Bill Bonner

We’ve always wondered why there is so much debate about the rate of inflation. It seems like such a simple thing to track. You go in the store. You buy a box of Wheaties. You write down the price. Next month, you do the same thing. What’s so hard about that?

But what if the box is smaller next month? What if the Wheaties are twice as good? What if you can get the same enjoyment from a box of Wheatie-Puffs at half the price?

What’s the real rate of inflation? It depends on how you figure it. The Labor Department shows consumer price inflation at barely over 2%. John Williams’ ShadowStats puts the figure close to 8%.

We say “close to” and “about” because the numbers are never more than approximations; no point in dressing them up with decimals as though they were precise and reliable.

But comes now MIT University with a project to track prices by monitoring them on the worldwide web. Instead of creating a small sample of prices and checking them periodically, the Billion Prices Project looks at a huge number of prices from all over the web, in real time.

The resulting numbers may not be perfect, but there sure are a lot of them. Using such a huge volume of price information, the Billion Prices Project is probably the most reliable measure of consumer price inflation developed so far.

So, you’re probably wondering… Well, what’s the story? How much consumer price inflation is there?

Over the last 12 months, prices have gone up 3.2%, say professors Alberto Cavallo and Roberto Rigobon, who developed the index.

But get this, the rate of consumer price inflation is speeding up. Annualize the data from the last 3 months and you get 7.4%.

We don’t need to tell you, Dear Reader. If that rate sticks, today’s financial world comes unglued.

By the most recent calculation by the Billion Prices Project, US government bond yields measure only half the rate of consumer price inflation. How could that be? Why would investors buy a bond yielding only half the inflation rate? Are they idiots?

Maybe they are betting that the latest inflation numbers are a fluke. Ben Bernanke said so himself.

“I think the increase in inflation will be transitory,” said the man more responsible for the price hikes than any other living human being.

Mr. Bernanke says gasoline at $4 a gallon…and a box of Wheaties at $5…are features of “global supply and demand conditions.”

Fair enough. Perhaps they are. But what about $1,500 gold? The supply of the yellow metal is barely any greater than it was when it was priced at $1,000 an ounce.

You may say that demand has increased by 50%…but that only introduces a string of other questions. Gold has no uses – other than ornament and money. What happened that would increase demand for it so suddenly? And if something has increased the demand for gold, perhaps that same thing might have affected oil and wheat too.

The feds are insincerely trying to figure it out. They’ve been asked by President Obama himself to look into price increases and report any funny business. Of course, the real funny business is right in plain sight. The Fed has tripled its holdings of private and public debt – and added nearly $2 trillion in extra cash to do it. Most of that money is still frozen in the banking system. But what will happen when things heat up…and it’s multiplied, maybe ten times over? Won’t that cause prices to rise even faster?

Maybe that’s what people are worried about. And to protect themselves, they’re buying tried and true money, traditional money. Because they’re afraid the more modern variety won’t hold up.

“Dollar’s Slide Accelerates,” reports The Wall Street Journal.

As predicted in this space, the feds have failed. Pouring more liquidity onto a saturated marketplace did not work. The economy already had more than enough debt; it didn’t need more.

More debt and dollars did not create a genuine recovery. Instead, they merely drowned millions of ordinary households…

The New York Times has the story:

WASHINGTON – The Federal Reserve ’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.

“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.

But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.

And now, we’ll make another bold prediction. What happens when the QE2 program expires? Probably nothing…at first. But just wait. The Japanese, as usual, are setting the pace. In the two weeks following the tsunami/nuke crisis, they expanded their central bank balance sheet by two and a half times – adding huge new stockpiles of money for the banking system to draw upon.

The US feds won’t be left behind for long.


Bill Bonner
for The Daily Reckoning

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Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • The InvestorsFriend

    Bill, Your Title here talks about Gold and Inflation.

    Many of the wackos who visit this site are Gold bugs. They say Gold is the only real money.

    What is inflation as measured in the amount of Gold it takes to purchase oil, houses or wheaties or a car?

    Yes, that’s right! Inflation measured in Gold is massively negative!

    Joy oh Joy we have massive deflation of prices of things as measured in grains of Gold required to make a purchase.

    Gold buggers you cannot deny this!

    Bu what does it mean?

    I might tell you later if I am in a good mood.

