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Economics

Ron Paul’s farewell address to Ben Bernanke – saving the very best for last

In what might possibly be the Congressman’s last ever Congressional face-off with Federal Reserve head, Ben Bernanke, Ron Paul gave possibly his finest challenge to Ben Bernanke and the entire central banking system to date.

Over the years there have been some almost legendary exchanges with the current Fed Chair – like “is gold money” or “Ron Paul schooling Bernanke on currency devaluation”.

To be fair almost all of Ron Paul’s questions to the Fed Chair, be it Greenspan or Bernanke, over the years have been ‘must watch’ moments (just watch Ron Paul recommend back in 2000 that Greenspan look for new employment as an example).

Why have these moments been so gripping? Because Ron Paul seems for decades to be the only person to actually call the Fed Chairs on their faith in what will surely be remembered in history as a ‘pseudo-religion’ – namely ‘monetarism’.

In essence Ron Paul has been the only guy calling ‘BS’ on the entire system and has done it with such grace, humility, fearlessness and intellect that it has been impossible to ignore.

And Wednesday’s exchange was no exception – in fact, of all the Ron Paul encounters with the Federal Reserve over the years, this was his finest moment. Ron Paul managed to succinctly (5 minutes) call total ‘BS’ on the inflation data, proved that petrol prices are lower when priced in silver, say that inflation is theft and he then topped it off with a compromise solution that is brilliant in its simplicity and impossible to legitimately refuse.

Moments of genius:

  • Ron Paul kicks off by asking “do you do your own shopping at the grocery store”? Bernanke simply replies “yes” – to which Ron Paul flashes back “so you’re aware of the prices”. The manner in which this question was asked was genius because it implies that the price rises in shops are so obvious that if Bernanke does shop there is no way he would have failed to notice what everyone else has – that prices have risen dramatically. Also note that Paul doesn’t say ‘price rises’ he just says ‘prices’ – implying that everyone knows which way the prices have moved that he doesn’t even need to say it.
  • Ron Paul goes on to say that “nobody believes the 2% CPI inflation number” and that by using the same methodology of just a few years back to calculate the CPI it is running somewhere nearer 9%.
  • Ron Paul adds “the people on fixed income are really hurting, the middle class is really hurting” because their inflation rate is very much higher than what the government tells them.
  • Paying back money with devalued money is ‘theft’ – “somebody is stealing wealth and it’s very upsetting”.
  • Where do people put their money if they don’t want it to be stolen by inflation?
  • Ron Paul then reaches into his pocket and pulls out a silver ounce – back in 2006 (when Bernanke took charge of the Fed) and said that it would buy 4 gallons of petrol. Today it will buy 11 gallons of petrol – that’s preservation of value – in others words petrol when measured in a currency that isn’t being printed into oblivion has actually gone down in cost.
  • But rather than leave it there Ron Paul offers up a solution – one that is a compromise, something that Ron Paul has spent his entire political life avoiding. He asks “why don’t we just allow currencies to run parallel… why don’t we legalise competing currencies?”.
  • He then warns Bernanke that if he continues his path the “Fed will self destruct” – meaning that they will not stop until the paper money stops working and they will “End the Fed” themselves.
  • Bernanke’s come back? “Good to see you again too”!
  • On the matter of CPI 2% inflation numbers he just says that their done in a “serious and thoughtful manner” – he simply ignores the point that other indicators show inflation at 9% – very telling that he didn’t challenge that important point.
  • Bernanke then tries to say that nobody prevents you from using gold and silver – missing the entire point. Because of legal tender laws gold and silver is taxed (sales tax and capital gains) and can’t be used to pay taxes. Simply put gold and silver are deliberately hindered from competing against fiat money because their are not competing equally – Ron Paul simply calls for removing this impediment and letting people decide what to use.

For lovers of people who don’t want their hard earned wealth stolen by inflation, for lovers of ‘real’ statistics and not government fudged numbers, for lovers of real, logical, intelligent economics and for lovers of people who demand freedom of choice in their money as much as their freedom of choice in the sandwich they buy, then thank goodness Ron Paul has been there all these years calling them out on this nonsense.

This clip is for you:

Whilst this very maybe the last time that you see Bernanke and Paul go head-to-head Ron Paul is still running for president – with the election coming in November.

There is plenty of time for the economic conditions to change by such an extent that the idea of President Paul is a very real one – After all Ron Paul is the only guy out of all the Republican candidates that nationally beats the incumbent  Obama if the elections were held today – sorry, who’s that you say is unelectable again?

So was this the last time we’ll hear the Fed really challenged? From the looks of it Ron Paul is just getting started – and he’ll make sure he’s about when the Fed ends itself.

