Wanna see it? Here it is!
This is the Commodity Research Bureau (CRB) index based on closing levels and plotted on a 2 x 3 point and figure chart.
This is the same chart that we featured last week. The yellow box is the trading range that the CRB was in for more than a year. The vertical line of "X"s on the far right of the chart is the takeoff which only started a month ago, on February 18.
Now, back to the title of this commentary. Of course, any economist worthy of the name knows that "inflation" is not "back", it has never left us since the advent of the Fed in 1913. But since there aren't many economists worthy of the name practicing any more, it has taken the quantum leap by the CRB over the last month to have it finally dawn on people that something is "screwy" here.
For the purposes of what follows, let us outline three different "definitions" of inflation. First, the one that competent economists use. Second, the one that governments use. Third, the one that almost everyone else uses.
Inflation under the first definition - the CORRECT definition - is easy to illustrate with just one statistic. When the Fed was born in 1913, total (funded and unfunded) US federal government debt was $US 1.3 Billion. In 1913, unfunded government debt was precisely $US 0.00. Today, total (funded and unfunded) government debt is anywhere from $US 45,000 Billion to $US 65,000 Billion, depending on which figures you accept. Of that, the funded debt is about $US 7,774 Billion.
The second definition, the one that government uses, is a statistic which claims to "measure" the prices of an ever varying "basket" of economic goods. We say an ever varying basket because every time that the CPI and PPI threaten to get out of hand, the composition of the basket and/or the method of calculation is changed. This became necessary in the 1970s when the world woke up to currency depreciation and both workers and "pensioners" started to demand "COLA" (Cost Of Living Adjustment) clauses on their contracts. It became absolutely vital in the wake of the Fed's rate cutting orgy of 2001. The official "inflation rate" had to be kept down so that the world would not run screaming in horror from the interest rates being offered on US government debt.
The third definition is the most dangerous one - to political establishments, governments, treasuries, and central and commercial bankers. Remember, the price increases which are the popular definition of "inflation" can occur in any combination of three sectors of a given economy. The increases can occur in the prices of financial assets, and/or they can occur in the form of increases in a nations' trade and current account deficit, and/or they can occur in the prices of real (producer and especially CONSUMER) economic goods.
Take the first one - the prices of "financial assets" - stocks, bonds, etc., etc.. In the era between 1966 and 1982, US stock markets went nowhere and Treasury bonds savaged anyone unlucky enough to have bought and held them. The US stock of money increased throughout the period, but the money did NOT go into financial assets, it went into REAL economic goods of almost all varieties - and into the ultimate alternative to "financial assets which are precious metals. This is the reason why the 1970s are known as the "inflationary seventies".
Then there was the era between 1982 and 2000, during which the US stock of money increased MUCH faster than it did in the 1970s. In August 1982, the Dow stood at 776 points. In January 2000, the Dow stood at 11723 points. This blow-off is nearly as big as the Gold and silver boom of the 1970s, yet nobody characterised the US (and world) stock market boom as being "inflationary".
There were two reasons why the great stock market bull was NOT called "inflationary". One is the fact that when everyone is getting "rich", at least on paper, they see this as being a very good thing. And since "everyone knows" that inflation is a very bad thing, how could a situation in which everyone is getting rich be called "inflationary"?
The second reason is that any government which is inflating like mad absolutely LOVES a situation in which they can report that they cannot see any signs of "inflation" anywhere. They know that the "signs of inflation" - a booming stock market and an ever growing trade and current account deficit - are staring them in the face. But they also know that as long as the party lasts, nobody will see either of these phenomena as having anything to do with "inflation". One of the reasons they know this is that the "education system" they have set up has taught them that way.
And because nobody sees a boom in financial assets as being "inflationary", the governmnent does NOT include the prices of these assets in the "basket" which they use to calculate "inflation" via the CPI and PPI. This brings about such grotesque events as stock markets climbing 86% a year (the Nasdaq in 1999), money supply growth in double digits, an exploding trade deficit, and "inflation" (as "measured" by government) of practcally nil.
