Saturday, May 03, 2008

Putting your money where your mouth -- and fuel tank -- are

Do you still accept the Fed's view that inflation is not a worry because core inflation has "improved somewhat"?

Do you really think the government is blind to "real world" inflation?

Of course, it's not. It's just spin that "the Fed and much of Wall Street convinced themselves that the only inflation measure that matters is 'core inflation'."

Need proof that the government doesn't believe the spin?

Look at what has just happened with with US Treasury I Bonds, the so-called TIPS (Treasury Inflation Protected Securities). The newest issue of TIPS pays ZERO PERCENT investment income, but 4.84% p.a. for the inflation component.

Yep, regardless what the Fed, Wall Street and others are saying about the "contained" inflation, the US Treasury figures it's running at close to FIVE PERCENT.

This is from the Treasury's Press Release:

FOR RELEASE AT 10:00 AM
May 1, 2008

The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate.

The earnings rate combines a 0.00% fixed rate of return with the 4.84% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
So, all those current retirees and Baby Boomers facing retirement in the forseeable future can now get ZERO PERCENT on their investment in US I Series Treasuries, but 4.84% so long as they continue to consume, which can't be all that long if they're getting nothing for their savings, and nothing from their homes.

There's an interesting piece in Lanka On-line (yep, as in Sri Lanka, go figure), that parses some Wall Street Journal articles and relates as how this focus on core inflation is "Bubble Banking", "fraud" and "legalized stealing". See, "Federal Reserve under fire as commodity bubble wreaks chaos; WSJ says Bernanke addicted to printing."

The more diplomatic, perhaps, The Economist, walks a similar path in its article, "Ben's bind", the intent of which is "Disentangling the links between the Fed, the falling dollar and the soaring price of the world's commodities."
In the past, economic weakness in America has usually pushed the price of oil and other commodities down. But the recent surprise is that commodity prices have soared even as America's economy has stalled and forecasts for global growth have been trimmed as well. No one expects global growth to accelerate this year, yet the price of crude oil is up 20% since the beginning of the year, The Economist's overall commodity-price index is up 18%, the metals index is up 24%, and the food-price index is up 18%. Supply shocks—from drought in Australia to strikes at Nigerian oil wells—are clearly part of the problem. But the fact that prices have soared across so many commodities suggests a common cause.

Could the culprit be the Fed? Advocates of this idea point to two channels. First, by slashing real interest rates, the Fed has encouraged speculation in commodities by reducing the cost of holding inventories. Second, by pushing down the dollar, Fed looseness is pushing up the price of dollar-denominated commodities.

Because the Fed focuses on “core” inflation (which excludes food and fuel), whereas the ECB targets overall inflation, America's central bank runs a looser policy in response to higher oil prices, thus pushing the dollar down.

Core inflation?? Core, blimey!!

HATTIP: Bloomberg and Barry
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