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The True "Misery Index" Is a Whopping 33%

Strip out the statistical manipulation, and you get a horrifying picture of today's America...

THESE ARE tough times we are living in, even if very few Wall Street economists acknowledge it, says Eric Fry in the Daily Reckoning.

Unemployment is high and opportunity is low. To make matters worse, the federal government is trying to make things better.

The Obama Administration is borrowing trillions of Dollars to "create jobs," while Ben Bernanke is printing hundreds of billions of Dollars to "stimulate growth." 

Despite all of this borrowing, spending and printing, there are no jobs and there is no growth. There are however, the mounting liabilities that present and future generations of Americans must attempt to repay.

As Charles Munger, Vice-Chairman of Berkshire Hathaway, famously remarked, "One thing about accounting, the liabilities are always 100% good."

So here we Americans sit with a rising pile of debt and a shrinking range of opportunity. Unemployment refuses to drop, while inflation continues to climb. We used to refer to the sum of these two economic scourges as the "Misery Index."

Readers old enough to recall the Misery Index will remember it was computed by adding the inflation rate to the unemployment rate. During the Presidential campaign of 1976, then-candidate, Jimmy Carter, popularized this index to indict the policies of President Ford.

By the summer of 1976, the index had climbed to 13.57%. Carter argued that no man responsible for giving a country a misery index that high had a right to even ask to be president. Four years later, under President Carter, the Misery Index reached an all-time high of 21.98%. Accordingly, during the Presidential campaign of 1980, then-candidate Ronald Reagan, remarked:

"As a candidate four years ago, Mr. Carter adopted what he called the 'Misery Index'… He suggested that no president has a right to seek reelection with an index of 12.5 percent. Today, by his own standard, he does not deserve reelection."

Candidate Reagan became President Reagan.

Fast-forward to the present, last week the Drudge Report picked up a CNBC story about how the Misery Index stands at its highest since 1983:

9.1% unemployment + 3.6% consumer price index (CPI) = 12.7% misery index

But the country's true misery may be much, much higher.

People who've given up looking for work no longer count as 'unemployed, while the government's CPI calculation is also a cosmetically enhanced version of its former self. The government bean-counters can make the rising price of a steak disappear by assuming you buy less steak and more hamburger. And so on.

John Williams at still runs the numbers the way they used to be run. If we recalculate, we get:

22.3% unemployment + 11.2% consumer price index = 33.5% misery index

In June 1980 the misery index was 22.0%. If circumstances now feel worse than they did then, this is the reason why.

Back in the late 1970s, as these two components of our national misery climbed ever higher, investors piled into gold and silver – hoping to protect themselves from whatever additional misery might be coming their way. For several years, misery continued to climb and the precious metals continued to soar.

But eventually, Fed Chairman, Paul Volcker, stared Misery directly in the face and declared war. He jacked interest rates up to the mid-teens and tightened the money supply to stop inflation dead in its tracks. The 13.3% inflation of 1979 became the 3.8% inflation of 1982. Economic activity rebounded to such an extent that by 1984, President Reagan was declaring, "It's morning again in America."

The nation believed him and re-elected him to a second term. By 1986, the Misery Index had fallen to less than 8%.

But three decades after Paul Volcker crushed inflation (and subdued the Misery Index), inflation (and misery) are ascendant once again. Gold and silver are also rallying. It is no mere coincidence…

This time around, there is no Paul Volcker at the Federal Reserve to stare down Misery or to wage war against inflation. In his place we have Ben Bernanke, who prefers to coddle Misery, rather than confront her. 

Far from staring her down, he is doing all he can to make her comfortable and to insure that she will hang around for a while. As long as Misery is comfortable, the bull market in gold and silver will continue.

We at the Daily Reckoning have been telling you for more than a decade to Buy Gold and silver. We still are.

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Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

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