Washington's Great "No Inflation" Hoax
Billionaire California bond manager Bill Gross calls it "a haute con job." Bloomberg News columnist John Wasik describes it as "a testament to the art of economic spin." More and more shoppers and consumer simply disbelieve it.
The subject of this scorn is the federal government's vaunted Consumer Price Index or CPI. Americans are now beginning to understand that this indicator has its own share of gimmicks not unlike a sub-prime mortgage or the six pages of fine print that accompanies your credit card agreement.
Some of these CPI ingredients -- product substitution weightings, "hedonics" (price reductions for added product quality or satisfaction), and use of owner's equivalent rent (instead of home ownership costs) -- have a comic aspect suitable to mockery by Bill Maher, Stephen Colbert or Jon Stewart. But in a larger sense, they're not remotely funny. That's because the federal minimalization and misrepresentation of inflation, pursued statistically over the last 25 years, has been the main buttress of Washington's over-favorable and self-serving portraiture of the U.S. economy.
Distortions aplenty have followed. Some of the most pernicious include the shortchanging of federal pension and Social Security obligations and cost of living increases, a parallel shortchanging of cost-of-living increases in wage contracts tied to the federal CPI, the suppression of equitable interest payments on bank accounts and certificates of deposit, and the camouflaging of weak U.S. economic growth through inadequate adjustments for inflation. The benefits to the executive branch in Washington jump out -- huge annual federal savings on Social Security and pension outlays, as well as on the amount of interest paid on the federal government's multi-trillion-dollar debt. Some $250 billion a year could be involved.
If many individuals are losers, many businesses and financial institutions have been winners. Minimal cost-of-living increases favor corporations, while low interest rates make money cheaper to the financial sector. In particular, the gargantuan $10 trillion increase in financial-sector debt since 1994 could become unmanageable if mounting inflation forced borrowing costs up to 8% or 9%. And it is axiomatic regarding equities that when rates rise in the bond market, that competition usually undercuts stock market values.
In short, there have been three big gainers from understatement of U.S. inflation: the federal government, wage-paying businesses and the institutions and markets of the swollen U.S. financial sector. But skeptics have a weighty counter: Okay, it's easy to understand how they all might profit from understating inflation. But if the understatement is patently false, how can they hope to get away with it?
In fact, the belief by many conservative U.S. economists that inflation is under control, despite global indications to the contrary (including soaring commodity and energy prices), has a major ideological component -- their fidelity to monetarist economic principles (that only money supply expansion can create inflation) and to the Efficient Markets Hypothesis (that markets process all available information, so that if inflation were serious, markets would have reacted already). As late as January, monetarists on the Federal Reserve Board, notably Chairman Ben Bernanke and colleague Frederic Mishkin, believed in the new-version CPI and argued that U.S. inflationary expectations were safely "anchored."
Financial economists and money managers generally agree. A late April survey of 120 U.S. institutional money managers by Barron's, the financial weekly, found that on average, they predicted a CPI inflation rate of 2.72% in December 2008 and just 2.79% in December 2009. Elsewhere in the world, central bankers and politicians are worrying about another wave of commodity inflation akin to that in the 1970s, but U.S. money managers take comfort in the Efficient Market Hypothesis and in the wisdom and sanctity of the CPI.
Critics, by contrast, smell a potential disaster. Oil is up over 80 percent in the last twelve months. The New York Times' consumer reporter, W.P. Dunleavy, wrote on May 3 that his own groceries now cost $587 a month, up from $400 a year earlier. That's a 40 percent increase. Reports in the financial press make frequent reference to foreign investors who distrust the U.S. dollar because they calculate true U.S. inflation at 6% to 9% including food and energy.
California economist John Williams, who runs an organization called Shadow Statistics, contends that if Washington still used the CPI measurements applied back in the 1970s, inflation would be in the 10 percent range. My own analysis, set out in much more detail in an article in the May issue of Harper's, comports with that of the cynical foreign investors.
Therein lies the danger. If the current inflation rate is really 6-9 percent instead of the 2-3 percent claimed by government and most U.S. money managers, then Washington's official estimates that the economy still grew at a rate of some 0.6 percent in the first quarter of 2008 become nonsense. Subtracting a 6-9 percent inflation rate from nominal GDP growth would identify an economy that was deteriorating and shrinking, not growing. Concerned foreign dollar-holders would become even more concerned.
In theory, a vigilant Congress might want to hold hearings, but in practice I suspect not. Democratic presidents (notably Bill Clinton) have been involved in the numbers game along with Republican administrations. Neither party has clean hands. Far more likely that any serious investigation will be mounted clandestinely by central banks or sovereign wealth funds in places like China, Singapore and Saudi Arabia as part of their ongoing study of just how much longer they can continue to support a deteriorating U.S. dollar. It is not a happy prospect.
Kevin Phillips's new book Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism was published by Viking in April. His article on untrustworthy government statistics ("Numbers Racket") appears in the May issue of Harper's.
