The following excerpt appeared in the April18, 2011 issue of the Wellington Letter, an investment and economic analysis newsletter targeted at serious investors, as well as individuals striving to understand the implications of financial, economic, social and political trends around the world. This excerpt has been republished for your reading pleasure with permission from Bert Dohmen, President of the economic analysis and investment firm Dohmen Capital Research, and author of the new book Financial Apocalypse: Predicting the Unpredictable.
Global Underreported Inflation Disguises Weakness
China’s official inflation rate (CPI) just came in at 5.4%, higher “than expected by analysts.” Well, it’s not less than we expected. In fact, this is a fairy tale. Actual inflation is mid-teens. Official food inflation year-over-year is 11%.
All the “hot” international markets have an accelerating inflation problem. Russia is running at 9.5%, India at 9%, Brazil 6.3%. What always happens in such an environment is that the central bank hikes interest rates, but always too little, too late. The added cost of money raises the cost of business and is passed on as price increases, causing even higher inflation. And that’s how these countries will see double-digit inflation this year. Write that down as our forecast.
When that happens, they will become more forceful in tightening money, availability of credit, etc. And that eventually produces a recession and a financial crisis.
There is another aspect to this under-reporting of inflation: the GDP growth numbers of these countries are fictitious. Yet, money managers apparently believe them and are sending billions of dollars overseas into stocks in those countries. Ex: let’s assume a country’s nominal GDP growth is 15%. Official inflation is 5%, which is deducted from the 15% to give headline GDP growth of 10%. But what if actual inflation is 10% instead of the “official” version of 5%? Then actual GDP growth is 5%. That certainly reduces the great growth stories of these emerging markets.
In the U.S., inflation is also far underreported. John William’s www.shadowstats.com calculates the CPI before the “fudge factors” were introduced by Bush Senior and Clinton. Here is a chart showing official CPI and the one from Shadowstats.
Note that they have the CPI at 10%. If we use that to convert nominal GDP to actual GDP, then we get big negative economic growth. In other words, the reported GDP growth is just price increases. Here is the chart from Shadowstats:
There you have it: the US economy has been shrinking since 2001 if you factor out price increases, according to shadowstats.com. Even the huge credit bubble from 2003-2007 was insufficient to give positive, “real” growth if you correct the inflation numbers. Of course, the average governmental economist would vigorously debate this.
However, please consider that “real” wages (inflation adjusted) have been declining for 30 years or more. The labor unions tell us this while making the point that the rich have prospered at the same time. That the only thing we agree on with them. However, their insinuation is that the rich have taken the money from the laborers. The truth is that the inflationary policies of the Fed have made many people poorer, while the smarter people have learned to protect themselves and even profit from the inflation. Yes, inflation is the great, silent tax.
The Fed continues to shovel liquidity into the financial system but it is doing little to fuel growth, except in the way of prices for consumer necessities. They just hope that eventually some of that money will be used to grow businesses and jobs.
In the meantime, there are no inflation concerns at the Fed. Federal Reserve Vice Chairman Janet Yellen said the increase in food and fuel costs will have only a temporary impact on inflation and don’t require an adjustment in monetary policy.
Bloomberg quotes Yellen: “The surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view; warrant any substantial shift in the stance of monetary policy.”
That’s an amazing statement. So, she admits we have rising demand and diminishing supply. What is causing the rising demand? Is it possibly excessive money growth from the major central banks of the world?
Learn more about the Wellington Letter by visiting Dohmen Capital Research.
SHTF Plan Editor’s Note: Over time, regardless of short-term and intermediate-term movements in stocks, commodities and precious metals, prices for essential goods will continue to rise. It’s basic mathematics and it simply cannot be ignored. While Ben Bernanke may have held a press conference on Wednesday suggesting that the second round of quantitative easing will end in June, he also indicated that the Fed will continue engaging in other “aid programs.” It sounds like the Fed is working on coming up with another term to describe their QE activities, because QE is just so 2010.
Clearly, the Fed has two choices. Either stop printing and pull liquidity out of the system, which will likely collapse the stock markets and completely destabilize our supposably stable housing market and economy, or, keep printing and watch price increases continue to accelerate, possibly leading to a hyperinflationary Armageddon. Our view is that the Fed will continue to infuse the financial system with money until the very end – they’ve committed well over $20 Trillion already and there’s no turning back now.
All the while, the Fed, Treasury, US government leaders and global central bank officials will create boogeymen of everyone and everything except themselves. Recently, President Obama announced that the Justice Department will open investigations into market manipulation involving traders and speculators who may be attempting to profit from the economic malaise affecting the average Joe on Main Street.
Our response?
