Man is such a lucky creature because machines do all of our work. Our economy and prosperity stand on the shoulders of the geniuses who invented the wheel, lever and plow, and the creative thinkers who dreamed up mathematics, the internal combustion engine, silicone chip and the internet. These innovations have led to wondrous and unforeseen leaps forward for mankind. Human ingenuity, mixed with a desire to do better and produce more with less, has relentlessly driven productivity forward.

There was a time when I actually looked forward to the government's reports on productivity because it made me feel that I could share in the collective genius, good luck, and hard work of my fellow man. Then I woke up and realized that those very reports were being used to rob me! Here's how I came to that conclusion.

The other day while at the gas pump, I was thinking about productivity, creativity and technological advances. When I realized how much it would cost me to fill up my Sport Ute - an amount that would have fed a family of four for a month when I was a kid - it dawned on me that the one thing the government never reports on is that the dollar in my pocket will buy me more next year. Indeed, my dollar should buy more because of the relentless increases in productivity, and I should in reality be better off if I saved money, rather than spent it. But, in my lifetime, my world has only known inflation so buying goods today that I will need tomorrow, and stashing then away, has proved to be a better investment than saving cash in the bank.

Even though my wallet was noticeably lighter after paying the bill to fill up my car, I proceeded to go to the supermarket. Regardless of all the gains in productivity, everything on the supermarket shelves - and I mean everything - was more expensive than the last time I shopped. A nagging thought kept bothering me:

"If mankind's machines produce more with less labor each year, why shouldn't the dollar I make this year buy more next year?" Shouldn't this increase in productivity flow through to the wage earner and saver?

This brings me to a serious examination of inflation. Because I'm a trained economist, I know that inflation is the Government's and Federal Reserve's way of taxing financial assets like cash. I also realize inflation is a horrible and insidious silent tax. I even encouraged my wife to purchase inflation-indexed I-Bonds so she would at least be able to keep up with inflation. But perhaps those I-bonds haven't kept up with what I see as real inflation, which is not the same inflation measured by the government.

So, anyway, back to the supermarket. Here I was rolling the cart up and down the aisles stunned at the cost of simple groceries. We're not even talking about the price of meat - pushed up by the price of cattle, hogs and chickens, which has been pushed up by the price of corn. Corn has been pushed up because some Washington politicians think that turning all corn into ethanol for use in cars is popular, but I view this as incredibly stupid, unless, of course, you like higher food prices. As a consumer, when I think about the escalating cost of food today, I realize I really didn't benefit at all from all those productivity gains! Meanwhile, with inflation, the government has basically stolen/taxed my share of productivity away. Stunning and painful thought!

Shopping was so stressful that I needed to go home to rest. Just as I'm drifting off, reality hits me like a ton of bricks between the eyes. I have been writing for years about how the government has been using "hedonic" price adjustments to hold down reported inflation and one way inflation measures are modified over time is in the way in which goods from the present are compared with goods from the past. Let's use the purchase of your computer as an example:

The concept behind a hedonic adjustment is that because your computer is twice as fast and stores twice as much data for the same price, the price you paid is cut in half. The actual price you paid for the computer is not cut in half, but the price as reported in the price indexes is!

Well surprise, surprise! Most of what passes for hedonic adjustments in the price indexes is simply another way of reporting the improvements in technology. Another name for this is, of course, "productivity". Technological advances, hedonics, and productivity are all names and measures for the same fundamental fact: technological advance allows for the increase in productivity that is translated into the hedonic adjustments.

Something didn't feel right. I got up and examined the shrinking dollar in my wallet and I felt like I was robbed! First, by the Federal Reserve Bank because they have keep inflation moving ahead so I never receive the benefit of productivity, and then by the slick Bureau of Labor Statistics, ("BLS") that actually made the Price Index pay for productivity by subtracting it from the CPI and reporting it as a smaller number than it really is! (It's ironic that the best and brightest at the BLS are employed to figure out how to use fancy statistics to rob their grandparents of their social security increases.)

If our government was fair and money and credit growth were restrained, I estimate the dollar could purchase about two percent more each year, and we would be living in a saver's paradise. Taking productivity out of the Price Index means that when the CPI shows three percent, in reality it's more like five percent. Our government gains by doing this because as the world's largest borrower, they benefit from increases in productivity. On the other hand, savers and those on fixed income really get ripped off. In a $14 trillion economy, the two percent productivity rip-off is likely to amount to a cool $280 billion, and the total inflation tax on five percent is over a half trillion dollars. That is enough tax revenue to pay for a not so little war!

I'm working and making a great living so why should I, of all people, complain because the inflation tax is cruel and pushed higher because of productivity being perversely subtracted from inflation? Well, I'm getting older, too, and my heart goes out to the retired couple next door on fixed income, knowing full well that their cost of living is adjusted down because of productivity. If there was no increase in productivity, the government would have to pay the retired couple more since the hedonic adjustment, reducing inflation, would be zero. If the hedonic adjustment was zero along with zero productivity, that same retired couple might be able to stay even with the real cost of living! For people on fixed income, technological advance - leading to increased productivity - is a curse rather than a blessing.

So, when looking forward, it is important to remember that whenever productivity slows down inflation will suddenly pick up, because there is no hedonic adjustment (productivity) to subtract from the real number.

Now that I clearly understand how this productivity tax works, I am less inclined to buy inflation-indexed bonds and more inclined to buy gold and sliver. I believe precious metals are more likely to track the real inflation numbers. The government's phony numbers are used to hide and pretend that the inflation tax is much lower than it really is. Given the size of our country's deficits, and the size of unfunded entitlements, the U.S. government is insolvent. The U.S. is inflating like crazy, and it's only going to get worse.

Every trick in the book will be used to make sure that the masses continue holding the government's paper money that promises to always buy less, and less, and less. Sticking in a productivity tax through hedonic adjustment is a cute trick, but as a saver or investor you shouldn't fall for it!