Tag Archives: Reader’s Question

A Reader’s Question on Modelling (Munger and Buffett’s View)



Just wanted to shoot you a quick email applauding you for putting together the “Ultimate Investor Checklist.”  investment_principles_and_checklists_ordway This may be the most valuable word document I have on my computer.


Quick question, I’m a huge fan of Charlie Munger (currently am reading Poor Charlies Almanack)- In the checklist when he describes being a business owner Charlie says:

      • Ignores modeling forecasts for the next quarter, next year, or next ten years.
      • Ignores forecasting completely.

http://www.mymentalmodels.info/charlie-munger-reading-list/ (Search through this link on Munger’s Mental Models.

If Charlie Ignores modeling and forecasting, how does he go about estimating Intrinsic Value? I know Charlie has said in the past that he has never seen Warren Buffett use DCF, so how do they go about estimating Intrinsic Value?

John Chew: A good question.  First, a model is not reality but a metaphysical description of reality.   You probably should build a simple spread-sheet of sales, capex, taxes, etc. to understand the economic model of the business you are looking at–we are not all geniuses like Buffett or Munger.

But rather than have me say what I think Buffett would say, read the source. Note his analysis of Coke and Sees Candies:

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998  Hope that helps!

Arbitrage by Buffett_Research  (just for Buffaholics)

A Reader Asks, “How Can I Improve as a Value Investor?”


june12goldbears-1024x647 (1)
A Reader’s Question

Thank you once again sharing the links, access to the value vault, and your blog posts. My experience over the last couple of years has been primarily in private growth investing, and the insights you have shared have helped me significantly reconsider my investment approach.

I have been reading your book recommendations and following CBS lecture notes, but is there anything else you would advise me to do to become a better value investor? I am keen to learn and it appears that there is culture of apprenticeship in the world of public equity value investing. Maybe I could reach out to some practitioners in London (where I am based) – would you be able to highlight any you would consider particularly strong?
Thanks in advance for your help.

My Reply: There are plenty of case studies and examples on this site to learn about valuation. You can visit:http://pages.stern.nyu.edu/~adamodar/        https://www.coursera.org/course/accountingand…Value Investing for Grown ups by Damodaran to learn about valuation and accounting. But the secret to investing and improvement lies within you. That sounds either profound or hokey, but true. I don’t believe MBA courses or apprenticeship (if you can find one) will really help.  You don’t want to learn about another person’s style, you want to develop your own.  Google and youtube.com Michael Burry for why this is true.

As an example, you can read 5 Keys to Value Investing.  The author worked as an analyst for Micheal F. Price. He would submit ideas and get grilled by Price. I didn’t see a whole lot of mentoring going on.  Of course, you want to study other investors and the psychology of investment:

  1. Charlie_Munger_The_Art_of_Stock_Picking
  2. Buffett Klarman and Graham on Mr Market
  3. Great Investor Behavior
  4. Investing and Personality Type

But there are no shortcuts to studying yourself. You have to consistently and persistently keep a notebook, log, diary or tape recorder of your trades/investments/decisions. Review them that day and a week, month and year later. Study your proclivities. Can you step outside and see yourself objectively?   Impossible?   Hire a high school kid on Summer Vacation to film your day at work and see if you notice tendencies.  You won’t believe the tape!

Do you have a business plan for your investing career? Goals? Map out the steps.

I highly suggest you see how your countrymen developed their own styles in: http://www.amazon.com/Free-Capital-private-investors-millions/ by Guy Thomas

Review: Conclusion “Free Capital” treads original ground in profiling anonymous, “everyman” successful investors that no one has heard of yet who have interesting stories, experiences and lessons to share all their own. We can all learn from more than just Warren Buffett, after all.

It’s not without its flaws, of course. As the author himself states, the book doesn’t cover losing investors, people who took some of the risks investors profiled took, and failed, or who took other risks that didn’t turn out right, and then explores what lessons can be learned from their shortcomings. As an avid deep value (Benjamin Graham) guy myself, I would’ve done without the day trader and some of the other guys who seem like GARPy, momentum-based swing traders with short time horizons and questionable “value” metrics.


As an example, I know that I am an emotional basket-case. I cry during the cartoons if Tweedy Bird gets hurt (http://youtu.be/89FDAYsTgfs).  If I buy a stock at $7.05 and the next print is 7.04, I am on the floor wailing.  If Jim Cramer on CNBC said buy Tweedle Dumb stock, I would wait for the stock to rally, then buy after the news is priced in only to sell at a loss seconds later.

