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Three Ways to Guage the Strength of the Economy


Unlike other metrics, these are hard to manipulate.

I've come up with a new economic barometer to gauge the strength of the economy: the Osborne Rule. Like former Fed official John Taylor of the eponymous Taylor Rule or William Phillips of the Phillips Curve, I'm going to name something after myself. The Osborne Rule is a simple way to figure out how the economy is doing. Unlike other metrics, this one is hard to manipulate.

The problem with the stock market, GDP, or CPI is that all of these measurements can mean very little when the government is pumping money into our economy. As you may know, we used to be on the Gold Standard. The Fed couldn't introduce new money unless we had more gold to back it. This system ended under Nixon. When the Fed pumps money into our system, it causes assets to go up. An extreme example is Zimbabwe or Germany post-World War I. That's why the stats that we read about are of no use.

Did you know that the $4,500 discount from Cash for Clunkers is being used by the Department of Labor to decrease the stated amount of the average new car sold? That's one of the categories in the Consumer Price Index, along with iceberg lettuce and milk. As you can see, the Department of Labor gets to decide what is and isn't calculated. They're the boss of this metric. Not good if your future Social Security checks don't go up with the true rise of inflation. Aren't TIPS predicated upon the CPI? Yep.

Your stock portfolio and home may go back up to 2006 prices. But unfortunately, you may be using the profits to buy gas at $8 a gallon.

Metrics of the Osborne Rule

1. The first metric is the value of the dollar. It's true that other countries are printing money, just some not as fast as the US. If the dollar doesn't weaken any more than 25% from where it is today, that means we're in good shape. So if the dollar doesn't go any higher than $1.77 for the Euro, 73 for the yen, or $1.11 for the Canadian dollar, we'll be good. Governments can control their currencies in the short term, but not the long term.
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