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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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US Postal Inflation Proxy

Although you wouldn't know it from watching the blood of long equity traders splattering on the exchange floors in recent days, the first week of July is often the slowest trading week of the entire year. The vast majority of us Americans head off on vacation and celebrate the birthday of our great nation and business takes a back seat to pleasure.

Ever the trooper, I was trying to decide what to explore for this lazy, lethargic summer week before I started my own Independence Day festivities, and the first thing that came to mind was something we just had to deal with as a newsletter publisher. Amazingly, the US Postal Service foisted yet another first-class postage hike upon the American people. At this rate, pretty soon mailing a single first-class letter will cost more than it costs those infernal postal spammers to blitz us with a whole month's worth of paper junk mail! No wonder the USPS perpetually claims it is struggling.

While all Americans could rant about the postal service for hours on end, all-in-all I think most would admit, postage prices aside, that it does do a fine job of moving the mail around. While I don't particularly savor the experience of going to the post office, probably 99%+ of all the letters I have mailed in my entire life have been swiftly delivered without any problems whatsoever. It is truly an extraordinary logistical feat to route billions of letters a day to their proper destination with a 99%+ success rate year in and year out.

Angst and hassles over rate increases aside, one thing that has long intrigued me about first-class postage rates is their excellent potential as an unbiased proxy for general price inflation in the United States. Unlike the horribly-flawed CPI full of unbelievably subjective hedonic smoke and mirrors, first-class postage rates just "are." There is absolutely zero judgment necessary to find out what they were with unbiased surgical precision at any point in the history of the USPS.

Physically it should take roughly the same amount of tangible resources such as fuel to move a one-ounce letter 2000 miles today as it took 30 or 40 years ago to move a one-ounce letter the same 2000 miles. If the actual physical inputs necessary to transport a given piece of mail around today are assumed to be approximately the same as in recent decades past, then most of the difference in nominal costs for mailing letters is probably attributable to the general US inflation environment. General price inflation increases the US Postal Service's costs in terms of wages, supplies, capital equipment, fuel, and other key inputs to the business of moving mail.

To see if any interesting insights might emerge, we secured the data for the history of first-class postal rates in the United States back to 1885 to compare with various inflation rates. As expected, our little research expedition for this slow summer week in July did indeed yield some thought-provoking fruit.

We opted to use 1960 as the point of embarkation in our graphs this week. We wanted to avoid starting in the 1970s for two reasons. First, the US cast off its long-standing gold standard on an international basis under Nixon in 1971, removing all remaining restraint on the Federal Reserve to keep its incessant fiat monetary growth disciplined. Foreign investors and governments who were promised gold on demand for their dollars at any time were suddenly told to go take a hike by the US government, ushering in the era of unbridled inflation of newly unredeemable fiat US dollars.

Second, in 1973 the Muslims were continuing to wage their ancient Jihad against the Jews with unimaginable hatred and were upset with the US for daring to acknowledge Israel's right to exist. As ancient Israeli King Solomon wisely said 3000 years ago, there is nothing new under the sun. The Arabs' rage and temper tantrum in response to their dismally failed 1973 Yom Kippur Muslim invasion of Israel designed to destroy the tiny Jewish nation led to the Arab oil embargo, which caused reported inflation rates in the US to jump quite dramatically.

In comparison to the chaotic 1970s, the early 1960s were fairly sedate on the inflation and geopolitical fronts and provide a cleaner analytical baseline without extraordinary events like the US gold default and Arab oil embargo.

Provocatively, between 1885 and 1959 there were only two permanent increases in US first-class postage rates. There was a temporary increase during World War I, but believe it or not it was actually repealed after the horrifying trench warfare of WWI drew to a close in the dying days of the era of smaller federal governments. In 1885 it cost 2 cents to mail a first-class letter. The rate was not increased to 3 cents permanently until July 1932, coincidentally the very month in which the Dow Jones Industrial Average bottomed following the 1929 crash.

