Modern Central Banks' Business Is Misunderstood by The People

I am thinking about the Consumer Price Index which was designed to show the amount of inflation in the cost of living within the economy. That was before a certain Alan Greenspan came along. Mr Greenspan was a proponent of the benefits of sound money for society. He even wrote a paper on the matter.

For some strange undocumented reason, after Mr Greenspan became the Chairman of the Fed he underwent a character alteration and came up with the idea of making changes to the way the CPI should be calculated. Nowadays the CPI seems to be the index of all things which are not consumed and which do not undergo price increases. So after Mr Greenspan’s change of personality or philosophy, or whatever somebody said to him about his future prospects, - and after the very many following alterations since then in the way the CPI is calculated - the inflation measurement must be viewed with a certain scepticism.

This is not, of course, news to anyone who actually buys such luxuries as food, fuel, or such consumable goods, because their bank balance shows the real story, and highlights the fiction that the CPI has become.

So has made a business out of producing economic stats the old way, I mean using the methodology which existed more or less before Mr Greenspan came along, and all of his successors too. This CPI tells a different story from the official CPI.

Here is the Shadowstats chart for inflation using 1990 based methods:

So Mr John Williams of says that inflation would be 5% give or take, compared with the official CPI of under 2%, if changes since 1990 were set aside.

But look at this:

Here Mr Williams has set aside the CPI calculation changes going back to 1980 and viola! We can see that if the 1980 CPI formula were used it would be knocking around the 9% area which is just a little bit less than five times the official number.

Now the scholars and establishment figures on the whole take the position that the world has changed a lot since 1980, and the CPI must be calculated with revised formulae to take account of that. Pooh! Pooh! Shadowstats! Though intuitively we acknowledge that they probably have a point, in that things have changed …. five times difference!

And if we look over to Wall Street, there also seems to be a universal acceptance of the new (post Greenspan) CPI there. However I wonder if the fact that the stock market rises all look much much more dramatic, if prices are prevented from (officially) rising faster than said stock market, has anything to do with Wall St.’s (public) preference in this metric? Say it ain't so, Mr Big Broker!

So with all that in mind I would like to remind readers that, if John Williams has a valid case, or even a semi valid one, but if we don’t believe Mr Williams’s exact figure, then inflation is running at an unknown multiple of what the government says it is, of some multiple of up to 5x. That's highly significant.

That sounds to me like classic financial repression, and capital control, so that stagflation can reduce the real value of the national debt. At this stage I will say that although I am using US metrics here, I consider that these points apply to all of the western countries, and the actions of their governments and Central Banks. So where I say “Fed” please assume I also mean ECB, BOE, and BOJ as a minimum.

So if inflation is depreciating money that things are priced in, what have we to go on when making investment decisions?

Here is a chart from Macrotrends which shows the Dow Jones Industrial Average during the stagflation during the 1970s recession period, which was a stagflationary time. The Dow is in blue, but if inflation is subtracted off from the Dow the resultant value is the red line.

So that’s 16 years of the Dow apparently going sideways, but if you sold your stocks and went shopping with the proceeds the purchasing power of your money in the stock market had reduced mysteriously by 65%! That means that inflation was outpacing stocks by 3% each year for the 16 years, compounding to 65%. Note this is not saying inflation was 3%, it was 3% in excess of what stocks performed.

So what does the stock market look like when we detrend it by the CPI to show the “real” underlying performance?

I refer readers once again to Macro Trends. Please pay special attention to the period from 1966 to 1982.

So in nominal terms, or using the official numbers, the Dow went sideways, and did not go down. But in real inflation adjusted terms it went down 65%. This makes it clear as to why it is that Wall St. shows us the official numbers for the Dow.

Now if readers would like to look once again at that Macro trends chart but this time please pay special attention to the period 2000 to the present. I give the link again for your convenience:

So if we look at a newspaper DJIA chart we can clearly see that the large capital stocks are once again going sideways, and something like the official 1970s chart looked before inflation was deducted. But take note of this: if we look at an inflation adjusted chart the Dow is still going sideways! So either inflation is really toddling just under 2%, and the Dow is growing at 2% to cancel inflation out, or Mr Greenspan and his successors, Bernanke/Yellen (& counterparts overseas) are concealing something from us. That would be that while the Dow is officially going sideways, it’s purchasing power is doing what the inflation adjusted Dow did during the 1970s. It’s going down consistently in real terms.