This article was previously published at Gold Made Simple News.

Economics

Glastonbury festival: charting a history of inflation

This article was first published at GoldMadeSimpleNews.com on Friday, 24 June 2011

Spare a thought this weekend for those intrepid revelers who have made the journey down to Pilton this weekend for Glastonbury Festival. Not because it looks set to be yet another mud bath, not because man can not live off doughnuts and Stella alone and not even because U2 are headlining on Friday. No, spare a thought because of the cost.

This year for the ‘privilege’ of camping in a muddy field, getting soaked to the core basking in a typical English summer’s day whilst listening to one of the worst lineups in living memory, has set people back a staggering £205 (including booking fee and postage) and this is before the £20 car-parking fee.

It wasn’t always the case where you have to re-mortgage the house just to goto an English festival. In fact the very first Glastonbury in 1970, where you could listen to Marc Bolan, he of T.Rex fame, cost the princely some of £1. Oh, and of course all the milk you could drink was free from the farm.

In today’s money, according to the BoE’s ‘under’-inflation calculator, that’s the equivalent of about £12.

1981 marked the first Glastonbury that would be recognizable today and is widely seen as the first Glastonbury proper. Michael Eavis was at the helm and the Pyramid Stage was made a permanent fixture. New Order headlined and judging from the pictures it looked like it rained that year too. The cost for the 18,000 or so in attendance who didn’t ‘jump the fence’? £8 – that’s about £23 in today’s money.

Interestingly the 1981 festival was put on in support of CND and £20,000 of the money raised from the festival when to help their campaign – how times change.

By 1986 the Cure and Madness were playing and this time £130,000 was raised by the 60,000 or so in attendance for CND and local charities. The price of admission in ’86 was £17 – or about £40 in today’s money.

1993 saw the £50 ticket barrier broken for the first time coming in at £58. Although with The Orb, Velvet Underground and Rolf Harris on stage some might say it was worth it. This time £250,000 was raised for Greenpeace and other charities. In today’s money the ticket would have set you back some £95.

By the time 2003 rolled around 150,000 were paying over £100 to see the likes of De la Soul, Flaming Lips, Jimmy Cliff, Moby, Radiohead, REM and the The Darkness. In today’s money that is about £125.

Over the next 9 years we can see inflation really start to bite with the cost of a ticket rising some 100% by 2011. That’s about a 10% annual inflation rate – so much for the BoE’s 3% they claim over the same period.

Glastonbury price chart Glastonbury Festival: Charting a history of inflation

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In the past 9 years alone the price has more than doubled. But what happens when we price Glastonbury tickets in a currency that isn’t being printed into oblivion?

Screen shot 2011 06 24 at 15.40.52 Glastonbury Festival: Charting a history of inflation

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Back in 2002 it would cost you about 1/2 an ounce of gold to goto Glastonbury. Today it would take just over 1/5 of an ounce. Or to put it another way, whilst the price of a ticket in pounds has doubled in 9 years, in gold terms the price has more than halved.

In fact, when priced in gold, the cost of a ticket is the same price as one back in 1992 when the likes of Primal Scream and The Levellers were taking to the stage.

Curiously the price decline of the festival over the past 9 years in gold seems to directly correspond with the fall in the quality of music over the same time period. Go figure.

Economics

GDP in the UK is growing at 0.1% annually, not 1.8%

This article was previously published at GoldMadeSimpleNews.com on May 25th, 2011.

“There are lies, damn lies and then there are government statistics”

Today we got the second revision of UK GDP from the government-funded Office for National Statistics. The economy is growing at an expected 1.8%, not brilliant but right around HM Treasury’s forecast for 2011, so all is good, right?

Not so fast – next week we’ll be releasing data going back 60 years of GDP and going into detail what exactly it is and how it is calculated. But today we present a little teaser using today’s figures.

When calculated more accurately GDP in the UK is ‘growing’ at a tiny annual 0.14%.

First lets look at the raw data provided by the ONS in todays release:

Nominal increase in UK GDP 300x171 GDP in the UK is actually 0.1% annually NOT 1.8%

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First let’s calculate the increase in Q1 2011 from Q1 2010

Q1 2010 GDP was £359,147bn

Q1 2011 GDP was £375,693bn

£375,693bn subtract £359,147bn is £16,546bn. So the increase in GDP from a year earlier is £16,546 or a 4.6% annual increase. But hold on, we were told today that GDP was 1.8%, according to that simple calculation the economy grew by an impressive 4.6%. So what gives?

You may have noticed but the pound today buys you a lot less than a pound of a year ago (thank you Mr King). This depreciation in the purchasing power of the pound in your pocket is better know as inflation.