Also, I have an aversion to paying full price. I went “Dutch” on my honeymoon; my wedding had a cash bar. My guests had to take the subway to the reception; some had to hitch-hike. I am a cheapie.

Ok, I have to deal with serious psychological issues, but how does that help YOU?

Well, even I can develop methods to work around my quirks. See the chart at the top of the page. I have been buying certain gold/silver stocks over the past year because of two reasons: historic/generational low cheapness and lack of the same in other markets, in general. But prices can swing 10% in a day!  How would I survive?

My time frame is the next three-to-five years. I study the companies without input from others, I turn off CNBC, and I place my buy and sell orders BEFORE the market and then check at the end of the day. I may go months without doing anything in terms of buying or selling, but I will keep following the companies and their industries closely.  I have also held stocks like Enstar (ESGR) for a decade.

My time-frame is longer than most participants.  I work around my psychological hurdles because I have faced them. And only YOU can face yours.

I hope that helps.

A Great Individual Investor’s Investment Letter; A Reader’s Questions


A successful individual investor recaps 2013 (Must Read) David Collum_2013_year_in_review  

Note how few long-term decisions he made. Owning long-term bonds from 1980 to 1988, etc.  Buying precious metals in 2001 and STILL holding on through 2013–now that is long-term investing! 2013 was only his second losing year in several decades thanks to gold and silver being down 39% and 55% this year.


A Reader’s Question

I have a couple of valuation questions that I have been wrestling with recently.  I would love to hear your take.

First, do you ever use a PE ratio for valuation?  I have always used a EV to EBIT or something ratio whether pre-tax or after-tax.  (I have an idea of the multiples that interest me in both cases.)  Sometimes I come across something that has a low PE but not so low EV/EBIT.  I think this is when the company has financial leverage and is paying an interest rate substantially below the earnings yield.  If it’s a high quality business and the leverage does not harm the company is it sometimes better to use a PE?
John Chew: No, I would use EV (enterprise value which includes net debt) rather than “P” or market cap because debt is part of the price that you pay. Also, look at the terms and conditions of the debt. Note the quality as well as the quantity of the debt. Bank debt is more onerous than say company-issued bonds. 
Also, if you are normalizing earnings, and current earnings are depressed and may be for a while, do you account for this in the valuation, perhaps as a liability?  Or is this an effort to be overly precise?  This quote from Jean-Marie Eveillard in The Value Investors suggests that the former method is overly precise because the future is uncertain:
  “There is no point asking about a company’s earnings outlook because if we are investing for the long-term, then short-term earnings never affect our intrinsic value calculation. Asking management about long-term plans is also pointless to me because the world changes. No one can predict what will happen, and so what is important for us as analysts is to discover the underlying strengths and weaknesses of the business ourselves.”
John Chew: You do not count this as a liability when you normalize earnings.  You look back over a long enough history 12 to 15 years (including the 2008/09 credit crisis) to sense what normal earnings are.  Part of normalizing earning would be assessing the competitive advantage of the business or the uniqueness of the assets.  For example, you should be able to have confidence in the earnings power of the assets owned by Compass Minerals (rock salt positioned near the Great Lakes giving a cost advantage). 
Finally, I want to share a quote from Dylan Grice that I recently found and thought you may find interesting:
Dylan Grice in the July 17, 2012, Popular Delusions
The power of a discounted cashflow model is that it allows us to achieve a value which is objective. With a model based on discounted future cashflow we can arrive at intrinsic value.
But is this correct? Can cash flows be objectively valued? Suppose I’m a fund manager worried that if I underperform the market over a twelve-month period I’ll be out of a job. What value would I attach to a boring business with dependable and robust cash flows, and therefore represents an excellent place to allocate preserve and grow my client’s capital over time but which, nevertheless, is unlikely to ‘perform’ over the next twelve months? The likelihood is that I will value such cash flows less than an investor who considers himself the custodian of his family’s wealth, who attached great importance to the protection of existing wealth for future generations, values permanence highly, and is largely uninterested in the next twelve months.
In other words, an institutional fund manager might apply a ‘higher discount rate’ to those same expected cash flows than the investor of family wealth. They arrive at different answers to the same problem. The same cash flows are being valued subjectively and there is no such thing as an objective or ‘intrinsic value’ embedded in the asset, even though it has cash flows.
John Chew: Well, I agree that investors have different discount rates. You need to use one that fits your situation.  We are discussing human beings making decisions under uncertainty or human action.  All value is subjective. To learn more go to: http://mises.org/austecon/chap4.asp
Thanks for the questions and to all a Happy, Healthy and Prosperous New Year in 2014


A Reader Seeks Guidance

I appreciate your feedback and willingness to guide me in the right direction. I wanted to go over my current situation and get your feedback.

