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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It's not just inflation figures, the majority of economic reporting our government does is based on selective/self serving statistics, the same goes for unemployment figures, US budget figures (which doesn't take into account war funding), trade figures, etc., etc.
Our government opperates like Enron did - and we all know how the truth/financial facts finally caught up with them.
Now now, the unemployment figures are accurate, if you accept that they have removed certain individuals who are not really "unemployed," they just can't get a job...
And war funding is not part of the budget, since you don't know how much it will cost until you fight it. Besides, this was will pay for itself in lower oil prices, as we have already seen.
I am not a sarcastic person at all (wink).
Or the underemployed, such as engineers fixing copiers or installing cable, welders and machinists working in supermarkets, or any other full time worker only part time
Tonelson on a recent NPR radio program said the real unployment number is closer to 9% when you take into account the ones who have dropped off the unemployment insurance rolls and the underemployed, Michigan, the one state depression, has "official" unemplyment of 7% the real number is 12%
Concealed inflation is used to help conceal the greatest rip-off scam in history, one which makes past
robber barons look like penny-ante pickpockets.
The US no longer manufactures anything of consequence other than weapons (our chief
export). The social and physical infrastructure have been allowed to deteriorate. Our
assets are being sold off, and we become more indebted every day.
The Soviet Union, at least partly due to wasteful military spending, collapsed to end the
Cold War. But our leaders decided to continue our extravagant military spending, to
militarily “secure” power and wealth. Whether due to the influence of the
“military-
become dominant in our policies and economy.
Now we are being led down a road toward our own ruin and collapse, as we unthinkingly
sacrifice our political rights and economic well-being.
The ONLY way our militarized economy can stagger along is by the creation of ever
more credit, debt, and increasingly worthless fiat money. We can never repay, because we
must borrow more just to buy what we need, and can offer only weapons in exchange. We
are reduced to “creating wealth” by the “shock doctrine” and pillage of other countries.
http://glo
Oh man! That's so painfully true. good post.
Good points.
"The ONLY way our militarized economy can stagger along is by the creation of ever
more credit, debt, and increasingly worthless fiat money.
So If you had to bet more peace or more war - where would you put your dollar (penny)?
A certain irony in that the new president of Russia, Medvedev, hass pledged to put Russia back on the world power map. His plan to do so is rebuild infrastructure, revitalize the manufacturing industry, pay down debt, bolster the middle class.
Hmmm - maybe we should get him over to here to be president!
You are correct that without a vital manufacturing base and rebuilt and modernised infrastructure and the healthy middle class it creates, we are destined for a long and painful decline here in the US
Some excellent points being made here about CPI, GDP, unemployment and general market manipulation. Almost seems like this could be a solid bipartisan issue. It should be. No matter who the next President is, Phillips and a small army of like minded people should be given the authority to expose the weakness in our systems and clean things up.
I am not naive enough to think these problems can be corrected over night, but with some backing by the House and Senate, at minimum, some of the more significant abuses could be addressed. Most people know and understand the old phrase "pigs get fat and hogs get slaughtere
To put it mildly, there is room for improvement. Perhaps all who are like minded could ask Phillips to put together a team and a preliminary proposal to present to the House Banking Committee on behalf of X number of signatures on a petition.
I'm sure some far more knowledgeable on this subject than I have a better idea of how to approach this in a serious and effective manner. I'd like to encourage posts on what could/ should be done to fix the problem.
Agreed. But, despite this being an inherently bipartisan national issue, the surveyed "experts" quoted in the article are afraid to speak out. (the Barrons' April survey of 120 institutional money managers, i.e. lens crafters of our monetarists' world view) These sheep will not speak, and the consumer lambs are suffering silently. Sorry for the awful metaphors, but outside voices never break the Wall Street mantra unless they are accompanied by these "experts".
Thanks for a great article. Finally someone has explained this.
Thank you, Mr. Phillips. You know, I'm far from being an economist, but I've been saying since the 1980s that the government has been manipulating the inflation figures. Sure, the cost of TVs and electronic gadgets have fallen, but the cost of important things such as food and energy have generally made life more difficult for working class folks.
The recent events bringing light to our government's lies, secrets, and manipulation are resulting in a giant sized full frontal bare naked emperor. The damage done by these rampant deceptions will have a long affect. The majority of attention paying citizens will not easily believe what their government tells them. Gullibility won't be a tool as readily available to those who will lie to us.
Well I stopped believing most of the stuff since Vietnam. Now I don't believe anything this Administration says. Most people are not stupid if they did a little reading they would have know this stuff, now they know it because they can no longer mortgage their houses to get more money, because they are going down to where they should have been and their food and gas budget is way out of whack.
