The Understating of Inflation

In the video embedded above, Peter Schiff discusses the issue of the federal government understating the effects of inflation. Here are some of the highlights from the video:

- From 2002 to 2012, the CPI increased by 27.5%. During the same time period, Peter Schiff’s basket of 20 popular goods rose in price by 44.3%.

- From 1999 to 2012, the CPI indicated that newspaper and magazine prices rose by 37.1%. During the same period, the average price of the 10 most popular newspaper and and magazine publications rose by 131.5%.

- From 2008 to 2012, the CPI indicated that health insurance costs rose by 4.3%. During the same period, a Kaiser survey of employer sponsored health insurance indicated that costs rose by 24.2%.

- Mitigating factors such as the fact that America’s trading partners are willing to accumulate dollar reserves and invest them in US treasurers.

I would like to expand a bit on the fourth point mentioned above. Currently, the US dollar acts as the global reserve currency. In other words, all other countries hold US dollars as reserves, thus creating automatic demand for the US dollar. Without this demand, hyperinflation would have happened eons ago and the collapse of the dollar would be part of of history textbooks. But how did the US dollar become the global reserve currency in the first place?

In 1971, President Richard Nixon went off the gold standard. Basically, the US dollar was now backed by absolutely nothing and was/is essentially worthless. As a response to this development, the US decided in implement the Petrodollar system with the help of the OPEC nations. In 1973, Saudi Arabia became the first nation to agree to the Petrodollar system. The Petrodollar system, in essence, requires that all oil be sold exclusively in US dollars. Saudi Arabia and the other OPEC nations, in return, would receive weapons and military protection from the American military. Due to this agreement, any country who wishes to purchase oil will have to keep a reserve of US dollars for future purchases of oil, thus catapulting the US dollar towards its current global reserve currency status. The artificial demand created by the Petrodollar agreement is propping up what should be a worthless currency. Another caveat in the Petrodollar agreement is that the OPEC nations agreed to invest their excess profits into US Treasuries. This process is known as the Petrodollar recycling. The reinvestment of excess oil profits into US Treasuries allows the US government to further pursue their inflationary habits. In recent years, countries such as Iraq, Iran, Libya, and North Korea have all expressed interest in exiting the Petrodollar system in favor of purchasing/selling oil using other currencies and commodities. Judging by the US government’s rhetoric on these nations, it is quite clear that any move against the Petrodollar agreement will be met with strong push back from good ol’ Uncle Sam.

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