(click for sharper image) 

But there is a problem when using the CPI or RPI to try and work out what prices from the past would be today. Both those measurement are deeply flawed and manipulated measures. After all the UK government bases how much to increase pensions and other benefits using these measurements.

In other words the government has a direct vested interest in keeping those figures as low as possible.

And here’s the proof, last week the government announced that it was considering stopping increasing benefits inline with the CPI:

Reports suggest the government is considering changing the way many benefits are calculated each year, so instead of annual increases linked to inflation they would be pegged to the rise in average earnings. But the BBC suggests that before any increase there will be a two-year freeze in benefits payments.

And we’re not talking about small change here either:

In recent years inflation has risen at a far higher rate than average earnings. Whitehall officials say a switch since 2008-9 would have saved £14bn

So clearly the government has a vested interest in keeping the CPI and/or RPI as low as possible. And just to show this isn’t UK specific, here is Argentina being caught red-handed manipulating their inflation data:

Argentina is on track to be the first country ever censured by the International Monetary Fund for not sharing accurate data about inflation and the economy.

The IMF’s board of directors, meeting yesterday in Washington, gave the country until Dec. 17 to respond to concerns about the quality of its official data, it said today in an e-mailed statement. If the deadline is missed, the board can issue a declaration of censure, a warning that has never been used and which means sanctions may be applied if the concerns aren’t addressed.

“The Executive Board regretted the lack of sufficient progress in implementing the remedial measures since its Feb. 1, 2012, meeting and expressed to the authorities its concern that Argentina has not brought itself into compliance with its obligations,” according to the statement. The board “took note of the ongoing dialogue between the IMF and the authorities regarding the measures, and called on Argentina to implement the measures without delay.”

But it’s not even that a government might be tempted to fudge the RPI or CPI numbers, it is the metric itself that we call into question. The methodology changes on regular basis, in-fact the ONS is going through another one of these rounds as we speak:

Britain will consult next month on whether to change its retail price index measure of inflation, the Office for National Statistics said today, which could lead to lower returns for holders of index-linked gilts and certain pensions.

“As a result of work to understand the reasons for the differences between the RPI and the Consumer Prices Index (CPI) estimates of inflation, the National Statistician is to invite users’ views on the way the RPI is constructed,” the ONS said.

The consultation starts on October 8, and any changes will be announced in January next year, to be implemented in March, the ONS said.

The ONS did not say what its preferred change would be, but instead listed options, ranging from doing nothing to moving the formula used to calculate the historic RPI rate fully in line with that used for the CPI measure favoured by the Bank of England.

To put it simply the way the CPI or RPI is calculated today is a totally different measure than it was 30 years ago. So to say the RPI rose 5% in 1980 and to compare that today is absolutely meaningless, you are now comparing two completely different things.

So why is this important? Go back to the chart at the top of the page. Back in 1980 gold in the UK hit a then record high of £371. When you use the RPI to inflation adjust £371 in 1980 to today you get a number around £1300.

In other words the gold price in the UK, which is currently around £1100, just has to put on another 20% to match the all time high from 32 years ago.

But there is a problem, if the RPI/CPI are constantly being changed how can we be sure that £1300 inflation adjusted price target is an accurate reflection of the loss in purchasing power of sterling over that time frame. The answer is you can’t.

So we thought it might be worth while to find another metric that can be used to inflation-adjust the price of gold to. Something that everyone can relate to, is easy to understand and appreciate.

And we think we’ve found it… Beer!

Back in 1970 the average price of a pint in the UK was just 10p. Today the average price of a pint is about £3.17 (London readers can only dream of such a ‘cheap’ pint).

Which means that since 1970 the price of a pint has increased an eye watering 3170% in 42 years.

Back in 1970 the price of an ounce of gold was £15. So if we increase £15 by 3170% we can get a ‘beer inflation-adjusted’ price of an ounce of gold, which would be around £476 per ounce in today’s money.

