Lies, Damn Lies and Government Inflation Statistics

Describing the decade that began in 2000 as the "naughties" or "oughties" offers a useful shorthand -- and particularly for people interested in discussing the U.S. economy's perilous dual pathway of rising commodity inflation coupled with financial assets deflation.

Ought and naught, of course, are two old-fashioned ways of saying "nothing" or "zero," appropriate for a painful decade that stretches from ought-one and ought-two to ought-nine.

But the term's negativism is also appropriate. As financial economists have begun to point out, between 2000 and mid-July 2008, the leading stock market yardstick, the Dow-Jones Industrial Average, dropped from a 2000 peak of 11,700 to a level 500-700 points lower. Moreover, allowing for eight years worth of inflation, by official data, the decline was nearer 25%, making the real return much worse than "naught." This is what people have to watch in a stagflationary economy, which the new Consumer Price Index numbers (June's one-month increase of 1.1 percent) have finally started to admit.

The possibility that inflation could even reach double digits should start to resolve today's central debate: whether this decade's unhappy U.S. economy is more like that of the depression 1930s or that of the stagflationary 1970s. Alas, there are elements of both.

To begin with, even the national media agree that home prices are in their biggest nationwide decline since the 1930s. Also, last month's slump in the Dow-Jones Industrial Average was the biggest June slide since the early depression year of 1930. And depending on who you talk to, the financial crisis is either the biggest since World War Two or the biggest since the 1930s.

Yet there is also escalating resemblance to the 1970s, when a global food and energy price surge followed the loose fiscal policy and boom of the Vietnam war era. No such trend existed in the 1930s. However, especially since 9/11 and then the invasion of Iraq, our decade has also seen has that kind of easy money and loose fiscal policy. As a result, global food and energy prices have been soaring.

The just-released inflation numbers suggest a gruesome possibility. Our own decade, like the years from 1966 to 1982, could see another severe economic downturn and stock market slump, but one partially camouflaged by fast-rising prices. Here is the precedent: between a Dow-Jones (intra-day) peak of 1000 in early 1966 and an August 1982 bottom of some 780, the Dow declined a nominal 22%. However, a truer calculation, adjusting for soaring inflation, put the real decline close to 70 percent -- a disguised disaster.

Could it happen again? Maybe. It is possible to imagine somewhat similar economic terrain. In 2010 or 2012, the Dow-Jones could easily be at 10,500 or 11,500, for a seemingly small ten-year or twelve year decline. But if simultaneous inflation has totaled some 30 percent, then the real decline would be 30-40% -- major league erosion, in other words.

And there is a worse possibility -- that the changed Consumer Price Index measurements in place since the 1990s have significantly underestimated inflation, and the true damage has already been much deeper. Why would Washington allow this, you might ask. The answer: that because a large chunk of the federal budget rises with inflation, the savings from understating it are enormous, however unfair to retirees and workers.

We are not talking small numbers. With global inflation heating up, the investment firm of Morgan Stanley recently noted that "The percentage of the world's population living under double-digit inflation is 42 percent. Six out of the ten most populous countries have inflation running at more than 10 percent."

Bill Gross of California-based PIMCO, the world's biggest bond manager, tells investors that interest rates on U.S. Treasury notes are inadequate. Inflation around the globe has averaged nearly 7 percent over the past decade, but the official U.S. inflation rate has averaged 2.6 percent. "Does it make any sense," says Gross, "that we have a 3 percent to 4 percent lower rate of inflation than the rest of the world?" And if Washington understates inflation by one percent, he adds, then gross domestic product has been overstated by that same amount. ("U.S. Inflation understated, Pimco's Gross says," MarketWatch, May 22, 2008)

Nor is Gross alone. In May, former Federal Reserve Chairman Paul Volcker told the Congressional Joint Economic Committee that "I think there's a lot more inflation than in those [CPI] figures." He said that the sharp run-up in housing before the recent implosion wasn't reflected in CPI data, adding that food and energy prices should not be excluded in gauging long-term trends. And when prices do go up, he said, government calculators are "much more inclined to say that there are improvements in quality" rather than an increase in inflation.

