Our Deteriorating Economic Outlook: Serious Inflation On the Horizon

Editor's Note

​Have you noticed that prices seem to be rising faster than the official inflation numbers?

Independent of increasing prices, with food price increases are hidden two additional ways:  (1) reducing quantity or weight yet offering it with a similar price; and (2) reformulating the ingredients of a processed food with cheaper, and often unhealthier ingredients.

Please read and pay attention to this article by Dr Paul Craig Roberts, Guest Columnist, with Dave Kranzler and John Williams of www. shadowstats.com​.

The Deteriorating Economic Outlook

By Paul Craig Roberts, Guest Columnist (former Assistant Secretary of the U.S. Treasury), Dave Kranzler (www.investmentresearchdynamics.com) and John Williams (www.shadowstats.com)

July 8, 2014​

The third and final estimate (until the annual GDP revisions) of first quarter 2014 real GDP growth released June 25 by the US Bureau of Economic Analysis was a 2.9% contraction in GDP growth, a 5.5 percentage point difference from the January forecast of 2.6% growth. Apparently, the first quarter contraction was dismissed by those speculating in equities as weather related, as stock averages rose with the bad news.

Stock market participants might be in for a second quarter surprise. The result of many years of changes made to the official inflation measures is a substantially understated inflation rate. John Williams (www.shadowstats.com) provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.

A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.

Realistic economic analysis is a rarity. The financial press echoes Wall Street, and Wall Street economists are paid to help sell financial instruments. Gloomy analysis is frowned upon. Even negative quarters are given a positive spin.

Years of understatement of inflation has resulted in years of overstatement of GDP growth. Thinking about the many years of misstatement, we realized that the typical computation in nominal terms of the ratio of debt to GDP is seriously misleading.

Consider that debt is issued in nominal terms and repaid in nominal terms (except for a few Treasury bonds with inflation adjustments). However, nominal wealth or nominal GDP overstates real economic strength. The debt is growing, but both the nominal and real values of the output of goods and services are not keeping up with the rise in debt.

To understand how risky the rise of debt is, nominal debt must be compared to real GDP. Spin masters might dismiss this computation as comparing apples to oranges, but such a charge constitutes denial that the ratio of nominal debt to nominal GDP understates the wealth dilution caused by the government’s ability to issue and repay debt in nominal dollars. We know that inflation favors debtors, because debts can be repaid in inflated dollars.

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New Silver Price Electronic Exchange: What Does this Mean?

What Will the New Silver Price Electronic Exchange Mean to the Precious Metals Market?

Photo: dailywealth.com

For a long time organizations such as GATA.org, those involved in the precious metals industry as dealers and resellers have claimed that there is price fixing in the precious metals markets.  Some have claimed that the big banks and the Federal Reserve have done a tremendous amount of “naked shorting” to suppress their true worth.

As with any claim or concerns about price-fixing, lawsuits are occurring.  Apparently the current system has lost some credibility and has become a liability.

The London Metals Exchange now announces a new set-up, a silver price electronic exchange,  starting in August for the selling of silver.  Apparently it is trying to address these concerns. (see article below)

So the question becomes what will that do to the price of silver?  If there is a new market for trading will that cause silver prices to increase?  Will prices become more volatile or like a roller coaster ride?  What impact will this have on other precious metals?  These are just a few of the questions I have.

I do not have a degree in finance, business, or economics although I do teach business law to MBA students.  So I am a layman, just like you, who reads, observes and looks for patterns.

What I am trying to determine is when the price of precious metal rise, is there an inverse relationship to the health of the dollar?  If there is, then obviously when the price of precious metals elevate one should be concerned about the viability of the U.S. Dollar and other currencies.  Another question I am mulling is whether a rise in precious metals is more of an accurate indicator of the true rate of inflation instead of our government statistics?  Since the Clinton Administration changed the formula for inflation accounting many say that the real rate of inflation is underreported.  See John Williams’s website www.shadowstats.com for more information.

For those interested in this topic see the announcement below:

UPDATE 2-CME, Thomson Reuters win battle to replace century-old silver benchmark

Fri Jul 11, 2014 11:05am EDT

(Writes through with quotes, background)

* LBMA settles on silver fix replacement after 2-month hunt

* New mechanism heralds change in precious metals benchmarks

By Clara Denina and Jan Harvey

LONDON, July 11 (Reuters) – CME Group and Thomson Reuters will operate an electronic silver benchmark when the 117-year-old “fix” is disbanded in August, in a move widely seen preceding sweeping reforms of precious metals price-setting.

The London Bullion Market Association (LBMA) said in a statement on Friday that CME Group will provide a price platform and methodology for the daily process, while Thomson Reuters is responsible for administration and governance.

CME/Thomson Reuters will start testing the new process in early August after the closely contested competition to produce a solution.

The silver fix – used by producers, consumers and investors – is set every day at noon by three banks via a conference call, working out a price at which their customers are willing to buy and sell the metal.

But with increased attention from regulators in the wake of benchmark manipulation in other markets, the current operator – London Silver Market Fixing Ltd – said in May it would stop running the daily call.

The LBMA consulted market participants with the aim of producing a transparent electronic alternative that complies with toughened regulatory benchmarking standards.

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