The rise of the cost of a pint in the UK:

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 (click for sharper image) 

Comparing the gold bull market of 1970-80 to today:

Gold Made Simple ® has compared the bull market of 1970-1980 in gold with the current bull market. Its findings were:

• During 1970-80 gold went from £15-£371, a 2500% increase
  • During 1970-80 the BoE increased its balance sheet (printed money) by 300%
  • During 2000-11 gold has gone from £180-£1000, a 555% increase
  • During 2000-11 the BoE increased its balance sheet 1000%
  • For gold to match the bull market of 1970-80, gold should trade north of £4500

The full analysis with charts can be read here:

The relationship of the Bank of England’s balance sheet to gold:

Next Gold Made Simple ® has looked at the expansion of the Bank of England’s balance sheet and gold. It’s findings were:

• Gold holdings at the BoE have collapsed over the past 60 years
  • Today the BoE holds 310 tons, in 1950 that figure was 2543
  • The BoE balance-sheet has been a vertical line straight up in the past 4 years
  • At £1000 per ounce just 4% of the nation’s money is backed by gold
  • A return to the long term average of a 20% gold backed balance sheet would require a gold price of £4670

The full analysis with charts can be read here:

The relationship between the UK’s national debt and gold:

Finally Gold Made Simple ® has taken a look at the correlation between the UK’s debt and gold. It’s findings were:

• The UK national debt is predicted to be £1.314tn by 2015
• There is a strong positive correlation between higher debt and higher gold
• If gold repeats the 1980 peak, in debt:gold ratio terms, then the price of gold will have to reach about £5050

Who knew that beer would be so good at proving what a complete waste of time the meaningless RPI or CPI really are. Is there nothing it can’t do?

Using the ‘Beer Price Index’ the all time inflation adjusted high price of gold is £3730

Why is it that those with an Austrian Economic bent seem to be born with a sense of humour whereas those of Kenysesian bent seem to have had theirs surgically removed at birth – when did you last hear Krugman crack a joke or two?

As a quick aside, songs can get to number 1 in the UK with as little as 30,ooo units shifted in one week. Frisby’s ‘Debt Bomb’ song has had nearly 70,000 view on Youtube in 6 days.

Check out the Debt Bomb website here.

Enjoy:

Lyrics:

DEBT BOMB
(Lyrics by Dominic Frisby)

Aw, aw baby, yeah, ooh yeah, huh, listen to this

Mortgages, cars, consumer shite
Government spending all through the night
Pensions and healthcare and welfare rights
Education , wars to fight

Run up a deficit, ignore the facts
Blame someone else, put up tax
I can’t deny we had a crack
But now we gotta pay it back

Debt bomb, debt bomb, you’re a debt bomb uh hu
The addiction to credit just goes on and on and on – give it to me
Debt bomb, debt bomb, you’re a debt bomb
A bail-out ooh you’re turn me on

You know what you’re doing to me don’t you. ha ha,
I know you do

If you can’t afford it don’t be ill at ease – no
Spend it anyway, you’ve got voters to appease
Take the prudent savers and just give them a squeeze
That’s the economics of Keynes

Quantitative easing, zero interest rates
Steal from the future, hide the bad mistakes
We gotta keep those asset prices high
Don’t matter if the credit’s dry

Debt bomb, debt bomb, you’re a debt bomb uh hu
Try to pay the debt off with inflation
Debt bomb, debt bomb, you’re a debt bomb
Malinvestment ooh you’re turn me on

A boom brought about by credit will always bust
You’ve then got two choices, decide you must
Abandon the addiction, the credit lust
Or the currency collapses , it just turns to worthless dust

Debt bomb, debt bomb, you’re a debt bomb uh hu
Destroy the country’s money, anything to carry on
Debt bomb, debt bomb, you’re a debt bomb
Bubbles ooh you’re turn me on

Meet Dominic Frisby’s ‘Debt Bomb’ – Song would be number 1 in the chart if released

The heady days of growth at 0.8% in 2012 and 2% in 2013 have been slashed all the way to 0.2% and 1.4 percent respectively:

(click for sharper image)

Which means that the idea that the latest £50bn increase to the balance sheet of the Bank of England is its last, is just wishful thinking. Back at the start of February this year we wrote a note about ex-BoE member, David Blanchflower, saying he thought that the BoE would print an additional £225bn in 2012 – this was back when the QE portion of the balance sheet of the BoE was £275bn – meaning that Blanchflower was looking for the balance sheet of the BoE to exceed £500bn by the end of the year.

Since February we’ve now had two rounds of money printing both at £50bn a piece taking the balance sheet at the BoE to £375bn – after todays downgrade in the growth in the UK we’re probably now looking at another £75bn-£100bn sometime in October/November, taking the balance sheet to £450-475bn by the end of the year.

