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

[hosshoss777]

This article states the, and I mean no insult, obvious. Because for some reason it's the obvious that needs stating and investigating. We the people need an education on things like monatarism, privitized currency, currency markets, global banking, and the interconnections between them all and yes, the petro dollar needs to be on this list.
At the center of all this linking every American to this "thing" is the Federal Reserve. Any American is linked that carries a Federal Reserve, debt created, fiat, dollar bill in his/her pocket. We know to all know what that means. We the people need an education on how the FED is Privately owned, for profit currency monopoly, by a global conglomerant of Banking families and interests. We all need to know what that means and how that really works and how it connects to our daily lives of economic cycles and Wars for profit, and the financialization of commodities. And yes, "our" "government".
This eduaction if thorough will touch base and alter the perceived, inculcated "history" of the 20th and and early 21st centuries.

[davidpeace]

Also, it seems, that the American public needs a lesson on the perils of deregulation, about every generation or so. Much of what is going on happened in the twenties just before the Great Depression. And it happened before even that during many booms followed by busts. Americans don't seem to learn from history well because this sort of thing keeps happening.

[davidpeace]

Why do people continue equating the health of the economy with the Dow? Because that's the number that is most reported on the news. The Dow and other stock market indices only measure how much the wealthy made, (and down doesn't necessarily mean they lost money, think shorting). The best indicator would be things like the Consumer Price Index, except the government has to quit subtracting “non-core” items, food and energy; as if not all people eat or need warmth or have to go anywhere ever. Of course that would take a government that is brave enough to tell their citizens the truth instead of bald-faced lies. And now those lies are unraveling...

[Donald Wolberg]

In actuality something approaching 60% of the American working and retired public invests in the "stock marke" either directly or via a huge assortment of retirement accounts. This number may be closer to 80% when all pension funds, public and private are taken into account.. The American economy is remarkably democratic. In truth, the difficulties of the energy sector that drives increased food and other costs is the direct result of a Congress that is as ineffectual as it is self-serving.

[bgregs]

But that STILL doesn't answer the question! The stock market is NOT the economy! The stock market is merely the thermometer taking the economy's temperature, or the results of a psychological evaluation of the economy! THAT'S why the stock market can appear to remain high even while the economy is tanking, AND why the market can stay low even though the economy is doing really quite well!

[genxlib]

Mentioning the breath of stock market penetration is only relevant if you also discuss the depth of that penetration. In other words, the vast majority of those participants own very small pieces of the pie.

Regardless, it doesn't change the underlying truth of what davidpeace is saying. The DOW is not a good representation of the health of the overall economy. It is a representation of the health of business.

Once upon a time, these things may have been indistiguishable. There was an unwritten social contract between employees and employers. Employers offered long term stability through a living wage, benefits and pensions and in return had dedicated, loyal workers.

In todays economy those links have been broken which means the stock market can no longer be used as a barometer for the health of the larger economy.

This can be easily illustrated by how the stock market reacts to news reports of off-shoring, plant closures, layoffs, union busting, ect . The company involved is rewarded with rising stock values while real Americans suffer through negative consequences.

I would even go one step further. The stock market doesn't even represent a good barometer of the health of the business community. In reality, it represents the PERCEPTION of the health of the business world. There is way too much psychology involved in market volatility for it to represent a good guage. This is why stock market crashes happen. Actual reality doesn't change in one day but perceptions of reality can.

[NABNYC]

Bush has helped the wealthiest people steal the money from the citizens of this country. Wall street, the corporations, the CEOs and insiders, the politicians with their millions in bribes, war profiteers, even the churches -- all looting the businesses, looting the treasury. Financial frauds cons and scams that look like they came from Nigeria instead of the downtown bank.

Jobs fly out of the country. Corporations open P.O. Boxes on some island and suddenly pay no taxes at all. Legally. Congress makes the laws, by the way. How much money have the politicians in Congress been paid to write the laws just so? Is our economy dying? Is our nation? Can a democracy survive when 95% of the wealth is owned by the top 5%, and most people have nothing? Unlikely.

"What tormented Ivan Ilych most was the deception, the lie, which for some reason they all accepted, that he was not dying but was simply ill, and the only need keep quiet and undergo a treatment and then something very good would result. He however knew that do what they would nothing would come of it, only still more agonizing suffering and death. This deception tortured him — their not wishing to admit what they all knew and what he knew, but wanting to lie to him concerning his terrible condition, and wishing and forcing him to participate in that lie. Those lies ... were a terrible agony for Ivan Ilych." Tolstoy, The Death of Ivan Ilyich

[Doubtom43]

If all the smart guys are in Washington, why then is it, that the country is going to hell so quickly?