  • Bob Blinker

    What is the best ETF for Gold and Wheaties?

  • The InvestorsFriend

    Others of the wackos that visit this site are not Gold Bugs.

    There may even be a non-wacko or two that visits… nah… not likely.

  • CommonCents

    Inflation is measured in dollars, our bills are currently being paid in dollars. You can measure inflation in terms of anything, measured in terms of Berkshire Hathaway stock and have huge deflation in terms of Enron stock the opposite.

    But, it’s the dollar that’s under attack by the Fed and the country will pay the price for this war.

  • The InvestorsFriend

    CommonCents, I agree.

    Inflation SHOULD be measured in terms of dollars. But God bugs, deranged as they are, often believe that Gold is the only real money. If so we have had massive deflation since about 2002. (Gold buys lots more now)

    The reality is that the purchasing power of Gold had been extremely erratic over the past 50 years. I can’t speak to the last 2000 years. Bill apparently was around then and can speak to that.

  • the investors 5-year-old nephew

    Sean my unkle seys you can even bore urself

  • eli


    MIT has axed the billion prices project

    can’t be having the true inflation data available to the public now can we?

  • Anselm

    The fact that the price gold is not inflated vs commodities which are used up is evidence that price inflation is caused by dollar inflation – that is increase in the money supply and that it is NOT caused by sudden scarcity of supply of commodities nor by greater demand from emerging markets for example.

    In other words it is evidence that it is caused by the Fed’s printing and no other factor.

    Wasn’t that clear enough from Bill’s post where he points out that gold is not used for much of anything other than a store of value and jewelry, Inv Friend??

  • The

    Look guys, If gold were a store of value, it would not be the case that a few years years ago it took say 600 ounces of Gold to buy a new house (say 300k/$500 per ounce)and today it takes only 133 ounces of Gold to buy a new house ($200k/$1500 per ounce).

    A store of value does not soar in purchasing power. Nor would a good store of value have plummeted in purchasing power as Gold did in the 80′s and 90′s.

    My simple irrefutable point is that if Gold is the real money than we have undergone massive deflation in the past few years. Even oil has not kept up with the rise in the purchasing power of Gold.

    Everything is cheaper in terms of what some say is real money Gold. Get it?

    And now I am in a bad mood so I am not going to tell you what it means. So there!

  • JMR Alan Greenspan

    @TIF: Yep. And thats exactly why you should buy gold to protect AGAINST inflation! There you have it, you just proved that gold DOES its job. If you hold gold, prices for you have gone down! But try going into the grocery store with an ounce of gold and buy something…

    As for the wackos, I’d say you’re one of the most regular readers (fan?) here, so you proved your point indeed. Wackos only. And guess what, the gold bugs wackos are making a better return on their investment than you! Gotta love insanity eh? hahaha

  • JMR Alan Greenspan

    Let’s have an exercise in gold bugging:

    Time machine back to the pharaoh’s age, you had a barrel full of gold coins, you’re filthy rich. Fast forward to medieval age, same barrel of coins, still filthy rich. Fast forward to present day, same barrel, same coins…yep, still filthy rich and more so by the minute.

    Show me any asset class that held its value over the same period and i’ll discuss the sanity of gold bugs with you…

  • The InvestorsFriend

    JMR Alan Greenspan, um, do the math. There has been about zero correlation between Gold and inflation in the past 40 years at least.

    Gold is soaring and inflation has not. Previously Gold was collapsing despite inflation.

    If you want to protect against inflation, you buy an inflation linked bond. A real return bond.

    Even a wacko can understand that?

  • Bill B Bonner

    Don’t encourage him, JMR.

    It only makes him even more confused.

  • Anselm

    “Look guys, If gold were a store of value, it would not be the case that a few years years ago it took say 600 ounces of Gold to buy a new house (say 300k/$500 per ounce)and today it takes only 133 ounces of Gold to buy a new house ($200k/$1500 per ounce).”

    That’s because the price of HOUSES went up and then crashed.

    HOUSES not GOLD. Understand?

    It is GOLD which has been used as a store of value, not houses whose supply had been radically increased due to a glut of building due to artifically low interest rates.

    I think you should start paying us all for your the education we’re giving you. : )

  • Free Property Rental Application

    Your aritcle is full of useful information. keep it up. Thank you for the article Bill.

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