of
these do not involve any physical exchange of the metal. They are
simply paper trades because most positions are closed out before the
delivery date. A buyer will almost always sell his contract before
delivery is due, and a short seller will do just the opposite.
Neither trader will see the gold, and the Comex will have exactly the
same amount of gold in storage as before those traders participated.
The Comex warehouses gold to provide a delivery option, but
historically most participants haven't used it. That has changed in
the last few years.
Recently
the website zerohedge.com, a highly respected observer and analyst of
monetary happenings, noted that the Comex supply of deliverable gold
had declined to barely 10 tons, its lowest ever, resulting in a
record-high ratio of 124 ounces of outstanding open interest for
every physical ounce of gold in storage. Fears of default were
quickly calmed by the Comex
“boosting
its eligible gold by a whopping 78% overnight,
from 362K ounces to 643K,...However, this was not achieved with an
infusion of actual new gold into the Comex, but
thanks to JPM [J.P. Morgan] reclassifying 276K ounces of gold from
the Eligible into the Registered category,
even as actual eligible gold continues quietly hemorrhaging out of
the Comex.”
Delivery
troubles on the Comex and increased demand for delivery by buyers,
fearing they may have problems doing so later, point to a higher gold
price. That does not augur well for the dollar, but another trend is
developing that is also negative for the dollar. In an article
headlined “Central Banks Dump U.S. Debt,” the Wall Street Journal
stated:
“Central banks around the world are selling U.S. government bonds
at the fastest pace on record, the most dramatic shift in the $12.8
trillion Treasury market since the financial crisis.
“Sales
by China, Russia, Brazil and Taiwan are the latest sign of an
emerging-markets slowdown that is threatening to spill over into the
U.S. economy. Previously, all four were large purchasers of U.S.
debt....China,
the biggest owner of U.S. treasury securities, owned $1.241 Trillion
at the end of July, according to the latest data from the Treasury.
That is down from the record $1.371 trillion in November 2013."
