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For investors, inflation seems to be in the eye of the beholder.

For investors, inflation seems to be in the eye of the beholder.

Today, the commerce department reported that producer prices during the
month of October rose by.8%, while the so-called “core??? rate
rose by.5%, versus expectations of increases of.2% and.1%, respectively.
producer prices have risen at an annualized rate of 4.8%, compared to a 2.1%
increase in the prior year. Even more spectacular, during the first two weeks
of November, the CRB index has risen an additional 5% (to an 8 year high),
with oil prices rising by over 13%. It is therefore safe to assume that the
November’s PPI will increase at a far more rapid rate than did October’s,
and for the year producer prices will have risen by well over 5%. That will
about a 240% increases in year over year PPI. If this rate continues for
another year, next year’s PPI will rise by over 12%!

The infamous bond market vigilantes however are nowhere to be found, having
been replaced by foreign central banks, leveraged speculators, and a bunch
of Pollyanna private investors who buy the Fed’s propaganda that there is
no inflation. Rising commodity prices are either being dismissed as simply
greater demand from China, or welcomed by delusional pundits who believe
that “a
little inflation is a good thing.” Others maintain that rising productivity
will shield the economy from any price increases at the consumer level. According
to Wall Street conventional “wisdom,” inflation is only a problem
when it results in rising core CPI. I have often maintained that such narrow
vision is analogous to standing on a train track waiting to see the caboose
as evidence of an on coming train. Inflation permeates through the price
structure in stages, with consumer prices often moving later in the cycle,
followed by
wages. Furthermore, excluding food and energy prices from the CPI simply
because such prices tend to be volatile is ridiculous when one ignores the
trend, which today is decisively up.

However, while stock and bond investors continue to ignore the increasing
inflationary threat, gold investors do not. So far this month, gold prices
have risen by 3.5%, silver prices have risen by 7%, and the U.S. dollar index
has fallen by almost 2%. So it appears that for some investors, inflation
truly is “in the eye of the beholder.”

Historically, there has always been a great battle between the interests of
debtors, who favor inflation, and creditors, who favor sound money. Debtors
want to repay their debts with cheaper money, while creditors want to be repaid
in money of equal or greater purchasing power. Unfortunately for savers, the
vast majority of Americans are debtors, and monetary policy is therefore being
conducted specifically to benefit borrowers at the expense of savers. The votes
of debtors far outnumber those of creditors, especially since so many creditors
are foreign and cannot vote in U.S. elections. The American bubble economy
can only continue expanding as long as debtors can continue borrowing and consuming.
Therefore, interest rates must be kept low and asset prices kept rising, particularly
residential real estate which acts as collateral for consumer borrowing.

These objectives can only be achieved though inflation, which reduces the
real debt burdens on consumers while increase the prices of their houses, enabling
them to borrow and spend even more. By debasing the value of the dollar, the
Fed is able to keep the dollar price of assets rising. The real key to this
policy is for the Fed to con creditors into believing that there is no inflation
so that they will continue lending Americans money at rates of interest which
do not accurately reflect the actual loss of purchasing power that such loans
are likely to produce. So far, the propaganda campaign has been working, but
recent price action in commodities, gold, and the dollar suggest that that
more and more people are getting wise to the con.

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