Look in the mirror and around your conference table. The speculators and manipulators are right before your eyes.
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Don’t worry everyone. We are in real good hands.
The world’s elite care about you.
The governments care about you.
They will solve the economic problems and take care of us all.
It is no secret that there is a cartel manipulating the currency and controlling the corporation. All you need to do to protect yourself from it is to walk away from it. Quit using its numbers and money where possible. Immediately redeem ALL FRNs for something of value.
Then step back and watch it all fall apart. If you get far enough away you will not get hurt.
Always remember that GDP includes gov’t spending. The gov’t gets the money by taxing and borrowing. Every gov’t transaction includes additional taxation. Therefore the GDP figures include counting the same supposed productivity several times.
Simple analogy: I count every dollar in my right pocket and put them in my left pocket. Then I count the bills in my left pocket.
Zimbabwe’s official inflation numbers were way low. Their GDP figures were way high due to go’vt spending.
John Galt figured out what to do.
Over the edge:
Can you provide any reputable back-up to how GDP is calculated?
I have long wondered how government spending is factored in?
So, for example, if we spend $1.6 trillion more than we take in, that is still part of GDP, dollar for dollar?
What about the Treasury borrowing from the SS trust fund to pay current expenses. I know that the deficit is lowered by the amount borrowed. Is the GDP increased by the amount borrowed, dollar for dollar?
Any reputable, particularly governmental links, to support your replies would be great.
Don Levit
SHTFPLAN wrote, “All the “hot” international markets have an accelerating inflation problem. … these countries will see double-digit inflation this year.”
As a result, what do you suppose will happen to the value of their currencies in relation to the FRN?
Is this where Marc Faber’s thought of (paraphrasing) “the U.S. economy will be less bad than over there” come into play?
How will this affect U.S. exports?
Will Germany and Africa come to the rescue and buy buy buy?
Fuzzy Numbers
“In this Crash Course video chapter called Fuzzy Numbers, you will learn how our official economic statistics are based on deeply misleading, if not provably false, data. Our economic recession, and possibly depression, can be partially explained by the extent to which we have chosen to provide ourselves with misleading economic data. Certainly if you share my concerns over stocks, bonds, and 401K holdings, or are a serious investor of any sort, you owe it to yourself to listen to this explanation of how wrong our measures of inflation and GDP really are…”
http://www.lewrockwell.com/rep/fuzzy-numbers.html
Some Nice charts and formulas on this one:
The Grossly Problematic Gross Domestic Product
“Regardless of whether you are an experienced analyst, a student or a complete layman, you simply have to be aware of this. And if you read on, you will learn of an alternative gross measure, including some real numbers and a new analytical tool as well as the explosion of a major popular myth.”
http://www.lewrockwell.com/orig5/johnsson6.1.1.html
Don, here is a quick and dirty method that still is higher than true GDP.
From US government websites get the annual budget. Subtract it from GDP. This includes borrowed monies which must be subtracted on top of the original deduction you just did. The reason for double deducting the borrowed monies is due to money spent as part of GDP and debt accumulated. There is NO money in any of the trust funds, just IOUs. This method still has the flaw of taxes paid by gov’t employees not being factored in. Ie. tax revenue multiplier effect. GDP exists for only one reason: forecasting future tax revenue stream. Every cent paid by the gov’t for goods, services and labor contributes to taxable profits. Wages are personal profit, your income.
Without inflation, the elephant is soon consumed one tax bite at a time. Never forget that every transaction carries a tax bill.
Wanna see some real ugly stuff? Go to the Dept of Commerce website and see what our dominant exports are. Then understand that most are completely dependant upon disposable incomes overseas. Licensing/royalties are for the few marketable patents, but mostly for entertainment stuff: music, movies and video games. Tourism? Uh-huh. When you’re afraid of unemployment you don’t take a vacation to the US.
Now imagine Japan selling some of our Treasury notes to pay for rebuilding efforts following the earthquake and tsunami. China is slowly getting out of US Treasuries. Maybe the Treasuries can be sold to some third-world dictators. Happens all the time.
Hope this helps. OTE
Good stuff, Mac.
…and the editor’s note at the end says it all.
Personally, I am on the other side of that bet…as I think at SOME point, The Bernank will be forced to pull liquidity.
When will that happen? Not a clue…but it’s the main reason I wouldn’t touch the stock market right now with a 10-foot pole.
Either way, this is going to end very, very badly.
When 42,400 factories are encouraged to offshore their location by OUR globalist administrations, and these same administrations encourage 30 million Illegals to infiltrate and invade the USA, subsidized by the American family and worker; the economy is going to shrink and the income of working Americans is going to dwindle.