At Charles Schwab & Company, one of the nation's biggest money managers, chief economist Liz Ann Sonders wrote in June that "Over the past 30 years, major changes have been made to the calculation of the CPI due to "re-selection and reclassification of areas, items and outlets, [and] to the development of new systems for data collection and processing," according to the Bureau of Labor Statistics. If you eliminate those adjustments and calculate CPI as it would have been calculated in 1980, it would be nearly 12 percent today...No wonder clients constantly tell me they distrust government inflation data." ("Back to the 1970s?" Charles Schwab Investing Insights, June 19, 2008)

Cynics will point out that rigged data and sneaky book-keeping are par for the course in American finance. However, the accusations implicit in the Volcker, Gross and Sanders comments suggest a government scandal of the first magnitude. Maybe our presidential candidates should take a break from discussing how many troops to move from Iraq to Afghanistan or vice versa and start publicly discussing the extent to which a fundamental mismanagement of the U.S. economy rests on a framework of what can bluntly be described as lies, damn lies and statistics.

Author and commentator Kevin Phillips' most recent book is Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, published by Viking in April.

Comments

[xrepublican]

C'mon, inflation is ALREADY in double digits.... we're just lying like hell about it. The whole Bush economic plan has been smoke and mirrorts - though to be fair, Bill started the real games with economic statistics. Bush just took it to absurd levels.... The CPI is totally bogus. Who cares if a toaster is cheaper if you can't pay for bread? But if the official inflation is low then COLA's stay low and everything else remains low..... no CD rates of 11% like in the late 70's.... no double digit Social Security increases or pension increases (pension? what's a pension?)..... the majority are getting screwed big time .... lower REAL Income, lower returns if not outright losses on any savings and now housing values are dropping like a rock...... we're bankrupting all but the wealthiest

Unemployment is also grossly understated. If we were calculating the misery index using 1980 metrics we'd be at 26 - FAR worse than the record level of 20.8 set then.

Combine all this with bankruptcy law changes it seems like there's a deliberate effort to put the whole Middle Class into indentured servitude with double digit interest credit card debt.

Feudalism - it's BACK! Bigger and Better for the 21st Century!!!!!

[renatam]

Until Americans begin to force their representatives for ACCOUNTABILITY, this shell game of erosion of the American standard of living to buttress and bail out speculators' revolving doors in dynastic enterprises tied to Bush/Clinton administrations -- nothing will change. Increasingly, optimism has been perverted by Congress to equal a kind of don't ask/don't tell when it comes to ACCOUNTABILITY. Consequently, we get Karl Rove wielding unparalleled power and then refusing to honor Congressional Subpeonas. Lobbyists swelling into a defacto CITY of interest on K-Street...and one of their kings calling Americans "whiners." How long can THIS go on w/out destablizing he entire world economy? Our President continues his "sunny" talk -- and Goldman Sachs CEOs make their four-year takeover of the Treasury Department -- while going Public. Citigroup's Board Member, Mr. Rubin is silent. Ditto, Mr. Greenspan.

When will Americans come first in America. Did we actually PAY these people -- including lifelong DEFINED BENEFIT PENSIONS we will never get thanks to their deregulation and outsourcing our industries, speculating on the side?

Thank you, Mr. Phillips. I hear talk of PATRIOTISM. This isn't it and is high time we begin to address this matter instead of continual bailouts of these spectulators by the American taxpayors -- otherwise known as "whiners."

[RedPillReaction]

When you ponder what is happening with inflation, the economy, the sub prime mortage fraud, the bank failures, deficits etc., keep in mind that The Federal Reserve is not a US Government agency, and it does not necessarily have the best interests of America in mind.

The Federal Reserve is a privately owned, for profit, banking monopoly that was granted the exclusive franchise to operate our monetary system by the Federal Reserve Act of 1913. It is instructive to read the history of just how this Act was passed through Congress, in spite of the public wariness and distrust of the banking industry at the time. Many of the same techniques and strategies are employed in Congress today.

For nearly a century, The Fed has profited handsomely off the backs of the American tax-payer by "loaning" money to our Government. Wars, military expenditures, intelligence operations, foreign aid, bank bailouts etc are expensive and we turn to The Fed to loan us the funds. Where does The Fed get the money? They simply "print" more Dollars, essentially creating it out of thin air. And the more money they put into circulation this way, the more the Dollar is devalued. This is the secret tax that has eroded the value of the earnings of Americans for decades. So when you hear a politician say we have to fund a war but there will be "no new taxes", you can count on inflation going up.