The final first-class rate increase in the 75 years between 1885 and 1959 occurred in August 1958, ramping up first-class mailing prices to 4 cents. In the 75 years before 1960, first-class postage in the States doubled but over all those years its compound annual growth rate was only 0.9%, incredibly low. It is too bad that immoral politicians couldn't stomach the iron discipline of the gold standard, which led to widespread prosperity, limited government growth, and steadfastly protected the savings of hard-working Americans from inflationary central-bank predation of their capital.

In addition to the low absolute growth rate, during the 1885-1959 period some of the increased postal rates were probably attributable to the explosion in territorial growth as the United States followed the old American rallying cry of "Manifest Destiny" westward. As more Americans moved west, more postal infrastructure was necessary to serve them. It obviously costs a lot more in real terms to mail a letter from New York to Los Angeles than from New York to Philadelphia. As the US population expanded and shifted west it is not surprising that postal rates increased at a reasonable pace.

Since 1960 however, there have been an almost unbelievable 15 first-class postage rate hikes in this relatively short period of time. The vast majority of the hikes, 12, came after Nixon's dollar gold standard default in August 1971, when the inflationary floodgates were blasted open that allowed the Federal Reserve to ravage America's hardworking savers with an endless deluge of rampant monetary growth.

In the opening days of 1960 it cost only 4 cents to mail a first-class letter anywhere in the States. Today it costs 37 cents, an enormous 825% increase. The graphs in this essay tell the story of the first-class rate hikes since 1960 and offer some insights into their potential usefulness as a general price inflation proxy.

All the data in this essay is monthly. It is all indexed to January 1960 to make that month equal to the 100 level so everything is growing off a common base for comparability. In both graphs, the white percentage numbers after the data-series labels are compound annual growth rates for each respective data series. The comparison between US first-class postage rates over time and the CPI as well as various money supply growth rates is an interesting sight to behold.

Postage and Inflation

The first thing that struck me about this graph is how much farther and higher postal rates have run up than the officially reported hedonically-distorted US Consumer Price Index. The CPI itself has grown at a frightening 4.3% compound annual growth rate (CAGR) over the last four decades or so, which further illustrates just how anomalously low today's officially reported inflation in the States of around 1% seems.

It is pretty sobering to realize that the equity markets, even as battered as they are, are relying on abnormal and extremely low inflation rates from a historical perspective for the shaky foundation on which to build the pricing models that Wall Street uses to make critical investment decisions for millions of Americans!

While the CPI's 4.3% is high, first-class postage rates have dwarfed the official inflation rate, growing at a CAGR of 5.2% since January 1960! While the extra 0.9% may not seem like much, as the graph indicates it is the difference between a current indexed level around 600 for the CPI and above 900 for first-class postage, a massive divergence over time. Once again operating under the solid assumption that it takes the same amount of physical resources to move a one-ounce letter today as it did in 1960, the postal rates are probably a much superior estimate of general US price inflation than the embattled CPI.

The postage growth rate more closely approximates the narrow M1 money supply than the CPI. When relatively more money chases after relatively fewer goods and services, inflation is the result. As the money supplies in the US, courtesy of the extra-Constitutional private Federal Reserve central bank, have been growing much faster than the US economy since Nixon's gold default in 1971, general price inflation is the inevitable consequence. In our free-market economy, when money supplies increase more dollars bid competitively on a relatively smaller pool of goods and services and general prices rise as a result.

As M1, basically physical currency and checking account balances, is the very money that American consumers and corporations spend on postage, it is not surprising that the M1 fiat currency inflation rate of a 5% CAGR is far closer to the growth of postage rate hikes than the politically-motivated funny numbers of the CPI.

As the four arrows above indicate, the largest postal rate increases since 1960 occurred during strong oil price environments. The mid-1970s Arab oil embargo to beat up on Americans for supporting Israel, the early 1980s oil price spikes due to staggering official inflation in response to the 1970s Federal Reserve monetary excesses, the early 1990s when Saddam Hussein took a strategic gamble in attempting to double Iraq's oil reserves by annexing Kuwait, and the recent series of rapid-fire postal rate increases in the last few years all occurred near times of strong oil prices.

