Now that the Pentagon has won the domestic war over the United States' intelligence services, our blinders have been removed and we are allowed to see the real reason that the Pentagon wants to control intelligence: to run "disinformation" campaigns against America's enemies around the world. If our military industrial complex is serious about understanding disinformation, they should become students again and participate in a case study to learn how to get disinformation right.

The Federal Reserve has done a masterful job of distributing disinformation. Last year, they were scaring Americans by announcing that deflation was a threat. This year, they continue to announce "inflation is contained" so interest rates can be raised at a "measured pace". The Federal Funds Rate has moved up from 1 percent to 2.25 percent while the CPI has risen from 2 percent to 3.5 percent! The real interest rate - the Federal Funds Rate less inflation - remains clearly negative. "Loose as a goose" as in continuing to "goose the money supply" might be a good analogy. Meanwhile, everyone is fighting deflation and totally focused on the core inflation rate, which is running at about 2 percent. The reason the core rate goes up so slowly is because it is carefully designed to leave out the key expenses that really affect our lives and go up in price such as energy costs, food, and housing. The essence of disinformation is basically to get everyone to look the other way when something like inflation is really big and in your face constantly.

Critically, the mainstream press has been a big help to the Fed in this endeavor. For the most part, they simply print what they are told without doing any factual digging or additional research, or actually examining the "real" inflation numbers. When the Fed claims that all that matters is the core rate, you really need to go to the BLS and find out what the year-over-year rate is. Price increases are downright ugly and the last thing the government wants you to do is take a closer look.

Well, let's peek anyway at some of the government's numbers on prices, courtesy of the Bureau of Labor Statistics ("BLS"):

The prices above surely indicate there is a whole lot of inflation going on now and in the "price pipeline". The magnitude of real inflation is around us everywhere. An example of this could be seen in New York where taxi cab prices increased by 25 percent, while nationwide college tuition, health care, insurance, drug prices and property taxes are, in most cases, running near or above double digit annual rates of price increase.

So, why does the CPI rate of increase look so low? Ah, the genius of disinformation. First, many of the items going into the CPI are adjusted for quality changes, referred to as hedonic adjustment. The idea is that since a new computer has twice the memory and processing speed for the same amount of money, the price actually fell in half. Even Bill Gross at PIMCO has caught on to this hedonic scam and estimates that these convenient but false hedonic adjustments pull the CPI down a full percentage point from where it would otherwise be.

However, our favorite disinformation trick in the CPI is the grand assumption that everyone in America rents their house. In calculating the CPI, a full 29.5 percent of the index is related to the direct costs of housing. Looking at the price weights, 6.2 percent of this fraction relates to people who rent, while 23.4 percent of the total CPI relates to the total costs associated with home ownership but the CPI assumes these homeowners rent, not own! As you can imagine, rents have not been moving up as fast as housing prices. If the national housing prices as published by OFHEO were used in the CPI, that 23.4 percent weight of the index for prices rising at 13 percent a year would alone have added 3 percent to the CPI (that is if gasoline, groceries, and everything else had not increased in price and only rising housing prices were affecting it).

What is the "real" CPI? If we assume that housing prices are only increasing at three times the rate of the cost of renting, and the hedonic adjustment is only 0.5 percent, I think we can safely assume the following:

In looking at these numerical facts and the actual world around us, we can truly appreciate the magnitude of disinformation on the inflation front. The Fed needs inflation, wants inflation, and is getting inflation. Without inflation to inflate away a massive amount of personal, corporate, and government debt, our financial system could collapse. A lower dollar and higher inflation will ease the federal deficit while the foreign central banks, that have purchased U.S. Treasuries, will end up paying for the war in the Mid East as America's debt is inflated away. To make the disinformation plan work, it is critical that even if inflation is not contained, the knowledge and perception that inflation is kicking up, is contained.

Unfortunately for savers, they are being slaughtered by inflation very silently but at least they are alive to work like a wage slave for another day. The average American is so busy trying to make ends meet that when it comes to inflation, they don't even know what's happening. We can only hope that the Pentagon will learn from the masters at the Fed how to have that soft touch when it comes to propaganda.