[blogscor]

It's not the economy, inflation or interest rate, it's a devalued currency. The common response to a devalued currency just won't work anymore. The Firmscor Unidollar $1.00,00 principle could revitalize the American Economy while rivalling the success of the Eurodollar E1.50. Shift the decimal point two places to the left to revalue currency weakened by cost of living increases lowering the deficit from $3 trillion to $30 billion while still keeping the American Dollar intact. Go to http://www.firmscorel.com/unidollar.aspx

[bgregs]

And it can do all of that while reducing confidence in the American dollar to point where it collapses at the new level! GREAT IDEA!!

[knighthowl]

I fear that having an idiot as President for 8 years has trickled down.

[michiganfan]

One of the things that I would most love to see, is for President Obama to appoint Volcker as his Fed Chairman.

[quest44]

Anyone whose kept their eyes and ears open can see we are heading for one of the worst economic times this country has seen since the 1930's .I think it actually could make the 1930's look like a good time ecomomicly.
I think the worst thing that ever happened to our country was Bush stealing the presidential election ! The man is as dumb as a stump and he had no idea how to govern this country and he put people as unqualified as he was in positions they never should have had ,,like Brownie who he told was doing a fine job in the Katrena clean up ! I knew we were headed for trouble the moment the election was stolen ! Now we have a war ,an ecomomy and a Constitution that has been violated that will all have to be addressed by the next president .I feel sorry for the mess that our new president will have to try and clean up. Bush and his administration should be held accountable for their crimes against the American people and the war crimes ! I would really be very angry if their crimes went unpunished !

[vippy]

While I agree whole-heartedly I have to wonder where are our congressmen and senators when policies are made. How did they ever change the way figures are being reported because all of them were there when the new unemployment figures reporting, the CPI, etc. were changed.
What on earth possessed them to change the figures rather than addressing the problem that
caused for them to change the reporting of figures, different math was used in order to make the
figures come out much better. They all knew it, they all have seen this coming and why did they
not fix the root of the problem but were only concerned with changing the figures in order to deceive us, the people? It is far past noon-time and we need to throw out the crooks, all of them,
for none of them did their jobs they swore to do!

[gevan]

I have always thought of our current decade as the "oh-ohs". As the end of time is still more than fifty months away, do we really need to worry about such mundane things as the value of money? Sure they've rigged the cost of living index. So? You can only tell when a Republican is lying when you see their lips move.

[fourex]

The government will deduct 1% point off of inflation next year because of the increased quality, of TV reception, not content. Eat that nay sayers.

[UnknownSoldier]

There is an idiot on the board who thinks it was Bill Clinton who signed the OffShore Drilling Ban, it was Bush I.

Sometimes we have to sift pass the Propaganda about the economy, and use some common sense. I ask the Bush apologist 1 question, how can a countries economy be growing if it continues to lose jobs. Bush's 2 terms as president will end with a net negative in job creation.
The Stock Market is pretty much in the same place where it was when he took office, if everything cost the same as it did in 2000, one could make the argument that the stock market indicies should remain stable. However we know that the cost of everything has gone up in the last 8 years, but the Markets have not.

The Reagan way of economics has been proven not to have worked, we have been doing this Reagonomics for 30 years now, it does not work.

[sierra]

Americans cannot exclude the Clinton Admin form its responsibilities of contributing to this debacle.....the signing of the destruction of the Glass/Steagall Act that separated investment banks from regular banks and other legislation that eased the ability of the "new" financial institutions to securitize weak paper with strong, have them rated AAA and wrapped in fish paper to peddle to the unsuspecting.
Clinton under the tutelage of Robert Rubin (who I think is now one of Obama's financial advisors!!) helped push this economy over the edge from exporting millions of jobs (NAFTA etc.), manipulating further the CPI figures and destructive legislation.
Dems and Repubs over the decades have both pushed the "free market" which in reality doesn't exist except in the first thoughts....
We have had a, "Socialize the costs and Privatize the profits" kind of capitalism for many, many years.
Kevin Phillips is one of the best commentators and writers on our economy.
This disaster is one of huge proportions. No one knows yet where all the "rotten" securities ended up. That's why so many banks worldwide have gone belly-up and hundreds eventually will also self-destruct here in the USA.