But if the CPI doesn’t show inflation, we can’t look at a CPI adjusted Dow and see the decline can we? They know that, and that’s their motivation for doing what they do.

Let’s do a little calculating. I will choose a number for inflation which is half way in between Shadowstats two numbers. I will pick 5.5%. So if the Dow is going sideways since the year 2000, then we have endured 13 years of 5.5% inflation, while the Dow was going sideways. But when 5.5% is compounded for 13 years that is a real inflation of very close to 100% during the period.

So while your investments in stocks went sideways, the purchasing power of the money invested went down to 47% of it’s original value.

Let's remind and take one more look at that Dow chart for the 1970s. So if my conclusions above are correct, then the Dow for the past 13 years, in purchasing power, looks like the red line, except it's down about 50% instead of 65%.

If the higher figure turns out to be the actual inflation, let's use 8% rather than 9%. Then "the take" from covert stagflation over the past 13 years was 66%. This is almost identical to the 1970s period, and stock owners, (or anybody else holding non appreciating assets) now retain only 34% of their spending power as it existed in the year 2000.

Way to go Powers That Be! You really really deserve those fat paychecks and benefits! Uh ... if that was your actual aims all along, I mean. We'll get back to that presently.

This might explain why it is that so many senior people are still working long after their supposed retirement age.

But where did all that money go?

For a start it reduced the cost of paying off the national debt. As a bonus for the government, it makes the national economy work better for them. If prices rise, sales rise, and so does taxation calculated on those sales. That suits indebted governments looking for extra money.

So with all this in mind today, I looked up the duty of a “Central Bank” in Wikipedia and this is what it says today:

The primary function of a central bank is to manage the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference. Still, limited control by the executive and legislative bodies usually exists.

Well that’s interesting!

It seems to me, that like the way of calculating the CPI, the officially accepted duties of Central Banks seem to have changed. Maybe they haven’t changed much in intent, but as to degree. But whatever. It appears that the duties of modern Central Banks might be described more like this:

Central banks are the officially assigned agents of sovereign governments for the ongoing business of demonetizing whatever currency is in circulation, or in the possession of the people. The business is to reduce the value of circulated money by increasing it’s quantity covertly, and the newly issued money is then used for the governments unstated purpose. The Central Banker, the government, and colleagues receive large amounts of the new money first, before prices rise as a result of it’s creation, enabling a never ending secondary business of the purchasing of assets prior to inflationary rises in their prices. The secondary highly profitable business, being a legal practice with some similarities to insider trading, is never discussed.

Of course, this means that by design, longer term this causes the value of the money in circulation to trend towards a value of zero.

The Central Banks’ business model is to replace the devalued circulating money in the people’s possession with another newer type of money which is issued to replace it. Replacement is done approximately once every 30 years. For new currency Central Bankers especially like money they can create for the lowest cost of production, eg paper, plastic, or nothing at all in the case of credit, provided they enjoy a monopoly of it’s supply. The supply is usually delegated to other commercial banks to carry out on their behalf, especially for money created as credit, ie debt on behalf of the people who borrow from those banks and receive the zero cost new money at a price which is called the interest rate for retail credit.

But what do I know? Maybe Wall Street have it right, and inflation is really 2%, and Central Banks really are the lenders of last resort!

Argentus Maximus

The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author & his work can be found here: RhythmNPrice.

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Key Economic Events Week of 5/28

5/28 9:00 ET Case-Shiller home prices
5/28 10:00 ET Goon Kash-n-kari
5/28 10:00 ET Consumer Confidence
5/28 1:00 ET Goons Cook and Daly
5/29 1:45 ET Goon Williams
5/29 2:00 ET Beige Book
5/30 8:30 ET Jobless claims
5/30 8:30 ET Q1 GDP 2nd guess
5/30 8:30 ET Wholesale inventories
5/30 10:00 ET Pending home sales
5/30 12:00 ET Goon Williams again
5/31 8:30 ET PCE and Core PCE
5/31 8:30 ET Personal Inc and Spend
5/31 9:45 ET Chicago PMI

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