By trade, I’m a computer engineer. But it seems my passion now lies in investing and creating a more balanced and comfortable life for myself where I can control my outcome, not some company where my best interests aren’t exactly aligned.

I consider myself a buy and hold investor. I don’t try to beat the market in the short term. Most of my holdings are aligned with the motley’s fool’s picks (stock advisor, rule breaker) and I have had very good success with them (high fliers such as chipotle, netflix, but also steady picks such as berkshire b shares, costco, etc). But I also want to learn to do better and be able to pick from the right ones and ultimately be able to do my own research. I enjoy the gardner brother’s research and can align with their philosophies but I also try to learn about Buffet’s and Pabrai’s philosophies.

I’m currently diversified into a basket of 50 picks in my IRA and about 20 picks in my regular account. I would like to learn to concentrate more into the better picks and have a portfolio of only 20 picks each. Throughout the past 10 years, I have seen returns upwards of 15% compounded annually in each account so I’m very happy with the results as they also include the 2008-09 recession and of course the subsequent runup. I would be very happy maintaining above 15% returns but aspire to hit 20% some day with better knowledge and understanding the business, financials, and the competitive advantage you mentioned. I’m in search for my first 10 bagger, I’m close with Chipotle around 8 bagger. I aspire to hold companies for decades.

I don’t know much about valuing companies or reading the balance sheets / cash flows / income statements so I use the motley fool’s picks to vet the financial side and then try to align my understanding of the industry to pick the stocks I’m comfortable with and can relate to. For instance, I shop at costco, use linked in, buy apple products due to their convenience and reliability compared to previously owner android and windows products, etc.

What advice would you have for a person like me? I’ve read through all of the buffet’s letter to shareholders, and have just recently started going through Pabrai’s.

My Response
Why don’t you take an accounting course online or at a school near you or get a programmed text with problem sets and the solutions. Then take Graham’s book on reading financial statements found in book folder (Use Search Box on this blog). Then go through Chipotle and find out what owner earnings are, how much they invest to grow and try to value the company based on different growth assumptions. Be conservative.

Look for companies with fairly consistent and moderately high return on capital or a return on assets over 12%. Look for strong companies and set up a watch list.

Google: Merrill Lynch’s How to Read a Financial Report.

Study how companies develop competitive advantages–read Strategic Logic (Search Blog)

Keep your expectations reasonable. Wait for my Analyst Handbook which will take you from beginning to end.  Many investors will be lucky to SURVIVE the next five years.   Red lights are flashing–Klarman returning cash, Tesla, Netflix roaring, IPOs on fire, and the belief that markets will never decline due to perpetual non-taper.

Good luck

Reader Question: Investing in a Rising Interest Rate Environment


A Reader’s Question

I am a student at XXX.  To cap off my summer internship, I am working on a series of projects which I will present to the investment team at my firm. One idea I would like to pursue is “Investing in a Rising Interest Rate Environment.” Are there any books/resources you would suggest for this project?

My response:  Well, if you knew rates would rise over a long period of time (decades) then a ladder of short duration bonds would probably be wiser than 30- year  Treasury bonds.  But when you talk about interest rates–what rates? 3-month, 10 year? Government debt or corporate debt? Are real interest rates rising?  You could have nominal interest rates rising while inflation is rising faster so real rates become more negative–sort of like today’s financial repression. You can’t just look at interest rates without looking at changes over time in commodity prices and producer prices.

Ask, “What is an interest rate?” Find out by reading Man, Economy and State by Murray Rothbard–see Chapter 6: Production: The Rate of Interest and its Determination. Go to www.mises.org/books/mespm.pdf

Two great books on financial history:

A History of Interest rates (4th Edition) by Sidney Homer and Richard Sylla.

The Golden Constant: The English and American Experience 1560 to 2007 by Roy W. Jastram (reprinted with additional material 2009). See a discussion here: alc56_golden_constant

The Golden Constant was the first statistical proof of gold’s property as an inflation hedge over the centuries–a seminal study.

