Inflation Whispers to the World “Buy Gold”

Paul van Eeden writes that to calculate real, inflation-adjusted interest rates, the kind that determine your buying power tomorrow, you combine the two inflations: monetary inflation and price inflation. Ergo, "Real interest rates should be calculated by subtracting monetary inflation (as calculated by M3, for example) from interest rates. If you did, you would find that real interest rates are negative."

Wow! Negative interest rates! Let's see: 4% interest rates minus 11% inflation in the money supply equals (and I can't believe what I am seeing!) a negative 7%! What are bondholders thinking, paying these ridiculous prices for bonds in order to lock in these insanely-low interest rates? What are the central banks thinking when they create the money to let people borrow money to do that?

The big problem, of course, is the inflationary growth in the most inclusive of all of the measures of the money supply, M3, which, in turn, causes price inflation. And in that regard, John Williams at ShadowStats.com put out a flash alert that M3 is now growing at 11%! The money supply will, at this rate, double in less than seven years!

Even worse, Mr. Williams said, "The alternate GDP shows ongoing recession with 4Q06 annual real (inflation-adjusted) change at minus 1.4% versus minus 1.5% in 3Q06." So the United States is having a real, honest-to-God recession?

To show you the incredible effect of using all the hedonic adjustments to GDP and inflation, all I have to do is point you to where he reports that GDP, according to the government's "official reporting", was "3.4% for 4Q06." What a blatant disparity! And surprisingly consistent with Jim Willie, of the Hat Trick Letter, who figures that government "exaggerates the GDP by 4% to 5% in every quarter."

And worse yet, this kind of monetary lunacy is rampant all over the world, as I gather from Gary Dorsch, of sirchartsalot.com, who says that money growth is "explosive" all over the place.

He added that money supplies around the world are growing alarmingly, such as, "In Australia, the M3 money supply is 13% higher from a year ago, British M4 is 13% higher, the Euro Zone's M3 is 9.3% higher, a 16-year high, Korea's M3 is 10.3% higher, China's M2 is 16.9% higher, a 16-year higher, Russia's M2 is 45% higher, and the U.S. M3 has been reconstructed to show 10.7% growth in 2006."

I remind you that the American M3 can only be estimated these days, as, "We are the only industrialised country that has ceased publishing the broad M3 money supply measure!"

Jim Willie of the Hat Trick Letter expresses a lot of people's worst fears when he says, "Global monetary growth is mammoth, a confirmation of my claim that we have already entered the Weimar Modern Era of unbridled money growth. Never in the history of central bankers has the hidden coordination, influenced pressure, gargantuan money creation, doctored statistics, and interference with financial markets been so broad, so deep, and so profound. My allegation is clear, that we now live in Weimar times. Collectively, they have abused the privilege of printing money, and in doing so, have guaranteed a gold bull market."

Depending on your perspective, it is either good news or bad news when he opines, "Do not expect a return to normalcy in the United States, not now, not ever." For me, as a holder of gold, it is certainly good news.

And speaking of gold, the International Monetary Fund, which we funded by literally giving them tonnes of gold in return for a fistful of their new Strategic Drawing Rights, has now predictably grown bloated and mismanaged, and now wants to bail itself out of its own budget problems by selling some of the gold! About 400 metric tonnes.

This is all too, too rich! The usual IMF advice is to cut spending and fire staff... but the IMF doesn't want to take its own advice this time!

The philosophic and comic angles aside, SilverForecaster.com says, "The IMF has 3,217 metric tonnes of gold and the sale of 400 tonnes could raise USD $6.6 billion at current market prices."

But my problem is not with incompetence or corruption, as that is always everywhere at the ends of long booms, but with inflation.

Ty Andros of TraderView.com hits the problem right on the head when he asks, "Do you really think inflation can be contained in the face of the global Tsunami of monetary stimulus? Inflation is set to runaway to the upside, along with the global asset inflation they are fostering. The poorest people in America are set to become a lot poorer."

And it isn't just the poor, as the middle class is in the same boat, Mr. Andros. This proves that Lenin, the former big shot commie, was far too narrow when he famously said, "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

The price inflation millstone is, as we know, baked into the cake as a necessary result of the rampant monetary inflation. And as for taxes, look out! For example, President Bush (according to the New York Times), "will ask Congress to 'eliminate annual indexing of income thresholds'" in the Medicare prescription drug benefit, "so that more people would eventually have to pay the higher premiums"! What a scam! And this is just the tip of the coming iceberg of higher taxes!

And to remind you of the horror of the inflation millstone, we just saw that money supplies around the globe have all been increasing at 10% or more, meaning that an opportunity to buy gold is whispering sweetly in your ear.

Until next week,

The Mogambo Guru
for The Daily Reckoning Australia

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