Thursday, December 07, 2006
Watch What the Dollar Does, Not What the Fed Says
We all know the joke about “adjusted” inflation numbers.
I’m referring to the fact that in an effort to find a “core” rate of inflation unencumbered by the ups and downs of volatile commodity prices, the Fed (and its pals in the bond market) routinely strips away the costs of the two most essential staples of human life: food and energy.
Not to mention the other adjustments the Fed makes, such as the “rent-equivalent” housing cost calculation that bears so little relation to the reality of home-ownership in America that the accounting scam artists at Fannie Mae, who we now know inflated the profits at that mortgage buyer by precisely $7.9 billion, would blush. (Fannie Mae's new slogan: “Buy a House on Us, What the Hell”)
Still, I’m not sure how the Fed will adjust away other real-world numbers now hitting my email inbox, such as the basic cable television price increase going through in one major Midwestern city that amounts to double the current “core” CPI of 2.5%.
Or the healthcare coverage increase being asked of a small business in a different major Midwestern city that is likewise somewhat greater than the current “core” CPI.
In fact, the proposed price increase is multiples of the current “core” CPI: it is a 30% proposed increase.
I am not making that up.
Now, this number is a starting point in a negotiated rate increase that will likely be lower than 30%, but even so it will still be significantly above the “core” CPI.
And while individual claim experience can and does affect the healthcare coverage quotes for businesses large and small, such that 30% is not likely to be the standard asking price of the HMO in question, the small-business emailer who flagged this writes as follows:
“I can tell you there is a complete disconnect between the government statistics and my real world costs.”
That last—about “real world” costs—is key: the Fed can run and it can hide from inflation statistics that don’t tell the right story, but those who buy and sell our currency in the real world aren’t so easily fooled.
A friend recently pointed out that the 30% decline in the U.S. Dollar over the last five years amounts to a 6% annual adjustment in the value of our currency, and 6% seems like a much more realistic notion of the actual underlying decline in purchasing power of assets based in this country than any “core” number the Fed might come up with.
So watch what the Dollar does, not what the Fed says.
And get started on those healthcare negotiations ASAP.
I Am Not Making This Up
© 2006 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 8:13 AM