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July 17, 2005

From Pinches and Paradox to Bear Raids and Goldilocks
by Rob Kirby

In today's, July 14, 2005, 8:30 a.m. CPI report, inflation was reported to be non existent or benign at worst and the price of gold was slammed AGAIN, this time to the tune of about 5 bucks, right on cue at 11:00 a.m. ET at the hands of N.Y.'s COMEX paper traders. These regular 'bear raid'

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muggings have become more predictable than sunup and sundown. But let's not pinch ourselves and hope no one else notices too, ok?

Lord Keynes gave the name "Gibson's paradox" to the correlation between interest rates and the general price level observed during the period of the classical gold standard. It was, he said, "one of the most completely established empirical facts in the whole field of quantitative economics." J.M. Keynes, A Treatise on Money (Macmillan, 1930), vol. 2, p.198. And it was a paradox because contemporary monetary theory, largely associated with Irving Fisher, suggested that interest rates should move with the rate of change in prices, i.e., the inflation rate or expected inflation rate, rather than the price level itself. Yet when Keynes wrote, data for the prior two centuries showed that the yield on British consols (government securities issued at a fixed rate of interest but with no redemption date) had moved in close correlation with wholesale prices but almost no correlation to the inflation rate.

The above passage is from an essay titled, Gibson's Paradox Revisited, available at: http://www.goldensextant.com/

The above passage is important in that in it Keynes clearly states that long term interest rates [as depicted by British consols, which were 'long bonds' of their day] are directly correlated with the general price level or wholesale prices and NOT the inflation rate or expected inflation rate. In layman's terms, Keynes is saying that long term interest rates are directly correlated, and in fact hardwired, to the PPI [Producer Price Index] - not the CPI [Consumer Price Index].

If we examine recent developments where PPI is concerned, we can see that PPI reporting was significantly delayed at least twice in 2004 - while CPI reporting had no such interruptions. Furthermore, today - July 14^th, 2005, in a break with tradition, CPI was actually scheduled by the BLS [Bureau of Labor Statistics] for release prior to PPI.

For those who feel this is irrelevant, I would offer that the BLS felt it relevant enough to devote a whole page on their web site with this headline banner:

"Why is the CPI being released before the PPI this month?"

The explanation offered is as follows,

Improvements to the data collection process introduced into the CPI program in recent years have shifted the timetable for producing the CPI relative to the PPI. Specifically, the deployment of penpad computers to BLS field data collectors permits them to transmit newly-collected data directly to headquarters in Washington for analysis and review. This replaces a longstanding procedure in which data collectors filled out paper forms in the field and mailed them to Washington. The new process also eliminates the need for manual data entry that had existed once the paper forms were received in Washington.

And then goes on to add:

These improvements mean it will not be atypical for future CPI news releases to be issued prior to the PPI release for that month. In fact, the CPI is scheduled to be published prior to the PPI in four of the six remaining months of 2005 (July, August, October, and December).

You see, dear reader, I keep asking myself why the BLS would buy penpad computers for the CPI data gatherers and no mention of the plan to purchase new computers for the PPI folks? I find this all very confusing, particularly when BLS officials made quotes like this one in response to ongoing PPI reporting delays in March of 04,

"WASHINGTON (Reuters) - Outdated computers are partly to blame for the delayed release of the U.S. producer price index and only "God knows when" the data will be ready, a top analyst at the Bureau of Labor Statistics said Monday."

After all, it was the BLS themselves that made the claim back on June 9, 2004, when May's PPI report was delayed "indefinitely" that aging computers had caused numerous delays in publishing timely PPI reports for much of 2004?

"WASHINGTON, June 9 (Reuters) - The release of the U.S. Producer Price Index for May has been delayed indefinitely by renewed calculation problems, but figures already out are accurate, the Bureau of Labor Statistics said on Wednesday."

So there you have it folks, aging computers being blamed for PPI not being reported in a timely fashion on numerous occasions throughout '04 and apparently the fix for the problem rested in the procurement of new penpad computers for the folks who tabulate CPI?

What I see occurring here right before our eyes amounts to brazen 'economic revisionism' or the reworking of benchmark yardsticks of historic value. I would suggest that economic revisionism has been elevated to a 'high art form' at the Fed, Treasury and the BLS. These people practice their craft ever so incrementally and with cunning - beginning with seasonal adjustments to reporting numbers, then factoring in substitution, hedonic and quality adjustments and finally - once all the lines delineating reality are sufficiently blurred - they simply move the uprights back 25 yards whilst telling the blindfolded place kicker he has a simple 'chip shot' from the 20-yard line.

None of this happens by accident. I would contend this is all part and parcel of a decaying fiat monetary system whose perpetuation mandates usurping inflation by its very definition. There is no conundrum on interest rates. Long term interest rates have been engineered down and remain low to induce credit expansion and consumption expenditure - period. Without it, the fiat system dies. Couple unnaturally cheap credit with a globalist mentality and you end up with exactly what we have achieved - zero savings and investment, plenty of outsourcing, dislocations and asset bubbles, a hollowed out manufacturing base and debt burdened and compromised middle class. In recent weeks, such luminaries as Warren Buffett, Robert Rubin, Paul Volcker and Stephen Roach have all - to varying degrees - fired warning shots humming a similar tune.

Interest rates, inflation and the price of gold are co-related and interdependent. This is why I write about gold and the suppression of its price. A rising gold price would make a mockery of nascent claims that inflation is low. It would also expose many of these false claims as deceptions. Unfortunately and shamefully, monetary officials prefer to conduct their carnie act, violating all of us, cloaked in double speak and secrecy behind drawn curtains.

This 'creeping repositioning' of the CPI [outlined above] relative to the PPI has the same aroma as the recent recalibration of the CRB Index. What I do know for a fact is the BLS has been pumping out reports for a number of years suggesting inflation is tame or non existent. Empirically, I used to fill the gas tank of my car for less than 40 bucks two years ago and today it costs a cool 50. And I live in Canada - a country whose currency has risen appreciably against the U.S. dollar - oil's settlement currency. I don't really want to go off on a rant about the increased cost of food, insurance, tuition, cable tv, property tax, new homes, professional fees, prescription drugs and anything else associated with health care. Amazingly, the bulk of pundits and monetary officials getting airplay in the main stream media insist we're living in a 'Goldilocks' economy.

What ever you do, dear reader, don't pinch yourself too hard - you might wake up in a cold sweat to find someone else sleeping in your bed, your chair broken and your soup bowl empty - not to mention an angry bear or three growling at your stock portfolio. Now wouldn't that be a bummer?

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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