[bgregs]

Because they aren't elected to be smart. They are elected to be charismatic, look good on camera, and smear their opponents!

[birdandcat]

Besides the commonly reported complaints about using a hedonic price index( adjusting the items from "quality " improvements), there are two other major objections to the current cpi. One is the exclusion of the volatile components of the index. Rather than exclude the volatile components they should be smoothed (some like an exponentially weighted moving average, but no matter) Consider the hypothetical: all compoents of market basket are flat except food and energy which go up 100%. if they constitute 20% of consumption, then you've got a 20% inflation rate while the cpi shows 0%. It the rise occurs in one month, then it certainly is volatile but the fact remains you have an overall price level that is 20% higher.
Second comment, less pointed perhaps, it seems to me that the prices of non essentials like big screen tv's are falling while necessities are rising. It doesn't do me much good to see that a tv i won't buy is going down in price while the heating bill on my house is going up

[Fremon]

Oh what's new. The govt and especially this govt has been rigging stats for the longest time. Especially inflation and unemployment. The gold market gives a more accurate picture for gold except when central banks release gold reserves to bring down the inflation figures. Same with unemployment which does not report people who have expired their benefits and drop from the rolls. Note also that this govt stopped releasing the money supply data to hide that their printing presses are working overtime. Should only the corporate media get on to these issues which they won't. The book "Your government failed you" should also have a companion "Your government lies to you".

[Nofuzzydreams]

Any statistics is controversial. For example quality should be considered. Cars cost more but they are also vastly superior. Houses cost more but many (even moderately priced ones) also include granite kitchens, tile floors and wrought iron staircases. Buying soap from The Body Shop today will cost much more than the price of soap bought at Walmart yesterday. Comparing these prices without accounting for quality will lead to misleading statistics as well.

Bottom line, as long as we keep the same calculations going year over year, we are ok. These numbers are meant to judge trends not measure absolutes.

A big difference between the 30's and 70's is that unemployment is at 5.5% - one of the lowest in the world and interest rates are still a far cry for over 15% in Jimmy Carter days.

Finally a saw a video on cnnmoney about not being able to get a mortgage without 5% or 10% downpayment. There was a whining tone in the video. Hello - that is how it used to be before the nineties and should be. We bought our first house in the late 80's by making some serious compromises to save for downpayment like canceling cable TV and lunch from home everyday. Today, the expectation is Panera bread for lunch, 30 dollars on text messages, latte at Starbucks and a house without downpayment. Easy money and spoiled attitudes are creating the current crisis (and inflation). The predatory lenders took advantage of irresponsible attitude.

[BillZBubb]

The 5.5% unemployment number is a bigger joke that the CPI. Why don't you apply a "quality" standard to the jobless numbers like you praise on the CPI? Job quality is way down. Or look at the percentage of the workforce that is employed, not ignoring the "discouraged" workers. Doing that might bust your fuzzy dream.

As for 15% interest rates, they happened under Reagan, not Carter. Over Carter's 4 years in office, TBond interest rates on average were several percentage points lower than in Reagan's first four years.

Seems like your dreams are pretty fuzzy.

[therealredstateblues]

Carter inherited the stagflation from Nixon and Ford's first forays into voodoo economics combined with the oil crisis. He did a pretty darn good job pulling us out of that

[UdvarHazy]

Unemployment at 5.5%? For someone who doesn't want to believe the gummint, you took a wrong turn somewhere! Unemployment is really upwards of 15%! Unlike the government, human beings include part-time-looking-for-full-time, and those tens of thousands who are "off the list"because they've been out of work for too long! (Once your "unemployment insurance" runs out, you're an unperson!)

I've made a living in statistical quality control--there are more ways to lie about statistics than the mind can fathom! And, yes--I worked for the government!

As the Current Occupant says, "Trust me!"

[BrettnCalgary]

http://www.shadowstats.com/alternate_data

[bgregs]

Funny that you should bring up unemployment statistics. Those are ALSO doctored! The fact of the matter is that they are ONLY reporting the people ACTUALLY RECEIVING unemployment insurance! That doesn't account for any of the people who are no longer receiving unemployment, it doesn't account for anyone who doesn't know that they can claim unemployment, it doesn't account for anyone who is not eligible for unemployment.

The REAL statistic is closer to 15%. Not only that, but when you add in UNDEREMPLOYMENT, then things start to get REAL dicey, since close to 30% of the WORKERS are underemployed!