What does the research say:

Gold is a poor hedge against major inflation and that gold appreciates in purchasing power in times of deflation.  The conclusions make sense when you consider that gold prior to 1971 was considered money.  When prices rise, then, by definition, the value of money declines relative to goods and services that money is exchanged for.

Since the 14th Century, gold’s purchasing power has maintained a broadly constant level. To put this in practical terms, an ounce of gold has repeatedly bought a mid-range outfit of clothing. This was true in the fourteenth century, when an ounce of gold was worth £1.25 to £1.33; it was true in the late 18th century and it remained true at the beginning of this century (2000 to 2008), when an ounce of gold averaged £269 or $472. Even the exchange rate between gold and commodities has been relatively constant over the centuries.

On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact. Being no-one’s liability, gold exhibits the same wealth preserving qualities in the face of financial turmoil, earning a reputation as a crisis hedge in addition to its credentials as an inflation hedge.

The Golden Constant: The English and American Experience 1560-2007 by Roy W Jastram with updated material by Jill Leyland. Published 2009 by Edward Elgar Publishing Ltd (www.e-elgar.com), hardback, 368 pages, ISBN: 978 1 84720 261 1.

How about today?

But from 1971 the opposite is true and we revert to what we today consider the more normal situation of gold acting as a hedge against inflation, as in the 1970s, or the fear of inflation, as in recent times (2009). Note that gold may hold its purchasing power through the decades, there are substantial deviations in price as compared to an index–which index to use?




The key takeaway after 453 years is that despite often substantial fluctuations, gold has held its purchasing power over the centuries in every country.  A German family owning a certain quantity of gold at the end of the nineteenth century would find, if it still owned it today, that it would still buy approximately the same quantity of good and services. In contrast, any quantity of German currency held at the end of the nineteenth century would today be worthless.

Since gold is no one’s liability, it can be viewed as the alternative to fiat money. Investors turn to it when confidence in fiat money, and particular in the US dollar as the world’s leading fiat money, falls. However, gold, despite severe fluctuations, does hold its real value over the centuries and the fact that it has repeatedly shown its ability to safeguard wealth through crises.

History combined with a solid grasp of economic principles allows us to place even gold into perspective.

Case for Owning Gold Has Collapsed; A Perspective in Silver; Reader’s Question;

GOLD CoinsMoney transmits value, Mises taught, but money does not measure value. This distinction is fundamental in Mises’s theory of money. “Money is neither an abstract numeraire nor a standard of value or prices. It is necessarily an economic good and as such it is valued and appraised on its own merits, i.e., the services which a man/woman expects from holding cash. (Human Action, pp. 414-415). Gary North, Mises on Money

Read more on the value of money: http://www.mises.org/daily/6380/The-Value-of-Money

What is, then, the best monetary policy? He argues that in light of his previous considerations “the state should at least refrain from exerting any sort of influence on the value of money. A metallic money, the augmentation or diminution of the quantity of metal available for which is independent of deliberate human intervention, is becoming the modern monetary ideal.”[17] He adds: “The significance of adherence to a metallic-money system lies in the freedom of the value of money from state influence that such a system guarantees.”[18]

The Case for Owning Gold Has Collapsed; Yellow metal could be headed much, much lower http://is.gd/h5KW6v. Gold could be headed not much lower, but much much lower.  This was written on April 18, when the value assigned to the monetary relic (AKA its nominal price) resided at $1391 per ounce.  So be warned, Mr. Gold advises that gold could go much much lower.  Gold bugs take heed; Mr. Gold himself has put the double ‘much’ whammy on you!

The article: The Gold Dilemma. The article is riddled with logical fallacies. Using CPI and GDP to measure anything meaningful is a fantasy–even forgetting that those indexes are politically constructed by bureaucrats.

Another view of gold’s history: 99816519-Special-Report-Gold-2012-In-GOLD-We-TRUST.

Why I own gold bullion–as a hedge against monetary chaos. Own what the government can’t print.