So how does all this money printing compare to the other central banks?

 (click for sharper image)

That’s right – the Bank of England has been the biggest printer on the planet… bar none.

But what is scary is that now that the IMF has cut the outlook for 2013 as well, this all but guarantees that the expansion of the balance sheet at the Bank of England will be expanding all throughout 2013 as well – in fact as we’ve said on previous occasions, the global money printing simply will not end this side of the ‘big financial reset’.

Incidentally the title for the IMF report is “New Setbacks, Further Policy Action Needed“. With think a diagrammatical title like this would’ve been much more appropriate:

(click for sharper image) 

IMF cuts the UK GDP growth outlook this year and next – prediction of a near £500bn BoE balance sheet by year-end doesn’t look so silly now

We can report that Gary Herbert, the Utah governor has singed into law bill 157 titled “Currency Amendments Bill”. Essentially what this bill does it once again recognise gold and silver as legal tender.

You can read the entire bill here. However the most important sections are:

• defining “specie legal tender” to mean gold or silver coin issued by the United

• Specie legal tender is legal tender in the state — Person may not compel another person to tender or accept specie legal tender — Court or congressional action to authorize gold or silver coin or bullion as legal tender.

The ‘non-obligation’ part of the bill is crucial and very welcomed – as we’ve always said if a return to gold is going to be a success it will only work on a strictly voluntary basis. After-all nobody should be forced to use gold any more than people are force to use fiat currencies.

• A nonrefundable individual income tax credit is allowed as provided in Section 59-10-1028 related to a capital gain on a transaction involving the exchange of one form of legal tender for another form of legal tender.

• Sales of currency or coin are exempt from sales and use taxes as provided in Subsection 59-1

So capital gains and sales tax have been removed completely from gold and silver. After the voluntary aspect the tax issue is the second most important part of any gold reform. This will now put gold and silver on an equal footing with fiat currencies – now let’s see what the free market chooses.

Here is a clip of Utah House Representative Brad Galvez talking about what the new proposals mean:

Also note that the proposed legislation had more ‘hits’ on the Utah legislature website than any other piece legislation being proposed – this tells you all you need to know about the return to gold -  the interest is very real, very large and this matter is only going to grow in size.

For gold bugs around the world this is probably the most encouraging steps regarding this matter since the disaster that was Nixon taking the US off the gold standard in 1971. There will certainly be many other states in the US watching very closely to see how this new law plays out – we wish Utah all the best in this cutting edge, forward thinking, monetary reform.

Historic Utah bill passes: Gold and Silver to be recognised as legal tender once again

The report is full of the usual ‘fan-charts’ which seem to be all the rage at the BoE – the charts aren’t particularly helpful in estimating the CPI rate in the future, but they are great at highlighting the bank’s schizophrenic mind when it comes to forecasting.

You can read the full report here. But the only two charts that matter are the CPI and GDP charts. First up the GDP chart and a comparison with the chart from the same report back in November 2011.

November 2011 GDP predictions:

February 2012 GDP predictions:

We can see that back in the November report the BoE thought GDP could get as low as minus 2% in 2012. It would appear that now the BoE is more bullish on the UK economy and the lowest possible rate that GDP might dip to is now minus 1.5%.

It would also appear that the ‘recovery’ (used in the loses possible way) in the second half 2012 (just how many ‘second half’ recoveries have been predicted since 2008?) will be much sharper than they previously thought.

November 2011 CPI predictions:

February 2012 CPI predictions:

Back in February the BoE saw a risk that the CPI would get below minus 1% by 2013. Now this figure is minus 0.5% – so clearly the BoE is expecting more inflation this year than they did 3 months ago.

Other than that the CPI expectations are broadly similar to that of the November report. Both reports have CPI inflation reaching their 2% government mandated target by 2013.

We’re going to make a bold prediction that you can come back and check in 9 months time. CPI inflation will be running much higher than 2% by then – how can we be so sure? Because there is no 2% target – its a myth. The BoE and the UK government positively want higher than 2% inflation – that’s what money printing (QE) is all about. Nice of them to let you know about such a dramatic policy shift wasn’t it?

Also as a quick aside there is an interesting note on house prices for the past two years. It’s interesting because there seems to still be some confusion about whether house prices have gone up (as the MSM would have you believe) or whether house prices have fallen (as we’ve reported on over the past couple of years). Well wonder no more – this from the horses mouth as it were:

House prices (Table 1.B) have been broadly unchanged over the past two years, having fallen during the recession. But rising consumer prices and average earnings imply that real house prices have continued to decline.

