A New “Sound Money Indicator”

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more: http://dollarcollapse.com/iNP/view.asp?ID=92

A New “Sound Money Indicator”

3/23/2009
by James Turk

The other day at lunch with a friend, we began talking about my Fear Index. He suggested that I give it a new name in order to more accurately convey the important message it offers. Namely, it numerically measures the soundness of the dollar. Others have made similar suggestions for a variety of different reasons. For example, the Fear Index is also used for another indicator, which can be confusing. It is a nickname for the VIX, which is a measure of volatility in the stock market. Anyway, I said to my friend that I would think about our luncheon discussion.

Thinking about the key points has led me to create the “Sound Money Indicator”.

To explain it, I first need to provide some background information, starting with some basics. The practice of “inflation adjusting” has become well-known. It attempts to equate in a consistent way the current cost of goods and services to the purchasing power of the dollar for the same goods and services at some previous point in time. It aims to offset the distortion in prices caused by inflation. Clearly the dollar is not a consistent measure of purchasing power. But inflation adjusting is not a solution.

There are two problems with inflation adjusting overlooked or ignored by nearly everyone. First, the federal government has repeatedly changed the Consumer Price Index so that it no longer accurately measures the rate of inflation consistently. What’s even worse, the adjustments cause the CPI to significantly understate the real loss of purchasing power in the dollar, which has been made clear by John Williams of Shadowstats.com.

The second problem is that inflation adjusting does not capture currency debasement.