At the same time, these globalist administrations have allowed “free trade” to bankrupt the nation, while the FED spends the American taxpayer into oblivion so the American people will not recognize the theft.
Treason. Washington DC should be burning with Congress in session.
Durango Kidd,
From 2001 to 2007 i slowly finished my bachelors degree from University of Maryland. Most of my business professors praised the outsourcing miracle, which helped industries to decrease their operating expenses.
My question as a naive Greek student was:
1. what would happen to the thousands of U.S. middle aged workers who lost their jobs.
2. In the long run, as more and more became unemployed, who would be able to buy the produced goods.
The answer was always the same. Due to development, new jobs would be created in order to cover the unemployed people.
But this answer was ridiculous because it took for granted that for the next years inceased development was de-facto.
I would love to go back and demand a new answer today. But i think i know it.
Be safe man.
BB can stop liquidity but don’t think he can pull it back from the banks. The barn door is open and the cows are not coming home because they’re in my freezer. I’m waiting for the next new trick. What ever it is, oil will be involved somewhere.
Comments…..
manos @
April 28th, 2011 at 3:11 pm
I’ve been puzzled for an answer to that one for years….
and finally on Alex Jones the person interviewed said it…the elite have earned billions and stored pms, etc…they couldn’t care less what happened and happens to we peons. There will be a revolution…hear that Nappytonto??
I agree with GA Mom, everything will be fine 😀
Now please stay in an orderly line while you are being micro-chipped prior to admission into camp…
Comments….. Sigh…. Well as my ol’ Pap use to say to me,”Boy get used to doing things on your own because there just ain’t no help a’commin”. Manos…sorry you had to pay all that money at the UMD for that answer. I guess in retrospect it was worth finding them out. Hope you got a chance to have some of our steamed blue crabs while you were here. Best to you and your family as I wish you all well.
The USA has the largest economy in the world, and will until at least 2016, when China is set to take over. As such, I have a hard time seeing that we will have a hyperinflationary depression that doesn’t effect all worldwide fiat currencies before that time. There is simply no other place for the demand to go and can’t simply be replaced on a dime. So China HAS to keep purchasing US Treasuries for the time being. I’d like to see what happens to the Renminbi if it gets to float freely and the currency traders get to punish it like they do every other currency from time to time.
So what I see is actually a long slow, with intermittant fast bursts, slog by the dollar to oblivion.
Perhaps it is “normalcy bias” but i don’t see a TEOTWAWKI event having more than a 1/10 chance of happening before the 2012 election.
Now that said,
I miss Mayberry. You ever have one of those days when you want to reach for the on/off switch to the world?
Mac-thanks for all you do with the site and the closing remarks are spot on. So many good comments here. Everybody knows that something is coming and it aint gonna be good.
I’m kind of out of it today. Yesterday I saw a motorcycle rider lying face down in the interstate after tangling with a couple of cars. He wasn’t moving. Cops were on scene but the ambulance was stuck still in traffic jam. Don’t know if he survived but by the looks of him, I doubt it. Then today I drove past a little town and a truck stop in sw VA and both were demolished by tornadoes. Never saw that much total destruction up close before. Then headed into TN and AL. More devastation. Lots of towns completely without power. In the last 12 hrs I’ve seen at least 5 places where tornadoes touched down. It’s awful.
(and being from okla, I’ve seen tornado damage before, my wifes cousin was killed in one 2 yrs ago) In some places the homeowners were picking through what’s left or standing in the front yard crying. Sorry to be such a downer tonight but I’m just kinda empty right now. Tomorrow It’ll be back to roller coasters and gilligans island and trashing the ptb. For now, I sure would like to turn off the world and be a kid again.
Mr Fife. can we play stickball on main street? There aint no traffic…
Maryland is one of the most “liberal” (with the least personal freedom and extremely high violent crime rates) states in the U.S. and its schools from kindergarten to Johns Hopkins are all run by far leftists. To expect truth from them is foolish.
You studied the wrong subject. You studied a subject where you learn “facts” that are really just opinions/propaganda. You should have studied mathematics, physics, chemistry, where “facts” never become “opinions.” Or maybe Philosophy so at least you’d be able to think for yourself…
Chin up there SmokinOkie!, this ain’t Mayberry, but how about a small town in Mississippi instead? hehehe…….:)
http://www.ihatethemedia.com/a-simple-way-to-stop-westboro-baptist-church-funeral-protesters
What else is new. The whole regime is corrupt. It’s corrupt because we the people allow it. Until we stand up, nothings going to change.