[emphasis ours]

Bank of England: Inflation by 2013 could be 4%… or minus 0.5% – take your pick

But it is investment demand out of Europe that shows where the real strength is. Investment demand in Europe reached an all time record or 118.1 tonnes or €4.6bn. This increase represents a staggering increase of 135% over the same period last year.

What’s really impressive is that this demand has come all whilst the gold price has rallied over 40% over the same period a year earlier. So higher prices haven’t deterred investors.

Global investment demand, while not as dramatic as Europe, was still impressive, pulling in an increase over the same period last year of 33%. In volume measures Global demand rose to 468.1 tonnes vrs 352.1 tonnes a year earlier.

It seems that investment demand is now the biggest driver in the gold market right now with Jewelry demand falling some 10% from 518.9 tonnes in 2010 to 465.6 tonnes. It now means that investment demand is now bigger than jewelry demand.

We expect this trend to continue for the next few years as people start looking at gold as money once again rather than something pretty to wear around the neck.

Central banks around the world are still out there buying up gold. In q3 of 2011 net purchases by central banks amounted to 148.4 tonnes – we sure have come along way from the days of central banks being net sellers.

Finally a quick word on supply. Supply for q3 2011 was only up 2%. Which means that demand is out pacing the supply of gold to market by some 4%. We will leave it to the imagination for our readers what this dynamic will mean for price if this trend continues.

European gold investment demand up 135% year on year

Yesterday the U.S. Federal Reserve delivered no real surprises. Its new policy was expected by the market and those members of the public who still follow the central bank’s every move with interest and, I can only assume, in the misguided belief that it has the answer to our problems. As part of “Operation Twist” the Fed will purchase $ 400 billion of long-dated government bonds and sell an equivalent number of short-dated securities from its extensive portfolio over the coming nine months. The operation is aimed at lowering long-term market rates and flattening the yield curve. In their infinite wisdom, the bureaucrats on the central bank’s policy-setting committee decided that here was another set of market prices that required their astute adjustment, or at least gentle guidance.

The Fed has recently acquired quite a taste for correcting market prices. Remember that the goal of the first round of debt monetization – euphemistically called “quantitative easing” – was to free bank balance sheets from the toxic waste accumulated during the boom and thus prevent banks from unloading unwanted mortgage securities in the market place at distressed prices, which would not only have burnt a considerable hole into their capital but would also have revealed the lack of true demand for these securities. This required the printing by the Fed of a brand new $ 1 trillion – give or take a few hundred billion – and provided a nice subsidy to the hard-pressed American financial system. The second round of debt monetization – QE2 – was squarely aimed at manipulating the prices of Treasury securities. Treasury yields were simply not in line with what the committee deemed appropriate for the planned recovery and had thus to be massaged to lower levels. Another $ 600 billion had to be printed for this initiative.

For the benefit of those Americans who were beginning by now to feel that monetary policy in the United States was acquiring a whiff of Weimar Germany, and who were still beholden to the quaint idea that the setting of asset prices and yields, just as any other price, should best be left to the market, Fed chairman Ben Bernanke, in an op-ed in the Washington Post in November 2010, spelled out the advantages of clever price manipulation by the central bank (I know, I know, you readers of the Schlichter files have read this quote already a few times. But it is simply too delicious to miss any opportunity to quote it again):

“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Well, the virtuous circle has not arrived yet. Defenders of this policy will argue that things would look even worse without it, and that for a while “quantitative easing” boosted equity markets and other risk assets. Hooray for that. Although it has to be said that the idea that we, the public, can easily be cajoled into feeling confident and behaving in more expansionary modes economically via the open manipulation of market prices strikes me as somewhat condescending and hubristic. But we are talking about a state agency here, so we shouldn’t be surprised.

The Fed’s entire policy program suffers from the same defect that all market interventions suffer from. The moment you stop intervening, the underlying problems come to the surface again. Just look at the short-lived results of QE2. Administrative price setting does not change economic reality, at least not for the better. The interventionist has to keep intervening and do so at an accelerating pace.