All the Silver Ever MinedAll the Silver Ever Mined

A reader’s question from the prior post: Am I 100% in cash?  No, I have cash, gold bullion, selected precious metals mining companies, a few other companies, and a tiny short position in certain stocks like GE and CRM.  If you think holding on through thick and thin after buying at the highs EVEN with UNSUSTAINABLE Fed manipulation of money and credit is a good plan, then view page 8 here: A Lesson in Financial History by Mish. Also, for more perspective on the unsustainability of current corporate mean-reverting profit margins see: An Unsustainable Equilibrium_Hussman. View the video presentations here and consider a donation to cure ALS: http://www.winecountryconference.com/2013-speaker-presentations/ People love to follow the crowd and momentum while mal-investment increases, so expect more S&P 500 movement to the upside until–unexpectedly–a surprise hits and people need to sell their “hot potato.”

But if you own great franchises at good prices then you have few worries. I wish I could find them now.

big-money-poll-2Short the SPY and Long PHYS for fun (not for real) at the highest offer for PHYS ($10,000 at $12.30 for PHYS) and lowest bid for SPY ($10,000 shorted at $158.10) on April 25 and lets see where we are in 12 months.

Update on April 29, 2013:bigSPY

Big sm spy




A Reader’s Question on Advice for a New Investor

Insantity Defense

A Reader’s Question:

Dear John: I have a friend who wants to know what to do with his money. I know Charlie Munger suggests investing in cheap index funds for a “no-nothing” investor. But aren’t there problems with indexes? What do you think?

Well, especially now when most bonds (especially government bonds) seem high risk for no-or-low return, the first question would be what should that person allocate towards equities.

I am working on my answer, but thought YOU have advice for this reader.

The links here:

all provide a case for equity investing.  However, when you hear that historically the stock market has returned 8.6% or 9% for the past 200 years, it is a little like saying the average height of the person in this room is five foot five inches tall. The room has a pro basketball player standing tall at 7.5 feet and a dwarf in the corner at 3.5 feet–the average is 5.5 feet.  People are still seared by this experience in 2007-2009.

I will post my response tomorrow.


A Reader’s Question on Schiller’s PE

Santa Foreclosed

Only a sudden, improbable drop in society’s rate of time preference (read: real interest rate) would allow stock-market indexes, in the absence of credit expansion, to jump to a new, consolidated level, from which point, at most, slow gradual stock-market growth could take place. Thus continuously prolonged stock-market booms and euphoria are invariably artificial and fed by credit expansion. Moreover such episodes of euphoria encourage the public to postpone consumption for the short-term and invest cash balances in the stock market. Therefore while expectations of stock-market booms fed by credit expansion last, the crisis and recession can be temporarily postponed. This is what happened at the end of the 1990s, before the severe stock-market adjustment of 2000-2001…..Therefore–and this is the most important conclusion–uninterrupted stock market growth NEVER indicates favorable economic conditions. Quite the contrary: all such growth provides the most unmistakable sign of credit expansion, un-backed by real savings, expansion which feeds an artificial boom that will invariably culminate in a severe stock market crisis. Source: The Stock Market, Credit and Capital Formation by Machlup

Reader’s Question on Adjusted PEs

I would like your opinion on an original (?) issue I have with the Shiller PE10 index.  I wrote a blog post on that subject (and I merely did it to get feedback):

I had seen too many Shiller PE10 indices, and investment decisions which depend on it (last one being the GMO Capital “13th Labour of Hercules” White Paper). Found here: JM_13thLabourofHercules_11122 (1)

In a nutshell: P/E10 is used where the denominator is inflated by official CPI-U, which has changed definition over time, with a wide convergence compared to the inflation indicated by a historic (1980, 1990) CPI-U index definition.

If you recalculate the Shiller PE10 with earnings inflated with “real inflation” (which I did in my post), you get 17 instead of 22 for today (roughly).

My post on PE: http://volatilitysmirk.blogspot.fr/2012/12/an-issue-with-shiller-pe10.html

John Chew’s reply: I applaud your efforts to correct a distortion but any government aggregate is flawed. See article on the CPI below.  Your adjustment may be less flawed but still you may not have a worthwhile tool/indicator. I mostly focus on individual companies and disregard discussions on market P/E.  First the P is distorted by the FED and the Earnings are distorted by GAAP accounting.  I would rather spend time on understanding the quotation (under the cartoon) on the stock market.

Hint: I highly recommend that you read this book: Stock Market, Credit, and Capital Formation

The above book is crucial to understanding the credit cycle’s influence on the stock market!

I don’t have a clue on how to advise you. However you go here and read Crestmont’s discussion on adjusted PEs.