[bgregs]

Granted, Clinton signed the repeal of the Glass/Seagall act, and he was wrong for that one. However, it was the REPUBLICAN Congress (Phil Gramm, McCain's economic advisor sponsored the bill!) which passed it with numbers great enough to overturn a veto. He STILL should have vetoed it, but it would have happened on his watch with or without his signature!

[davidpeace]

The Glass-Steagall act was passed in the thirties after Congressional investigations into the practices that caused the crash of 1929. Since its repeal, those same practices have come back. Both Dems and Reps have contributed to the deregulation mess we are in. Reagan's "trickle down" economics is better said as "pee on me" economics.

[rbenjamin]

One of the most clear-headed contributions I've seen in a long time. Thanks.

[gardenbookie]

HuffPost's Pick

Kevin, your article and most of the comments made here are way over my head. I don't know how the "cost of living" data is compiled. I don't know where these statistics come from. I'm not real certain who to blame for what's going on with our economy. I only know this: Five days a week I get up and go to work, do my job and come home. At the end of the week I get a paycheck. I pay the rent, the light bill, the phone bill, and the cable TV bill. Then I try to buy groceries. Next month I'll probably cancel the cable service. That's Economics 101 in my house.

[UnknownSoldier]

If you have to cancel your cable bill then using statistical exptrapolation they can come up with a number of people who will have to do the same thing. This hurts the cable companies, which will hurt the adverstisers, which will hurt the advertising agencies, etc etc........ which will cost jobs.

[sierra]

garden bookie

Your post makes you officially the best of the "economists" we have in the USA!!!!

[stevemarvin]

I call the decade the "Zippos".

[Pragmatus]

This is exacty the point I made in my own HuffPost article. (Here.) The Fed is finding itself faced with an impossibility--both keeping interest rates low (for liquidity reasons) and also tightening them to curb inflation. Don't look for the CPI to start reflecting reality any time soon. Better to lie about the true inflation rate (and only the fall of the dollar and the rise of commodities and oil will tell the tale) and hope nothing bad happens until the Administration changes, than to tell the truth and perhaps be blamed for revealing the true scope of the mess we are in.

[davidpeace]

What makes you think a new, presumably Democratic, administration will start telling the truth about the real rate of inflation, etc? The "non-core" food and energy statistics were taken out of the mix in the nineties, I think under Big George, and has continued under a Democratic administration and now a Republican one. How can most of the rest of the world be experiencing double digit, or more, inflation while the US sits at 2.4%? The insulation being supplied by the government, controlled by the wealthy Republicans AND Democrats, is starting to wear thin, thanks to the internet.

[olephart]

One of my favorite statistical tricks is imputed income. The idea that I "earn" the rental equivalent value of my home, the value of my no fee checking and all the other little addons that don't exist anywhere but in their statistics. The one thing that I would like to do is pay my income taxes with some of this imputed income. If they report it as part of the GDP it must be real and have value, right? There should be a line on the 1040 for applying your imputed income for payments.

[Donald Wolberg]

Numbers can be interesting, informative or misleading,even if they are the same numbers. Public numbers can be different from research numbers. The indices that are genrated by relating numbers to each other can be even more misleading or informative. Too often the political perspectiveor goals of the person interpreting numbers adds another layer of truth or non-truth and the glass will be half full or half empthy or worse. Thus it is with the U.S. economy and those whgo tell us what it all means. Our $13.4-$14 trillion (that's $13,400 or $14,000 billion) is the largest in the world without even a distant second. California's economy alone is the 8th or 9th largest in the world as i recall, with Texas and New York close behind. The stresses on the economy are obvious: high energy costs, public spending; a war and importantly, public perception. In the last two days, after the President issued a new executive order than ended President Clinton's order banning offshore drilling, the price of oil has dropped more some $20 in two days. The stock market has rebounded by more thn $400. Thus the empty glass of Mr. Phillips is rapidly filling. The success of the war in Iraq, the calming of the Iranian problem, and the continued growth of the economy, further indicates the doom and gloom of Mr. Phillips' pronouncements are less than accurate.