In any economically "developed" nation, almost everyone owns financial assets, even if they have never bought a stock or bond in their lives. If you use a bank, or have any type of retirement fund, or have any type of insurance, you "own" stocks and bonds. These are the mandated (by government) investments which banks and pension and insurance funds must own. It is NOT in the interest of governments or bankers or pension or insurance brokers to point out that the main impetus behind the increased prices of their investments is the increase in the stock or money engineered by the central and commercial banks.
The phenomenal increase in the stock of money which began when the $US and Gold were divorced in 1971 spent the first ten years mainly flowing into the prices of real goods. These were the prices of goods which everyone had to BUY. It was therefore seen as a very BAD thing and almost culminated in the destruction of the global monetary system. It did culminate in 20% plus interest rates in the US and a whacking great "recession".
But that all ended when the prices of financial assets took off in the early 1980s. Yes, the Japanese market keeled over in 1990 and US markets keeled over in 2000, but by that time, a global web of financial asset paper and their "derivatives" had been weaved which was so huge and complex that the new money which continued to flow continued to have a "home" within the financial assets sector. As an aside, it should be pointed out that real estate, which is a real economic good but a consumer good, functions as a financial asset. This is because as real estate valuations have increased, the function of real estate has not primarily been a place to live, it has been a source of new borrowing and spending power through refinancing.
Now, scroll all the way back to the top of this report and take another look at the chart of the CRB index. Two things should strike you immediately. The first is the simple fact that the CRB's bull market began in late 2001, shortly after the $US index reached its peak. the second item is, of course, the quantum leap taken by the chart in the short month since February 18 - the bottom of the vertical line of "X"s on the right of the chart.
Here comes the INFLATION - in the old-fashioned 1970s definition - rising prices of things which everyone has to BUY. This is a quantum leap in the price of the raw materials of an advanced economy. A leap in the price of these raw resources inexorably flows throughout the gamut of producer goods and ends up squarely affecting the prices of CONSUMER goods throughout an economy. The process is inexorable. Once started, it cannot be stopped.
Yes, the CRB started to go up in late 2001. Gold in $US terms started to go up in early 2001. But both the effect and the message given by these rising $US raw resource and precious metal prices did not get through. The financial sector bubbles, notably in real estate, were still growing. Starting in early 2003, US stock markets made a stupendous comeback. And right up until a month ago, longer-term Treasury yields have been falling almost as fast as the Fed has been lifting official rates.
For nearly four decades, the vast majority of people throughout the western world have been literally "conditioned" to look at inflation as being nothing more or less than the rising prices of consumer goods. For almost a quarter of a century, the ever accelerating avalanche of new credit money creation was flowing into financial assets. That is now reaching - or has already reached - a peak. Until a month ago, there was no official evidence of rising consumer goods prices. Both the CPI and the PPI remained marvellously suppressed.
That is all going to change, very soon, with this breakout of the CRB index. The REAL significance of this change is that while the inflation, properly understood, has never gone away, the effect of the inflation has long been to make people feel "rich" as the prices of their financial assets rose. Now, inflation is going to start to make people feel poor again, as the prices of everything that they have to BUY starts to rise faster and faster. It is easy to get someone who is feeling richer to borrow, even if interest rates are rising. It is hard to get someone who is feeling poorer to borrow, especially if interest rates are rising. And if people borrow less, the fuel for the credit-based monetary system is choked off.
That is already starting to happen, as a glance at the explosion of US government deficits since 2001 illustrates. It is going to accelerate, which means even more government borrowing, necessitating higher interest rates, making everyone feel poorer still. That is the most vicious of financial circles imaginable, and inevitably results in more and more people seeking a way to get off the "ride" altogether.
And, of course, that's where Gold comes in.