While oil prices are not included in our graphs this week, I certainly suspect that both the visual link and hard mathematical correlation between oil prices and first-class postage rate hikes would be quite striking. This does make sense, as in real terms it costs a given amount of petroleum (diesel fuel, jet fuel, gasoline, etc.) to move a letter with one-ounce of mass a certain distance. While the price of petroleum as a major transportation input in the business of hauling mail will fluctuate, the physical amount of petroleum necessary to move a given volume of mail probably does not.

I believe that the strong relationship between the largest rate hikes and high oil prices strengthens the validity of first-class postage rates as an inflation proxy to a great degree. This factor, when coupled with the fixed real costs in physical terms of moving mail and the subjective statistical wasteland of the CPI, makes the postal rate hikes appear to be a very serious contender for a superior inflation proxy for investors to carefully monitor.

Zooming out a bit, we threw in the kitchen sink and all the major US money supplies for a better strategic perspective on postal rates relative to monetary inflation. MZM, unfortunately, is not included as that data is not available all the way back to 1960. As above, all data is indexed to a 100 baseline in January 1960 and the percentages are the CAGRs of their respective data series. While postage rates approximated narrow M1 monetary inflation, broader money measures and even pure physical currency growth rates utterly dwarfed the postage rate hikes.

Inflation (1960-2002)

When I see graphs like this they make me just want to scream at the Wall Street propaganda cheerleaders who somehow claim that inflation in America is dead! Are they on crack cocaine? Have they sold their souls to Wall Street? Have they no economic history books? How can all the money supplies grow far faster than the US economy and lead to the lowest official inflation in the US for four decades? As I keep saying, something isn't right here.

M3 broad money is now actually heading parabolic, an exceedingly dangerous situation. The first arrow above marks its final turn northward in the mid-1990s, which coincides perfectly with the birth of the US equity bubble of the late 1990s. All throughout financial history excessive fiat monetary expansion has always led to enormous bubbles and catastrophic busts that wreak unfathomable damage. Alan Greenspan has certainly secured his notorious place in the all-time Economic Hall of Shame for allowing this mess to transpire under his watch.

For all you long investors out there losing your life savings in this brutal bear, fondly remember Alan Greenspan and his monetary inflation flood that led to the bubble, burst, and now bust that will ultimately inflict immeasurable damage on the US economy. Greenspan was the only human being on earth, at the very helm of the private bank issuing the world's reserve currency, that had the power to both create the bubble and to stop it early, which he dismally failed to do.

The second arrow above marks the current massive parabolic M3 growth explosion. Any time a graph shoots vertical it is a very bad omen. In biology, whenever animal populations witness a parabolic rise it is right before a widespread die-off as the carrying capacity of the environment is exceeded by the population boom. In the financial markets, graphs like this are almost always the signature of unsustainable bubbles that inevitably burst. Extreme growth rates are not sustainable in the real world forever!

As the equity market bust and brutal bear market have continued raging seemingly oblivious to the immense inflationary "stimulus" as all money supplies and inflation rates grew so explosively, it is frightening to even consider pondering just what will transpire if money supplies actually begin contracting due to deflationary debt implosions or other factors. As bad as things are now, they could unfortunately still get a whole lot worse before we are out of the woods in this supercycle bust.

In summary, the first-class postage rates in the United States appear to be a reasonable proxy of narrow monetary inflation. Because postal rates are absolute, unambiguous, and undisputed, they are probably in many ways a superior inflation gauge than the US CPI, which is ultimately just a political plaything for the US government. As I have discussed in many past essays including "Real Rates and Gold 2," there are many important reasons why the US government needs to understate the official inflation rate regardless of what is actually happening in reality.

While this essay only provided a superficial 10,000-foot overview of first-class postage rates as a potential proxy for general price inflation in the United States, more analytical work could probably strengthen this hypothesis significantly.

Perhaps in the future, when investors have lost enough scarce capital because they believed the understated CPI inflation lies, they will search for non-subjective inflation data to aid their capital deployment decisions. I would not be surprised at all if the humble first-class postage rate, as much maligned as it is, finds its way into some of these coming financial inflation models.

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