We’ll leave aside for now the woeful inadequacies of using the consumer price index (CPI) as a measure of inflation – read this to get up to speed – but in its simplest terms if CPI is running at 5% annually, £100 a year ago is worth £95 pounds today, or 5% less.

So to work out what our ‘real’ GDP is we simply subtract the rate of inflation over that period to give us a better measure of just how much our economy has grown.

The latest CPI figure for inflation over the past year was 4.4658% (rounded up to 4.5% when reported in the news). So, simple math time again:

UK economy grew 4.6% over the year

Your money lost 4.4658% over the past year

So, subtracting one from the other gives us a ‘real’ UK growth rate over the past year of 0.14%. Yes you read that correctly, the UK economy is in fact growing at stall-speed 0.14%.

But what gives again? Weren’t we told that the economy was growing at 1.8%, now we’ve gone too far in the other direction.

Well that 1.8% number published by the ONS is the number adjusted for inflation. Just not the inflation number that we’re always told about in the news. You see, when the ONS comes to work out ‘real’ growth in the UK it doesn’t use CPI as its inflation gauge it uses its own ‘special’ measure called the GDP deflator.

Go back to today’s ONS release and on page 4 it tells you what number they punch in for GDP deflator – It’s 2.8%. So we can see how they arrived at their 1.8% growth rate for the year. Nominal growth was 4.6%, minus out the ONS’ version of inflation of 2.8% and that gives you, hey-presto a bang on government forecast target of 1.8% – how convenient.

ONS Deflator 2.8 300x147 GDP in the UK is actually 0.1% annually NOT 1.8%

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This raises many questions. First up, why in the world are we using a different measure of inflation when calculating GDP? Surely we should pick a measure and use that. For all it’s faults, CPI inflation is the one that is presented to us each quarter; its the one we’re all familiar with. CPI is used as the target for the Bank of England. So why in the world should we use a separate measure of inflation when calculating GDP?

Also, when this data is presented in the news does anyone ever point out that a different rate of inflation is being used other than CPI – and that it is substantially lower than CPI inflation?

The second question this raises is: are we really honestly to believe that inflation has only gone up 2.8% in the past year? Many have argued that inflation is in fact a lot higher than even the CPI reports, so surely believing the print of 2.8% is a bit of a stretch.

So just how do the wise GDP deflator prophets over at the ONS arrive at the 2.8% number. A quick trip to Wikipieda on the subject explains all:

“Unlike some price indexes, the GDP deflator is not based on a fixed basket of goods and services. The basket is allowed to change with people’s consumption and investment patterns.[2] (Specifically, for GDP, the “basket” in each year is the set of all goods that were produced domestically, weighted by the market value of the total consumption of each good.) Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices. The theory behind this approach is that the GDP deflator reflects up to date expenditure patterns. For instance, if the price of chicken increases relative to the price of beef, it is claimed that people will likely spend more money on beef as a substitute for chicken.”

And how’s this for a bit of an understatement:

In practice, the difference between the deflator and a price index like the Consumer price index (CPI) is often relatively small. On the other hand, with governments in developed countries increasingly utilizing price indexes for everything from fiscal and monetary planning to payments to social program recipients, the even small differences between inflation measures can shift budget revenues and expenses by millions or billions of dollars.

Got it? The ONS can hedonically substitute its heart out until it comes up with a number it is happy with. In the past when CPI inflation has remained broadly inline with the GDP deflator this hasn’t really been much of an issue. But when one figure is 4.5% and the other is 2.8% that’s a massive difference.

As we’ve demonstrated above, if a GDP deflator closer to the CPI was used it would show that our economy has ZERO growth and would blast holes in the UK government’s growth targets for the year. We will leave it for you to decide if the ONS is deliberately using a lower deflator number to produce higher growth numbers that are more palatable.

Here’s a quick lesson why that GDP deflator is so important – and why the next time you hear on the news our GDP numbers you should go and find what GDP deflator is being used:

GDP numbers changed GDP in the UK is actually 0.1% annually NOT 1.8%

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Look at the difference just a slight change to GDP deflator has on the GDP numbers:

So if the ONS used a GDP deflator of say 2.2%, just above the BoE’s target, this would give you a growing economy of 2.4%, way above government forecast.

Even if the ONS used 3.5% as their GDP deflator in today’s release – a number still a full 1% below the CPI number – growth in the UK would be just 1.1%, well below the government’s forecast. Can you imagine the headlines and market reaction to such a GDP miss? And that’s still using an inflation number woefully short of reality!

But what happens to these numbers when you use another measure for the purchasing power of the pound in your pocket, like say gold? Gold has increased nearly 15% in the past year. Well, you do the math.