JOIN THE REVOLUTION
Read “Common Sense 3.1” at ( http://www.revolution2.osixs.org )
We don’t have to live like this anymore. “Spread the News”
FIGHT THE CAUSE – NOT THE SYMPTOM
Spot on regarding speculators, geeez, so I don’t expect anything to be done.
Keep paying high prices for gas, food and everything else. And as a justification for why our economy can not recover, OMG.
Without increasing manufacturing, the unemployment will increase, How do they create jobs or expect to recover or is this intention all along?
Kissinger and Greenspan said, deflation and inflation are two of the tools to put people into poverty.
I guess I just have to keep hoping things will get better.
No surprise here, is there? We’ve been lied to for a long time. In fact, most of the people in America will swallow a lie much faster than the truth because the truth, often, hurts. So, its easier on everyone to lie, lie, lie.
But, those lies are getting harder and harder to hide because the pain they are lying about is hurting the people. For all of this to get fixed, the pain has to be so great that the whole house of cards collapses in on itself. Many are crushed in the rubble. The subsequent recovery has to be done by honest people and will be since many will swing from branches by ropes.
I don’t want this to come, however, I hate the dishonest, police state and economic falsehood environment we have now. It needs to crash and it needs to crash sooner than later. Bring it on! It won’t be fun but it will be cleansing and then we’ll get then fresh, new, economic feeling!
…well, it will help us feel a little better as we pick up the pieces.
I can help but cheer on the gas prices, the unemployment and the inflation. The sooner it crashes, the better positioned all of us will be to get it rolling again.
I have always wondered what possible good could come from leaving food an energy out of the CPI. I have to agree with Sarah Palin on tghis one: anyone who believes there is no significant price inflation has obviously not been in a grocery store in the last year.
The official US CPI and employment numbers are so doctored as to be laughable.
Tha vast majority of the “stimulis” money was obviously intended to be wasted and produce no benefit.
Mclame would have been no better. He supported a system of “cap and trade”and “comprehensive immigration reform” (aka amnesty). In the end, they all love more taxation, regulation, and all of them have been dying to get their hands on our guns for years so we would be reduced to rock throwing like everywhere else. A crackdown on protests like we have seen letely in so many countries would have a different outcome in USA because the shots would go two ways.
Comments…..The fed wants the dollar low so our exports will go up…therefore boosting the economy,but they cant control how low it goes(they think they can) but once it goes so low it free falls and and hyperinflation ensues. The Roman Empire fell and so will we.It just takes longer. good post everyone…..love the responses.
SHTF PLAN wrote”…They just hope that eventually some of that money will be used to grow businesses and jobs.”
Wage inflation is getting to be pretty important.
It’s no wonder so many People think QE will continue behind the scenes.
Debt Saturation & Money Illusion
“…No matter what a corporation does to make money, it eventually comes down to a consumer having the money to pay for the goods or services it produces.”
http://financialsense.com/contributors/gordon-t-long/debt-saturation-and-money-illusion
Above, that should be, Bert Dohmen wrote, here too: “…Ex: let’s assume a country’s nominal GDP growth is 15%. Official inflation is 5%, which is deducted from the 15% to give headline GDP growth of 10%. But what if actual inflation is 10% instead of the “official” version of 5%?…”
The Dong is a hot potato now, imagine what it will be like when things get worse? Do you suppose other Asian currencies will be in the same boat? Western currencies too?
Gold, Gresham’s Law & the Dong
“…Latest figures from Vietnam’s General Statistics Office show CPI inflation at a whopping 17.5% – despite a supposedly tight monetary policy.
#3. A Falling Currency – The Dong has been devalued six times since June 2008. Most recently was February 11 this year, when it fell 8.5%.”
http://financialsense.com/contributors/ben-traynor/gold-gresham-law-and-the-dong
One last fact and projection to add, er subtract:
“The Vietnamese government had initially projected the country’s gross domestic product (GDP) to rise between 7.0 percent and 7.5 percent this year, accelerating from an annual growth of 6.78 percent in 2010.”
http://www.reuters.com/article/2011/03/08/vietnam-economy-growth-idUSHAN6753820110308
The numbers that emanate from the current sitting administration aren’t meant for those with half-a-brain or those that are mildly educated or those that can and want to handle their own situation. No not a chance, they are meant for the mindless masses that are going to vote yet once again for “you know who” once again touting hope and change, “but” we need more time and money. Let me make this perfectly clear. BuuuLLLss***tt!!
There is a good chance those reading this know who I am talking about.
“If We Can’t Unite To Topple Fed Dictator Ben Bernanke, Our Complete Collapse Into Neo-Feudalism Is Assured”
http://ampedstatus.org/if-we-cant-unite-to-topple-fed-dictator-ben-bernanke-our-complete-collapse-into-neo-feudalism-is-assured/
Six days on the Road Okie, turn it up.
