Deflation? More Like Inflation

by Adam Lass, Senior Editor, Taipan Publishing Group

Turn Washingtons latest propaganda inside out, and you get a really strong argument for gold.

I just gassed up the family van for $1.93/gallon! This is truly amazing, outstanding and unprecedented. Woo-hoo! Time to buy me that beautiful old Jaguar convertible my wife wouldnt even let me look at last summer.

Okay, that was a bit over the top.

It was a thrill actually having enough cash left over after a fill-up to ditch the brown bag and buy one lunch out this week. But that was really about as far as it goes.

I Guess Were All Austrians Now

Yes, yes, I know: Wall Streets and Washingtons chatterers and cheerleaders (pretty much one and the same by now) are all full of bluff and bravado regarding the steep drops in producer costs and consumer prices. This is the break weve been waiting for! The system is self-regulating itself!

Funny how the same Keynesians who are all in favor of doling out some $5 trillion dollars to every Tom Dick and Harry with a crappy business plan are now suddenly Austrian economics fans, too.

Come to think of it, its not really very funny at all. In fact, it is a clue to the latest fraud they are trying to foist on us.

A Real Drop?

Let me show you how this slight of hand works.

The headline on the Labor Department report brags of a 2.8% drop in overall costs. Even better, finished energy products (i.e. gasoline, diesel, jet fuel and heating oil) fell off 12.8%!

Moving on to consumer prices, the top line touts the largest one-month drop EVER -- a whopping 1% drop in overall costs in October -- as sellers hacked away at the prices of fuel, cars, and clothing in an attempt to lure in depressed customers.

Oh, the curse of having passed seventh grade math. I was so looking forward to doling out good news today (and maybe getting that Jag after all), but I am afraid that once again, the numbers just dont add up quite the way Washington and Wall Street would like.

Most Certainly Not

First, lets take a closer look at those producer figures. Yes, gas costs to retailers went down a startling 25%. But thats no real shock, as I think that we are all aware oil is down in the mid-$50s per barrel.

Unfortunately for those folks who eat, food costs were only down 0.2%, after nigh doubling over the past few months. And thats the good news!

Strip away these two drops, and you are left with a truly dismaying conclusion: Core prices actually went up 0.4%. Thats right: despite the headlines, costs to industry are still rising.

Its an Expensive World After All

Dig into consumer prices and you get a mixed picture here as well.

As mentioned earlier, the top line is down roughly 1%. However, when you compare October 2008 to October 2007, you see that the past years inflation still leaves us up 3.3%.

But even that 1% drop is suspect. Strip out the drop in fuel costs, and we actually see a 0.1% rise.

And in fact, not even that fuel cost-cut is an unalloyed joy. While retailers did drop gas at the pump roughly 33%, they only received a 25% cost cut. The rest is coming out of station owners bottom lines.

Keep in mind that big refiners like Exxon Mobil (XOM: NYSE) have for the most part sold off their local operations to private entrepreneurs, i.e. your neighbors and fellow PTA members, and suddenly this is less a cause of celebration and more a shot across the bow for your towns and states tax base.

The Big Lie

But all this is small beer compared to the really big fib. Over the past few days,
I have seen a veritable parade of talking heads and in pocket scribes ranting as to how this one-month drop constitutes the threat of a horrible deflationary juggernaut that must be stopped in its tracks before it can gain any further momentum.

Their cure for this looming threat? Why printing more money of course!
Because there is, after all, such a shortage of dollars out there (okay, it was really hard to type that without shuddering). As my fellow scribe Justice pointed out yesterday, we are in the midst of the greatest printing binge in modern memory.

The Next Bogus Rally

The only way Washington can possibly cover the filling of every Wall Street beggars coffee cup with billion-dollar bills is to frame the exercise as combating deflation.

Now, I cant tell you for a fact that this shell game wont work for a short period of time. Maybe they can even force share prices up for a while. After all, debasing the dollar metric on the left side of the chart by 15% produced an ostensible 15% increase in US blue chips in 2006 and 2007. Why not try it again in again in 2009?

I can tell you this for a fact though: If it does happen, gold will go up in lock-step with the markets for the exact same reason it did last time the
markets went up.

The Simplest Argument For Gold

Yesterday, Justice gave you several interesting and complex arguments regarding golds potential rebound. Here is a simpler one: Gold no longer moves in opposition with the market because ANYONE who can count knows that these market increases are fraudulent.

Every major player now buys gold to hedge their dollar-denominated stocks, and sells gold when those stocks inevitably collapse. You should do the same.