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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Public Losing Confidence in Official Inflation Statistics - Inflation Brainwashing Starting to Backfire

Economics / Inflation Dec 20, 2007 - 01:42 PM GMT

By: Money_and_Markets

Economics

Best Financial Markets Analysis ArticleLarry Edelson writes:On at least three occasions over the last couple of years I warned you that inflation was already running at about 7%-10%.

It was a no-brainer. Like you, I experienced rising prices every time I went to the gas pump ... to the grocery store ... paid an insurance bill ... wrote a check for my kids' college tuition ... or bought new clothes.


But naturally, the pundits in Washington kept insisting that inflation was benign, running a mere 2%-3%. Even with the value of the U.S. dollar plunging, they kept telling you that inflation was virtually nowhere in sight.

In the May 31 issue of Money and Markets , I also told you that it was just a matter of time before the inflation brainwashing by Washington would blow up in their faces ... and eventually become the biggest financial scandal of our time.

It is at that point, I said, when the private sector will lose all confidence in the powers-that-be. It is also when they will start taking things into their own hands, buying in anticipation of further inflation, and thereby pushing the inflation cycle even higher.

And we're on the doorstep of that new cycle now ...

First, public confidence in the Federal Reserve is quickly eroding. The Fed's moves to head off the subprime crisis are too little, too late.

Even the latest initiative — the cooperative money-pumping actions of the Fed, the European Central Bank, the Bank of Canada, the Swiss National Bank, and the Bank of England — is failing.

Second, the inflation genie is now starting to rage, popping out of its bottle, even in the official numbers. Last week's figures confirm it ...

  • November's wholesale prices jumped higher and faster than at any time in 34 years, up a whopping 3.2%. That's the equivalent of 38.4% inflation on an annualized basis! Even if it averages one-quarter of that, you're still looking at over 9% inflation at the wholesale level.
  • Producer prices rose 7.2% in November, their biggest jump since October 1981.
  • Unfinished energy products rocketed up 13.3% during November, the biggest jump in history!

Think those numbers are flukes? Think again. Your own experience in the real world tells you that inflation is running higher than what the government is reporting.

Coordinated Effort to Devalue The Dollars in Your Wallet Is Working

More proof comes from John Williams, of Shadow Government Statistics. John is what I call a forensic accountant, one who pours over government data to uncover the shenanigans Washington uses to massage and manipulate data.

According to Williams, a more accurate measure of inflation — a methodology that backs out government manipulations — hit 11.7% in November.

I repeat: That's 11.7% inflation!

Moreover, Williams has picked up on another worrisome trend, also previously reported here in Money and Markets by yours truly ...

Money supply is surging at its fastest rate of growth since June 1971 — the fastest rate in 36 years!

How do we know since Washington stopped publishing the "M3" data last year (probably because it was starting to show the government's runaway money printing)?

Because Williams painstakingly reconstructs the old "M3" estimates of money growth, and this reconstructed figure is showing money supply currently growing at an annual rate of 15.7%.

Since historically inflation tends to track M3 money growth pretty closely, I expect we will soon see 15%+ inflation.

All of this, mind you, is DELIBERATE on the part of Washington and the Federal Reserve. As I have held for years now, politicians and central bankers will always opt for inflation over deflation.

Reason: Inflation (devaluing the currency, the dollar) makes it easier for the public and private sectors to pay off debts, because it pushes up asset prices.

Bottom Line: Inflation Is Headed Higher, Much Higher

Secretly, inside the Federal Reserve, they're happy to see inflation taking off!

If this were any other time, I would not be so worried about inflation. But these aren't ordinary times. These are unique times for three reasons ...

#1. Never before has the world witnessed a "First World Debt Crisis" like we're experiencing today. Sure, there have been plenty of third world and emerging market debt crises, but the subprime mortgage disaster is the first time developed countries have faced such a large, widespread debt debacle.

#2. The dollar is hovering just above record lows and is headed much lower longer-term.

#3. Unprecedented strains have been placed on Mother Nature to pony up natural resources to meet the demand of almost four BILLION people in China, India, and other emerging markets — all who are now desirous and freer than ever to pursue better lifestyles.

Could this be any more bullish for inflation? Hardly! In my 30 years in the markets I have never seen forces so inflationary ... so enduring ... so potentially long-lasting ... and so critical for investors to understand.

Another thing this inflation means ...

The U.S. Is ALREADY in a Recession!

Every day of the week you're hearing one pundit after another debate whether or not the U.S. is heading into a recession.

For the record: I have been saying since August the U.S. is already in a recession. Why? Let's take a look ...

The most optimistic estimates of U.S. GDP show the country growing at a 4.9% annual rate.

The real rate of inflation — as I just showed you above — is running at 11.7%.

So what is the net inflation-adjusted real growth of the U.S. economy? It's not growing at all, but rather contracting at a rate of 6.8% (4.9%-11.7%)!

Most of the contraction is occurring in the property markets, where real estate prices have plunged and seem headed for further declines early next year.

But layer that on top of the contraction you're starting to see as a result of the spill-over effects of the mortgage and subprime disasters, and you are almost guaranteed to see a sharp collapse in consumer spending ... retail sales ... durable goods orders ... and more in 2008.

All the while, inflation will continue to surge! So ...

Stay the Course with Natural Resource Investments! They're Right on Track for This Environment ...

In my opinion, there is no better market sector to be invested in right now than natural resources. They offer you ...

 Protection against inflation

 Protection against the falling dollar

 Opportunity to capitalize on the booming growth in Asia and other emerging and frontier markets

 Tangible underlying assets

 A long-term bull market that should last at least another four years, and possibly much longer

My other suggestions also remain the same ...

Stay out of U.S. stocks , with the exception of my recommended natural resource plays.

Stay out of the bond markets. Already, bonds have been hit hard, falling more than 11% since mid-October. I believe more declines are coming. Ditto for corporate bonds.

Keep most of your money in safe , Treasury-only money market funds. My favorites include: American Century's Capital Preservation Fund , U.S. Global's U.S. Treasury Securities Cash Fund , and our affiliate's Weiss Treasury Only Money Market Fund .

Own gold! As much as 10% of your total investable funds should be in gold. A mix of physical gold in the way of bullion coins ... gold funds such as the streetTRACKS Gold Trust (GLD) ... and gold stock mutual funds such as the DWS Gold & Precious Metal Fund (SCGDX) and the Tocqueville Gold Fund (TGLDX).

And if you're more aggressive, hedge directly against the declining dollar with the Falling U.S. Dollar ProFunds (FDPIX) mutual fund. When the dollar is sinking, this fund rises in value. It's available through most brokerage firms or through ProFunds directly ( www.profunds.com ; phone: 1-888-776-3637). The minimum investment is $15,000.

And if you're a Real Wealth Report subscriber, be on the lookout for the December issue, which goes out tomorrow.

In it, I'll be reviewing the recent maneuvering by the central banks, and laying the groundwork and core recommendations for what I consider to be the most exciting investments in 2008.

Be sure to read it as soon as it's published. And if you're not yet a subscriber, you can order online now so you get it in time to kick off the New Year with the right investments.

Best wishes and Happy Holidays!

Larry

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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