Friday, January 20, 2006

The CPI Ain't What She's Cracked Up To Be

Statistics can be misleading. Take the fact that most economists, including Greenspan and the Fed, think that the CPI is the index to watch. This just demonstrates that they are not good historians. During the period leading up the 1929 depression, prices were relatively stable. What does that tell you? Nothing in and of itself, except that prices are not an indication of whether an economy is sound.



[Thanks to sdsu.edu for the image.]

Inflation is relative. Imagine a hypothetical situation where prices should by all economic indicators be going down, but they're not because there is a lot of inflating going on. ("Inflating" means that the Fed has loosened the credit money faucet and the proverbial "too many dollars" have been allowed out of their cage to chase "too few goods.") Maybe the prices remain the same only because the supply of goods is in fact exceeding demand, i.e. that relative to what prices should be doing under the circumstances, they're too high. They should be going down, but they're remaining the same because there are too many dollars in circulation. Get it?

In other words, I'm trying to illustrate to you that preconceived notions can deceive us into assuming a stable price level means everything is hunky-dory. Now don't get me wrong, I'm not saying this is what's happening right now, even though production was in fact quite high in 2005. Nor does this mean that I expect a 1929-type depression is upon us (although the comparison does make me want to look into whether or not we might be in a similar pre-1929-type boom phase.)

All I'm doing is checking out the price of gold on a regular basis, along with the price of everything in general including the Dow, treasuries, currencies, etc. The gold price can mean so many things that it is worthless to speculate (pardon the pun) on the reason for it or what it might forecast. For example, it could be:

- A rise in jewelry demand;
- A reaction to global political tension;
- A reaction to perceived future demand for gold relative to supply;
- Fear of currency volatility;
- Speculative profit-betting that gold is on a bubble roll;
- Attempts by Asian and Middle Eastern central bankers and other fund managers (even in this country) to protect their investments against a flight from the dollar;
- You name it.

One thing Professor Greenspan should never forget, however, is that gold ain't the tallest dwarf, it's the tallest giant.

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