Does anyone think that disaster can be delayed indefinitely? In other words do you think that they can delay any collapse forever?
I believe things are falling apart all around us, but isnt it true that someone or some group is always masking it?
I guess my question is at what point wont anyone be able to cover up the destructive reality of what has happened and is happening??
Bulls–t is right… Don’t p-ss down my back and tell me its raining!
Let’s go to WalMart and get one of them battery powered TVs to watch Dancin’ with the Celebrity Survivor Idols. Oh, and to keep the batteries charged, let’s get a battery powered battery charger!
Johnny V- Thanks for the link. That WAS funny!
The sun came up again today, so it’s business as usual for USA, Inc. I wouldn’t believe a washington beaurocrat if they told me good morning. You know these numbers are all cooked. At some point it will get so bad that even the masses stop believing them. Or maybe not. I thought we should have reached that point a long time ago.
One thing I noticed yesterday, and this does have something to do with prepping, not the previous post and all the melancholy sadness and such. It just came out that way last night- sorry, but you all know what a sensitive guy I am (he said with a devilish smirk). Driving through a couple of small cities in Alabama, population about 15,000 each. There was no tornado damage at all, only problem was that both towns had no power anywhere. Schools are closed. Almost everybody is off from work. So what are they doing? Everybody, and I mean EVERYBODY is out driving around! At first I wondered why. Then it came to me.
This is probably the conversation going on in every one of those thousands of cars: “Traffic sure is slow, what with all the lites being out, and having to do a 4 way stop all the way thru town.” “Ain’t no damage to look at. what ya wanna do?” “I dont know. Cant go home- aint no a/c or tv or juice for the video games. Let’s go get something to eat.” “Where ya wanna go? The taco bell is closed. So is KFC and McDonalds, and the chinese place.” “I dont know, just keep driving, we’ll find something” ” Hey, we’re almost out of gas! Ya think the station 12 miles east of town has power?” “I dunno. Drive out there and see…” When they reach the station there is literally a half mile of cars lined up to get in. If they have the patience, it will take 2 to 3 hrs to get gas.
And on and on it goes.
Now, this mindset is not unique to Alabama. This could be any town in america. They’re just out seeing the sights after the disaster. Burning precious fuel that can’t easily be replaced. No idea when the power is coming back. No provisions for disaster of any kind. I saw more than a dozen people walking with gas cans, most were a few miles from the nearest town. These are good, decent folks and yet they have no clue. Some will probably still be without electricity for weeks. A spokesman for Alabama Power said on the radio that the damage is so severe (Lines, Thousands of poles, transformers and sub stations) and so widespread that they will have to basically REBUILD THE GRID for many entire communities. How will these people survive an actual shtf event when jobs, grid power, fuel and most other commerce is not coming back? It’s scary to think about what the situation would be 2 or 3 months into a collapse. One good thing might come from this, maybe at least a few of these people will learn something. I sure hope so.
As for me, I’l just keep truckin’ down the road with this trailer load of sail boat fuel!
I beg to differ with the premise of this article. I think the official numbers ONLY account for inflation (probably not even all of THAT). This is especially true in USA.
I am afraid Mac is being too kind here and that things are worse than they appear.
@Dylan – You might want to research that fact on China. Lately they’ve been selling 2-3x more on the backend then they are purchasing. They’re selling long dated treasuries and buying smaller amounts of short dated ones. Quite smart of them actually, have a better chance of being paid in 7 years then 20 years in all honesty (though I doubt we last 7 years like this).
@Jane – Nope, it won’t get better until the people revolt, and they’re too worried about xyz sports team to matter. Likely why the government wants Football back on track asap, keep the sheeple “busy”. I agree with you, I think all we can do is hope it gets better (and prepare).
@UMD? – You heard of that whole global warming bit? Hardly any scientific data to back up their claims and we have emails showing they were fudging data to get the outcomes they wanted. Science is biased based on who is funding them and their wanted outcomes. Unless you analyize nothing but raw data it’s all biased. Sadly.
@SmokinOkie – That’s a funny/scary story to say the least. Drive around aimlessly, good idea!
Same thing happens here during winter storms. We lose power for 12-48 hours at a time and you see people driving around looking for damage or something (God knows what, idiots) and then knocking on doors to borrow fuel. Of course I’m always “out”. Sorry, too stupid to plan too stupid to survive.
I have to admit, the deletion of energy and food prices when calculating inflation was a brilliant political move by the ruling class. Sadly, there are still many idiots out there who believe these numbers.