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Kevin, I tried to post this a while back but the server went down.
Did I say you're a genius?
Bernanke and the Fed had to lie about the extent of inflation in order to bail out the financial companies. For decades the primary mandate of the Fed was to guard against rampant inflation, and it did so.
But faced with the choice of runaway inflation or a cratering stock market, Bernanke, using an inflation measure that excluded oil, gas and food prices asserted that he saw little inflation danger. So he gave Wall Street billions though it was sure to cause a quantum leap in inflation.
Of course, an accurate report of inflation would bankrupt Social Security because of the Cost of Living Allowances.
We ARE in a recession; no doubt. Whether or not inflation will make some difference in transcending that economic turn down is still in debate.
Any middle class family knows the inflation rate isnt 2-3%. All energy cost are up, way up, food going through the roof, college going up 7-10% a year, healthcare going up, whats left to keep it at 2-3%? Its amazing this subject never comes up in the media. Maybe someone like Maher can have an expert on to discuss this.
It's interesting to look at the number of items that have doubled in cost during the Bush 7 years in office. Then add 2.5 % a year inflation as reported by the Bush government. Not quite 100% you'll see. I guess liars do figure. I know, I know, but I don't own a Chinese TV so I threw that benefit out.
Personally I think they wouldn't have been able to fudge the numbers as much as they do if we were never taken off the gold standard. I would like to see us go back to seeing that on our money.
Part of the reason prices have been able to rise is a direct result of the consumer. We've become a populace that needs to keep up with the Jones'. Don't think for one minute that the corporations haven't known this and take full advantage of it. They have consumers convinced that the more money something cost the better it is. When in truth chances are that product is the same as the cheaper one just with a different dressing. Stop giving your money away for nothing.
Greed is the biggest offender by both consumers and the corporations. Home owners decided when they realized banks were giving out mortgages lets screw over everyone and keep raising the price of housing. Banks and realtors didn't do this without your help! You saw dollar signs and went right along with it not thinking about the long term effects or the big picture.
It wasn't that long ago when a family lived off of just one income and was still able to save 50% of that income after housing and living expenses were paid.
Having the major currencies back on a precious metal standard prevents currencie manipulation and moderates the ups and downs of the currency markets. It also prevents the proliferation of the money supply that fules buubles and creates inflation
Don't blame the consumer. By keeping inflation artificially low it kept interest earnings on savings miniscule. Coupled with service bank charges saving accounts lost value. For the average wage earner this discourages saving. And cheap Chinese imports completely dominate the market place and spur consumerism. Chinese imports have triggered the twin evils of killing consumer product industries at home while exporting decent paying jobs. It is interesting that the primary contributors to real inflation is in the sectors still dominated by US industries - agriculture, medical care, education and energy.
Anyone who buys groceries. clothing, fuel or any consumable item knows that Kevin Phillips has struck on an obvious truth which has conveniently been ignored for years. We have significant inflation in the US economy. In the 70's, the official CPI formula took out food, housing and fuel. Today's formula exempts those broad categories and then fudges others to arrive at the number the Treasury wants to report.
The MIT School of Economics said a number of years ago that if broad categories are to be exempted from the CPI in order to smooth the graphs and take out the bounce of some volatile markets, this should be done within a band around those numbers. If, for instance, housing or energy exceeds a given error band within a month, quarter, etc., then it should be taken into account. The Treasury has gone the opposite route by creating a formula which is pure fantasy and in no way reflects economic reality.
The truth is, we are in a recession as some analysts point out. Any therapist will tell you, the key to dealing with a problem is first to acknowledge that it exists. This government believes everything is fine in Iraq, the economy is growing, inflation is minimal and all is well. At some point the denial will have to stop and We The People will be left to come up with solutions. Again.
No, no, you can have inflation at 2% while houses go up 50% and gasoline go up 100%.
The guy on the TV said it, so it must be true!
Lying bastards. The revolution will not be televised!
They call it inflation when prices and wages go up in tandem. When it's just prices going up without any incerase in wages they call it "F@ck the poor and middle class"!
John Williams at ShadowStat
Only one candidate has been talking about these issues, and its NOT OBAMA. Its
Ron Paul. Yep, that loon has been talking about these monetary issues for the last 30 years, predicting this hyper inflationary depression -- and here it is! He also has a great new book out. And, he's still in the race!
If you want to find out more on people who have been calling this for the last 10 years, google: Peter Schiff, Jim Puplava, John Williams, Jim Willie. Lots more, but thats a start. So, great to see those on the left finally wake up to these issues. Welcome on in folks!
Yep. It is true, the government and the RV say so - there is no inflation. They may as well have "Baghdad Bob" telling us this
Eggs up 280%, Milk up 100%, Bread up 50%, Gasoline up 290% utilities up 30% cooking oil 309%
Some folks are blaming ethanol for the rise in food and fuel prices - yet with all of the talk of ethanol - where is it ??? No stations around here have increased their supply of ethanol fuel blends.