[ImmanuelGoldstein]

By that logic then we should weight things for their necessity too.
I need a granite tabletop less than medical insurance and broadband less than I need gas for my car.
I lived for years without a plasma TV, but will die within weeks without food.
So by 'hedonic' logic any infation in these items should be multiplied.
Also I have problems with much of the 'superior' argument for many items.
Is a granite tabletop really superior or just more expensive?

[TerrapinCB]

"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."
-Thomas Jefferson

[Tulka2]

Whoooa... good quote.
Living in the nw corner of Washington state. The housing bust has finally reached us like some kind of creeping black plague. Building houses was the only thing in the economy proping up ordinary workers. Alas. Perhaps we need an old Testement, every twenty-five year, all-debts-are-off, jubilee....? Seeing as most of everything is "owned" by about 2 % of everybody, a thing like that would mainly hurt people responsible for the mess. (Mort Zuccerman is at lunch in NYC and just got a cold chill up his spine.) I know, i know, it would be like pulling a tablecloth out from under a set table. But i like it.

We need a Roosevelt to co-op the revolution.

[TerrapinCB]

"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." -Thomas Jefferson. 2nd Pres.

[Rule Of Law]

I believe that banking institutions are more dangerous to our liberties than standing armies. - Thomas Jefferson. 2nd Pres.

[Rule Of Law]

Uh, I just copied him....

[Rule Of Law]

"I hope we shall crush ... in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country" -Thomas Jefferson. 2nd Pres.

[starboymikey]

Thomas Jefferson. 2nd Pres.
____________________________________________________________

Thomas Jefferson was the 3rd president. John Adams was the 2nd.

[TerrapinCB]

"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."

-Thomas Jefferson

[saibotchilizm]

The big run-up in prices over the past 5 years has been in large part because of the run-up in the price of oil. When the entire world economy is based entirely on burning petroleum for cheap transportation, that's what happens.

http://www.saibotchilizm.org

[blindhog]

I agree. I believe oils time has come and gone. I also believe the only way our country and other countries will get out of the pension mess, the medicare mess, and entitlement messes is through inflation of the money supply. I believe the only way anyone has a chance of beating inflation is by being in the stock market. Based on inflation, the market has already experienced a depression. Even our recent highs of over 14000 didn't compare to our previous highs several years back based on inflation at that time.

[triplbee]

In a few years I think the huge drop in home prices will help far more Americans than it hurts. I live in California and even though prices have fallen a remarkable 20% over the past year, the vast majority of Californians still can't afford to buy a house. It will be a good thing when home prices fall in line with incomes.

[MourningDude]

Like every other market in the world, this drop in home prices once again helps the already rich at the expense of everyone else.

Think of it this way...

Where did all the sub-prime money go? Those hundreds of billions of dollars of writedowns had to go SOMEWHERE. The banks don't have the money, they're going broke. The homebuyers don't have the money, they're being forclosed on. It's the previous homeowners that have it. (Well, the real estate agents and title insurers and loan sellers all had their hand in the pot too, but let's set that aside for now.

Those who primarily benefited from the price hikes were those who already had money and owned property. Those who lost out most were those who were finally trying to buy their first house because interest rates were at historic lows.

Now that the dream of home ownership has imploded for so many, and now that money is harder and harder for lower and middle class people to get, who primarily benefits from the price drops? Again, it's those who already have money.

They get you on the way up, and they get you again on the way down. It's the way of the world.

[bgregs]

On the other hand there are many out there who already bought one and either HAVE lost it or WILL lose it shortly. Further, they CREDIT tightening is not really slowing down, and THAT'S what's going to cause people to not be able to get houses!

[kjdwyer]

Another great article from Kevin Phillips. If you haven't already done so, read his book "American Theocracy." A perfect read on the present political situation.

[moAb]

Agreed, great article. "Bad Money" is also a winner by Kevin Phillips.

[Lemeritus]

American Theocracy was absolutely prescient. Four stars. Have Bad Money on my reading table now (a little disappointed that it isn't a large book, since Phillips is an engaging writer.)

[swift goat pet for truth]

"Absolutely prescient"?

You should check out the Onion from 8 years ago.
"Bush: Our Long National Nightmare of Peace and Prosperity is Finally Over"

http://www.theonion.com/content/node/28784

[Hoelder]

Thank you for making my point. Furthermore the government profits highly from understating inflation in regards to the national debt. The debt service stays small and the difference is made up by the depositor. In short it is not worth saving money, because the interest rate does not make up for inflation. You have to aggressively invest to break even. It is not worth the risk.

[ajax2]

Most consumers are two years ahead of the Fed in seeing this inflation. The more serious consequences happen when policy makers start believing this adjusted CPI nonsense .Even If they took a cynical look an admitted the calculations were to prevent COLA adjusstments they could still see the real inflation numbers one would think.