‘Strong’ US Dollar and Low Consumer Price Inflation are Govt. Lies

“The US is committed to a strong dollar,” said Treasury chief Paulson in India yesterday. What was he thinking? Maybe he spoke with a smile…at least the audience could have taken it for a joke. But press reports make no mention of anyone laughing.
No, dear reader, it was simply another monumental lie…the monetary equivalent of “weapons of mass destruction” and “I did not have sex with that woman”. 

After the Treasury Secretary affirmed his support for the buck, traders sensibly sold it. The dollar lost a little more ground against the euro.

We recalled for you how Carlos Menem told us that that dollar-peso exchange rate was fixed at 1 to 1. It was reliable, immutable, eternal, he said. A few years later, it was history. Now, Henry Paulson tells us that the US will maintain a ‘strong dollar’. Don’t believe him, dear reader. The US can’t afford a strong dollar.

How could so many things be so expensive…while consumer price inflation is so modest? Oil is over US$90. Other commodities are soaring…hitting new all-time highs. Labour in China and India is rising at 10% per year. How is it possible that the cost of living remains…according to the feds…under control? In other words, how could the dollar be so weak in the face of every major asset category we read about…but so strong in the face of general consumer spending?

The answer is simple; the feds are lying. So concludes the Economist in this week’s edition. It says that an average of “all items” is going up not at 2% or 3% per year as the US government claims, but at 16.7% per year! Food is going up even faster – at 31.6%.

“With each new release of economic indicators – the consumer price index, the new employment numbers, trade deficits, gross domestic product, and more – every number, bad or not so bad, is contorted into ‘happy speak’ by the talking heads responsible for keeping the good times rolling,” Strategic Investment’s Dan Amoss tells us.

“Inflation is grossly understated,” he continues. “You see the Fed exclude three of your highest-priced budget items from the CPI – energy, food and the price of your home.

“Just imagine how great your family budget would look if you didn’t have to include your mortgage payment, the gas to run your car, your heating bill or the weekly grocery bill. You’d probably feel pretty rich too. But reasonable people know you just can’t ignore these bills without some pretty serious consequences.

“In addition to excluding the above three, the Fed also plays a cool sleight of hand with the prices it does include. For example, we all know that a computer is twice as capable as one from five years ago, but costs about the same price. But the Fed goes ahead and adjusts the price downward to contribute a 50% decline in price in the CPI.

“So if you were to take out the adjustment tricks, inflation would probably run 3 or 4 percentage points higher than what the government will admit. Just think how fast an 8% inflation rate can eat into savings and investments.”

“How can you tell if a public official is lying?” asks an old friend.

“Easy…see if his lips are moving…”

The subprime loan mess is a US$900 billion problem, says Fortune Magazine. But there’s another problem just as big right behind it. It’s credit card debt. And it, too, is a US$900 billion problem…or US$915 billion, to be more precise.

Here’s the story:

As long as property prices were going up, consumers were able to borrow against their houses in order to pay off more expensive credit card debt. The credit card companies, meanwhile, were able to unload the debt on Wall Street, where it was packaged up – just like mortgage loans – into CDO derivatives and sold on to investors.

All was well until property prices stopped going up. Then, consumers could no longer easily increase their mortgage debt. This left them more reliant on credit cards, and less able to pay off their credit card debt when something went wrong.

Something always goes wrong. Disease, divorce, economic disaster – something always comes along just when you need it.

In Britain, the cycle is a little further advanced. Property prices rose faster than in the United States. And households became even more reliant on credit. When the housing boom slowed, consumers were forced to turn to credit cards. Delinquencies on credit card debt have already risen 50% in Britain. In America, delinquencies are just beginning to go up.

Problems in the housing market have a lot further to go, says Angelo Mozilo, head of Countrywide, one of the nation’s largest mortgage lenders. Countrywide reported a US$1.2 billion loss on Friday.

Housing prices fell 4.4% across a sample of 20 cities in the 12 months through August, according to the Case Shiller index. Inventories of unsold houses are still at record levels, suggesting that Mozilo is right; it ain’t over yet.

Bill Bonner
Markets and Money

Bill Bonner

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 Markets and Money.
Bill Bonner

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2 Comments on "‘Strong’ US Dollar and Low Consumer Price Inflation are Govt. Lies"

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Pier Johnson
Dan Amoss says “Inflation is grossly understated … the Fed exclude(s) … from CPI – energy, food and the price of your home.” Much confusion arises from discussing inflation and CPI in the same breath. Inflation is a process. The rate of inflation is the rate of accretion of new cash (notes and coins) into circulation plus accretion of new consumer credit (30 day balances). Inflation supports transaction. The more inflation, the more transaction that you can have. When the amount of goods stays fixed and transaction rate rises, you suffer a rise in prices. CPI is a meaningless measure… Read more »
barry broome

Hey Bill – nice article. Here in U.S. the republicans keep talking about how great the economy has been doing under the Bush administration – but they never address the issue of consumer and federal debt is at all time high. I’ve got a bad feeling about market in U.S. and am trying to rapidly pay off all debts. Thanks

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