PE Report Oct 2012 Revised_Crestmont,   Secular Bull Markets in perspective PE,   Secular PE Bear Market, and   Siegel s Shortfall on PE

Also, any aggregate number is distorted–see comments on the fantasy of using Gross Domestic Product as an indicator for economic growth.

What is up with GDP?   http://mises.org/daily/770

The proper way to measure an economy http://mises.ca/posts/articles/gdp-and-the-proper-way-to-%E2%80%9Cmeasure%E2%80%9D-an-economy/

Should we believe in GDP?: http://mises.org/daily/3843

What is wrong with the CPI http://mises.org/freemarket_detail.aspx?control=368

August 2001
Volume 19, Number 8

What’s Wrong with the CPI?
William L. Anderson

One thing that has achieved Holy Writ with economists and politicians is the Consumer Price Index, or the CPI. Each month, people from Alan Greenspan to traders at the New York Stock Exchange to the economist in the Economics 101 prison await the latest announcement from the US Department of Labor that tells us the change in “consumer prices” from the previous month.

Many folks make very important decisions after hearing this number, since it supposedly measures the “rate of inflation.” If the change in the price index is “too high,” then the Federal Reserve Board of Governors might vote to increase the Fed’s discount rate. Likewise, high numbers will also trigger a giant sale of stocks on Wall Street, as traders anticipate higher interest rates, which both eat into profits and provide safer avenues of investment through interest-bearing securities.

Economists depend upon the CPI when taking time-series measurements of financial instruments, since such measurements can only sense if they are expressed in “constant” money terms. For example, the 11,000-point Dow Jones Industrial Average of today is not 11 times the value of the 1,000-point Dow of 1969 because the relative value of the US dollar has declined by about fourfold in the past three decades, according to the CPI.

Given that the US government has made war on money for most of the past century, one cannot blame those who make a living from financial instruments to want a consistent measure of value over time. Like most products coming from the bowels of government offices, however, the CPI should be tagged with warning labels. Furthermore, one should remember that economists and politicians often use the CPI dishonestly.

The first thing to keep in mind is that the CPI is not an economic variable. It is a statistic that at best gives an inaccurate picture of an economic phenomenon: inflation. To calculate the monthly CPI, the USDepartment of Labor takes a weighted average of prices of various things that consumers purchase, and then its statisticians try to figure out the various proportions of different items in a “mythical” household budget. For example, the statisticians may hold that housing costs are 30 percent of household expenditures, food costs 20 percent, gasoline another 15 percent, and so on.

Armed with the proportional spending of the “average” household, the statisticians then assign that percentage to price changes of each item. Obviously, the higher the percentage of a household budget for a certain item, the more “influential” that item may be. For example, if gasoline prices rise sharply, then those particular price increases are seen as “fueling inflation” (no pun intended).

It is easy for the observer to see that the CPI can perpetuate the myth of “cost-push” inflation, in which the cause of rising prices is, well, rising prices. Indeed, many evening news broadcasts on the new CPI figures will begin with something like, “Increases in gasoline prices have helped ignite a new round of inflation, the Labor Department reported today.”

Furthermore, the portrayal of the “official” version of inflation as an average causes other mischief as well, the most noticeable being the classification of the prices of some goods and services as “rising faster than the rate of inflation.” The implication of such a statement is that if the price of something increases at a faster rate than the increase in the CPI, then something illegitimate must be occurring. Soon afterward, politicians begin to call for price controls, and then the real damage to the economy begins.

As economists and others of the Austrian School understand, inflation occurs when the value of money declines relative to the goods and services it can purchase. In other words, inflation is a monetary phenomenon, not a price phenomenon. Prices go up because inflation is happening, not the other way around.

During a period of inflation, prices of some things increase more rapidly than prices of others. For example, during the last decade, money prices of gasoline and food have increased, while personal computer prices have fallen. That does not mean computers are impervious to inflation, but rather that inflation affects different items in different ways. Furthermore, without inflation, computer prices would have fallen even further.

What, then, is the real rate of inflation if the CPI is inaccurate? The truth is that there is no good way to gain a true measure of inflation, especially in this era when the Federal Reserve System is flooding the economy with new dollars. All we can say for certain is that inflation, with all its evils and distortions, has become what seems to be a permanent part of our economy.


William L. Anderson, adjunct scholar of the Mises Institute, teaches economics at Frostburg State University (anderwl@ prodigy.net).