Dollar devaluation and speculative bubbles fueled by too cheap and easy credit and too much capital are the biggest culprits in price inflation for food and fuel. Thanks Al "bubble boy" Greedspan!
You are so right on.
----THE IMMEDIATE ANSWERS COULD WELL BE----
What needs to be done since it is not likely that there will be a return to a gold standard, is to force the Fed into a fixed fractional reserve. Instead of 10:1 it should be no more than 3:1 with dollar volume held to some fractional amount of currency already in distribution. That fractional amount could be based on actual M1 & M2 totals, or it could be a fixed fraction.
Secondly, since it is also not likely that current total US debt will ever be paid off, and that about a hundred countries have a debt service burden, ( borrowed funds owed to us, the World Bank, and "private" international banks), that prevents steady growth, there needs to be a movement to escalate current discussions and indeed threats to repudiate debt. A global debt repudiation when unraveled would clear the decks of all major funded and unfunded liabilities of nations conned by their leaders into huge liabilities in the name of security, development, etc.
'Hedonics'? And to whom to we owe this 'malapropped' spin off of hedonism?
'Idiotics' is more appropriate.
Give it a chance. Or try this: the latin word "stupere" is the root of both stupendous and stupid in English. We been getting a lot of "stupendous" products from our economy that are genuinely both stupifying and stupid. Now we could call this economy "stuponics", but both "hedonics" and "idiotics" are close enough to be appropriate.
Clearly, you have never studied any economics. Hedonics is a way of examining what characteristics of different goods are important for determining the prices of these goods. It's a perfectly legitimate method of statistical modeling.
If you wonder why the savings rate is low. Even if you invest in the markets - most of this of course is not an "investment" because money is poured into stocks with the expectation of increased stock prises and not with the meagerly dividends they get. it is speculation - you lose money due to inflation. Why would you invest? Why would anybody - including foreign currency holders - put money into our system at a loss. How long will investors still subsidize the over-spending of the American consumer? But inflation of that kind supports the big debtors. It is a intended destruction of the middle class.
It time we have agency with no connect to the in power administration to[ figure inflation rate , unemployment, CPI and to made the agency of a diverse groups we can not depend on these figures the way they have been figured has been changing since the Reagan Administration.
What's everyone worrying about? It's THEIR side of the ship that's sinking. All kidding aside, America has had a good run since winning WW2. The politicians from the past, dead and alive, are gone, but their federal debt machines, the monsters they created, (to get them elected) keep humming along. Now it's everyone for themselves. If you had a way to extort money from the masses, you'd probably go right ahead and use it. 109 million, plus multiple pensions, should hold for awhile. I was hoping the youthful backers of Obama would try to stop the practice of dumping the debt on to the future folks.
What's really ridiculous about this phoney inflation measurement is when you realize the Fed's discount rate is only 2% They're giving away money.
I've read Kevin Phillips' article in the May issue of Harper's, and I've been thinking about it a lot. I'm not an economist, or even particularly sophisticated with numbers (tho' I'm no dummy, either), but I found his analysis to be very alarming. And I highly recommend the article. In fact, that particular issue of Harper's is especially outstanding; there seems to be an underlying theme or sub-text. (read: Robinson & Berry)
My take-away message, and Mr. Phillips can correct me if I'm over-the-top, but I think we'd all be getting a much fairer shake in Vegas where we already know that the House is favored.
If I understand "hedonics" correctly it's the ignoring of increased price because the newer products come with lots of bells and whistles and are therefore supposed to be superior and more satisfying, like the thermostat I bought last winter that came with a twelve-page programming manual when all I needed, but couldn't find, was one with a dial to turn it up or down. I'm not more satified. Not being a twelve-year old nerd it gave me hours of frustration and being plastic and made in China can probably be expected to malfunction sometime next January.
Yes, what I great concept that "hedonics". When a person has a spouse, for example, that is sick, he/she may have to pay a good portion of the paycheck just to drive to work. The last thing he/she would possibly need is a used dingy SUV with all the gadgets breaking, and the windows don't even roll down. One reason why the trickle down theory is useless - everyone needs to make their own decisions in society and influence it in their way - not be handed some useless cr@p of an SUV and be told how great it was.
I am having trouble making lemonade out of this; is there a potential positive side to this? What can investors and consumers do to insulate themselves from our slipping economy? Where can accurate figures and facts be obtained?
Buy Euros.
I would not recommend directly buying a foreign currency, rather, purchase investments valued in that foreign currency. For instance, French government bonds, valued in Euros, or index funds based on one or more of the European stock exchanges.
This will provide an income stream in addition to protecting you from the volitility and weakness of the dollar.
Diversify. But if you're really interested in lemonade then good for you. You can find some great recipes on-line, or try cherry-limeade or pineappleade. Then share it with your family or find some child to mentor. Just trying to be helpful here.
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