[uhappytoo]

LOL! And the $20 temporary erosion in the price of oil has gotten you what? Lower gasoline prices? Lower food costs? Lower cooling bills?

The world demand for oil is increasing much faster than oil is being found or being pumped. Any decrease you see now in the price of oil is only an illusion.

[davidpeace]

Further, when all really is well again (excuse me *coughBScough*) there is no reason that big oil will have to really lower prices. They will have us conditioned to paying $4 or $5 or $6.... for a gallon will want to realize even more tremendous profits once the actual price of production and distribution goes down. It is very rare for inflation to completely reverse itself and we see prices continuously diving toward the bottom instead of skyrocketing. Capitlalism doesn't work that way.

[Pragmatus]

Yep, Mr. Wolberg. You are living in a fantasy world. Will you please come back and explain what happened when oil is once again over $145 a barrel and the market has descending into the toilet again?

[Soulsurfer]

Ah, the quick and dirty method. If we had enough oil to fill our own needs, we wouldn't be in Iraq today. You can drill all you want in and around the continental US and we'll NEVER produce 22 million barrels a day. Period. Plus the fact, any oil the oil companies pull out of OUR ground is sold on the world market. We don't have a nationalized oil company. They sell to whoever ponies up the dough. You're willing to possibly despoil some of the most desirable tourist destinations in the world, possibly kill off already depleted fish stocks and sea life, just so you can continue to drive a big ol' pick up truck...........makes sense, huh? Want to see what Florida and California beaches would look like? Go to Galveston, Corpus Christi, etc and compare with Florida and California beaches. The oil companies ALREADY own the rights to explore and/or drill 80% of offshore leases, yet they don't set up shop. They now want to own the rest, and they'll get it, for a pittance. Inform yourselves, trolls.

[Donald Wolberg]

Nonsense. There is 1.8 trillion barrels in oil shale alone according to DOE: thats 1800 billion barrels. We already produce 5 million plus barrels a day, so we need only to increase 15. That means reactivating the mothballed rigs off the West Coast, full employment for U.S. drillers, building or buying new reigs for the East Coast. Getting oil shlae is not drilling oil wells..it is mining and prrocessing rock or doing steam injection.

The world produces about 82 million barrels a day. We use about 1/4; Europe and Eurasia about 1/4 and the Asian pacific about 1/4. We have been at about 21 million barrels a day since 2002 or so and actually below that fo some years.

[billw8017]

Numbers are indeed interesting. It is interesting that while the economy lost hundreds of thousands of jobs, unemployment remained steady. It is interesting that the motive of the surge is changed so that people who have claimed success before can claim it again. It is interesting that food and fuels are considered too volatile to consider in a calculation of inflation despite being essential products and despite other products get fudged and adjusted all the time. It is interesting that the stock market has rebounded for the twentieth time this year and, therefore, all is well on that front. Interesting? Facinating!

[sierra]

The recent daily "recoveries" of the stock market can be called either, "Short Covering," or "Dead Cat Bounce!"

As far a statistics go:
http://www.shadowstats.com/

[bgregs]

First, you cannot be deemed to be credible when you keep lying and claiming that Bill Clinton is the one who signed that executive order. The President who decided to make an executive order AGAINST further offshore drilling is GEORGE HERBERT WALKER BUSH! Also known as DADDY BUSH!!

Second, to claim that two whole days of a market rebound and oil STILL at over $130/bbl means that everything is rosy..... That takes cojones!

[billw8017]

Donald Wolberg is clearly a Republican and we should all be grateful to have his voice among us. It's a different flavor koolade to be sure. bgregs' fact checking is a particularly precious service. The balance and the reality bring added value to the comments.

[Donald Wolberg]

Mr,. Clinton did the off shore? and Mr. Bush the Arctic? Silly is as silly does. The need for real energy not flawed babel is the bottom line. DOE says there is 1.8 trillion barrles in U.S. oil shale alone. 1 trillion tons of coal; enough uranium ofr all the nuke power forever, and we have not even gotten to the off shore or western oil yet.


The market rebound is because of perception. Iran is off the table; Iraq is won and the President opened up drilling that the Congress now rejects. Now that is smart politics and almost all the issues are off the table or close to it.