US interest rates must be set much higher to counter inflation, says The Mogambo Guru.

But that would require the government to actually measure inflation accurately. The official inflation rate is 5 percent. But the real rate – as measured in the pre-Clinton way – is 12.6 percent in June.

That means, to really take on inflation, the Fed would have to set rates at roughly 3 percent above the rate of inflation – at 15 percent if inflation is measured honestly. More from The Mogambo Guru below…

Martin Hutchinson, writing at PrudentBear.com, reminds us that “It was established pretty convincingly by Milton Friedman and proved beyond all doubt in the inflationary episodes of the 1970s and 1980s that if you want to bring inflation under control you must set interest rates at a margin above the current inflation level.”

How much above? He says that savings returns should be roughly “a normal level of 3% plus inflation.” So if “official” inflation is at 5%, like it is now, then this means that savings rates should be 8%? Sweet!

But real inflation, as measured by John Williams at shadowstats.com, is roaring far above a measly 5%, and while “annual CPI-U Surges to 5.0%”, as per the headlines, inflation measured the older, pre-Clinton way is 12.6% in June! Which is up from 11.8% in May! Yow yow yow! We’re freaking doomed!

So if inflation is actually running at 12.6%, the interest paid on savings should be 15.6%? Even more sweet!

I want to look at how, with an “official rate of inflation” of 5%, the bank money market rate is 0.72%, a one-year certificate of deposit pays 2.25%, while a five year certificate of deposit pays 3.39%! Hell, the 30-year T-bond barely yields 4.6%! Hahaha! 8% on bank savings? In our dreams!

Mr. Hutchinson continues ominously, “The overall lesson is as usual bearish. Almost all the world has abandoned proper anti-inflationary discipline and is destined to suffer a period of high inflation and recession in the coming years.”

Naturally my mood turns dark at that assessment, which may be what prompted The Economist magazine to remark, “countries, like people, behave dangerously when their mood turns dark.”

They don’t actually explain what they mean by that, but the magazine correctly said, “The credit crunch is in part the consequence of a flawed regulatory system. Lax monetary policy allowed Americans to build up debts and fuelled a housing bubble that had to burst eventually.”

This was eerily presaged by last week’s stirring Mogambo Minute Of Outrage (MMOO) editorial, which started off similarly, “The credit crunch is, in part, the consequence of”, but which continues, “corrupt Congressional scumbags getting corrupt Federal Reserve scumbags to act irresponsibly stupid to implement bizarre, impossible, laughable neo-Keynesian econometric theories by creating a continuous flood of money and credit so that an unfolding bust would be reversed and they could all make a lot of money, and their friends would make a lot of money, when the economy again booms under such an onslaught of new money, but which will cause horrendous inflation in consumer prices and people will get grumpy as hell, but about which we won’t talk at all and we’ll pretend that suffering and misery inflicted by higher prices doesn’t exist in reality because it doesn’t exist in their stupid, stupid, stupid little econometric models.”

So, I conclude, we need to get rid of the Federal Reserve, which, I am delighted to say, is also the opinion of the esteemed Gene Epstein. In his Economic Beat column in Barron’s this week, he says, “The abolition of the central bank is just a major first step…But it is a necessary first step” to the prevention of boom-and-bust cycles! Hooray! And well said!

Source: Inflationary Horror Movie