Surprisingly few people seem willing to ask what exactly the underlying economic problem is. As long as we avoid that question and simply talk superficially about slow growth, the risk of a ‘double-dip’ and the need for ‘stimulus’, I guess the Fed will continue to get away with portraying an image of, at worst, innocent bystander or, at best, a well-meaning and public-service minded bureaucracy that just keeps trying to fight the recession, diligently exploring all available policy tools. According to this popular view, our economic difficulties seem to have come over us like a bad harvest or an alien invasion. They appear to be entirely exogenous, and the Fed is our friend and partner helping us to get out of this mess.

The reality is different. Like all state bureaucracies, the Fed is in fact struggling with problems that are predominantly of its own making. The Fed is the reason we are in this crisis. Or, more specifically, the present economic crisis is the inevitable consequence of the political decision to adopt a system of unconstrained, constantly expanding fiat money, in which the central bank, in its role as lender-of-last-resort, systematically encourages bank lending and thereby the extension of credit on the basis of money printing rather than true savings. This system came into full bloom only in 1971, when Nixon severed the last link to gold and thus initiated, for the first time in history, a global system of unrestricted fiat money creation.

Our present problems are excessive levels of debt, now mainly public sector debt, weak financial institutions and distorted asset markets. On their present scale these problems would be inconceivable without a system of fully elastic fiat money and persistent periods of artificially low interest rates. Abandoning the gold anchor allowed the Fed, and other central banks, to cheapen credit and encourage borrowing for periods of unprecedented length. Today the Fed is promising us a way out of the crisis by providing monetary policy accommodation. This is hardly original. The Fed has practically always provided policy accommodation. Policy accommodation was the raison d’etre for the Fed. The Fed was founded in 1913 to support the banks’ money and credit creation and to avoid credit corrections. Hard and inflexible commodity money has now everywhere been replaced with elastic fiat money under central bank control so that the level of interest rates and the availability of credit in the economy are no longer constrained by the extent of voluntary saving but can be determined administratively by the central bank for the purpose of extra growth.

When Nixon took the dollar off gold internationally, the monetary base and bank reserves in the U.S., that is, the part of the overall money supply that the Fed controls directly, was $69.8 billion. Ten years later it was $147 billion, another ten years later it was $319.7 billion, another ten years later it was $645.1 billion, and last month, exactly 40 years after the dollar was ‘freed’ from gold, it was $2,679.5 billion. Like all interventionists, the Fed has to run ever faster to prevent the laws of economics to catch up with the unintended consequences of its interventions.

“Operation Twist” is another attempt to keep interest rates low and to encourage borrowing when the present crisis is in fact the result of low interest rates and excessive borrowing. The only solution to our problems is to stop printing ever larger quantities of money and to finally allow the market to set interest rates and to cleanse the economy of its accumulated dislocations.

Detlev schlichter is the author of Paper Money Collapse  where this article first appears. The book by the same name is out now and can be purchased here.

Watch out for Gold Made Simple News meeting the author and reviewing the book soon.

Operation Twisted Logic – Why the Fed is the problem, not the solution

Ron Paul has almost single handedly bought the issue of monetary reform and need for commodity based money into the mainstream. And yesterday was an example of just how far this debate has gone in the States where now hearings are being held on how to achieve once again linking currencies to money (gold).

It’s a must watch for those interested in gold Ron Paul leaves you with the impression that this matter isn’t just the most important political and economic question of our age but that it also urgently needs to be remedied as the debasement of global currencies goes on at almost fever-pitch.

Watch congressional hearing by Ron Paul on a return to the gold standard

“What we are dealing with is the end of the $ world reserve standard. This is not minor, this is probably a bigger problem the world has ever faced”

and:

“What i worry the most about is the consecquence of the currency destruction is violence. and boy every day there is more and more violence, whether it’s in London or demonstrations in Israel all around the world, revolution going on and this is all related to this fictions notion about what money is and what it should be.“

Further take aways are:

• Gold prices don’t go up – the value of the dollar goes down
• Can gold hit $3000? “Oh yeah, because the $ can go to zero”
• Amazed the dollar standard has lasted this long
• S&P downgrade in many ways irrelevant
• There are no cuts

Must watch:

Ron Paul: This is the biggest problem the world has ever faced

Then we show Ben Bernanke being absolutely certain that he can control inflation – so the question is, what if he’s wrong like Tim Geithner was wrong about the US debt?

Good food for thought:

Video: If Geithner was wrong – what about Ben Bernanke?