Bush can say all he wants about how good the economy is but the average person knows better and have lost their hope in our deceiving, manipulating and self-centered government.
You're right. It's finally smacking people over the head. You have to REALLY fear change to refuse to see the realities of our times.
This all makes me wonder about credit card rates that have been way higher than prime by a significant margin. Do credit card rates reflect the economic reality that has been hidden by government?
The Harper's article is excellent and should be required reading for all white Democrats who support the Clintons to see clearly how they have been consistently misinformed. Even if were educated to post-graduate level, you would remain ignorant because of consistent mis-information, mis-representation, etc. Kevin Phillips should be brought to the center of attention in the Obama financial and economic planning group with plans for telling the people the truth about the economy, and bringing transparency to economic date provided by the Federal Government.
i agree
This bitter middle aged middle class white saw thru the Clinton sell out of labor back then. Can never forgive or the rest of the DLC crew for doing so either.
The Clintons finished off what was left of any white working support for the democratic party with Nafta and china MFN. No wonder many have then allowed themselves to be bamboozled by the 3 G wedge issues of the right. The democratic party sell out of the working base was probably one of the biggest mistakes in modern policital history, and one for which the clintons can never be forgiven.
The CPI is one of the most critical stats of our government and has to be kept low to prevent a wide variety of potential economic costs as described in this article.
Another big lie government stat is the unemployment rate. It clearly understates true unemployment by not counting those working part time, substantually underemployed in low wage jobs, those who have dropped out of the job maket as can't find a decent job and other factors. While the government number is kept at or below 5% for political reasons, it really is about 10-15% overall and probalby closer to 30-35% for Black and Hispanic Americans.
"...kept low..."? I thought statistics were supposed to measure facts and realities; not government fantasies of a thriving economy.
"There are three types of lies - lies, damn lies, and statistics
This is par for the course for Bu$hco -- who'd rather bail out Bear Stearns than deal with thousands in trouble over greedy subprime lenders sticking it to 'em now. To have "gambled and lost" is only a calamity that the little people deal with, not big companies. And certainly not Bu$h -- ever, not once.
Even during the most prosperous Clinton years it was obvious that we were continuing down a dangerous path, and that the economic practices touted by Clinton would take us further astray. I'm sure plenty of other people realized this, and would be as happy as I to see Clinton's legacy tainted further by investigation, if it led to transparency in our government's policies.
Finally this systematic lying and manipulating of our most trusted economic indicators has to discourage any and all citizens. The corruption emanating out of Washington and in cahoots with the mega money lenders makes me have no hope or trust in my government.
This is like a bad dream. Surely God has to deal with these corrupt people.
Let us pray......
Please stop them......
This sort of thing has happened in the past, they fixed it all up with a piece of paper. It began:"When in the course of human events, ..."
There is no new world left to stand in and declare independence from the old one unless you are getting a ride on that rocket-ship to Mars that bush promised we are sending.
KevinPhillips is a GREAT american. I mean it, man!
america's economic hayday is over been happening for years but like most societies they are the last to see it coming. it is called denial.
reagan speeded up t he process and americans bought it hook lline and sinker. corp fascism is here for many decades. cant be stopped without compelte revolution. jefferson understood we dont.
we want a saviour like obama to save us. wont work. we are becoming a nation of haves and have nots. maybe even a nation of have mores and have nots.
demos are in bed with the corps also. all must go. clean sweep in wash. americans not ready for that yet. think things can be fixed.
bye bye middle class nice knowing ya. maybe this economic and class decline will slow down our imperialism. maybe maybe not.
Obama does not put himself out there as a savior. What part of the statement at the top of his website - WE are the ones WE have been waiting for - makes you think he's trying to play savior? He's trying to get people involved in and OWNING their own government again. Americans are starting to finally wake up to how badly we've been RAPED by our leaders (of both parties) for decades. The only way to fix it and keep it from happening again is to have constant vigilance over them, which the information age finally makes possible for the masses.
People are starting to do it, they're starting to get on email lists to be notified about topics important to them to respond quickly. As more people get in on this process, unresponsive politicians will lose their jobs and new ones will know that they are being watched, thus keeping them more in line with what they were elected to do.
Actually a vital middle class is vital to a healthy democracy. Having a plutocratic ruling elite make imperialism more likely - not less
What has the Gov. not been lying about since the JFK Assignation? They lied about the CIA involvements with JFK, MLK, and RFK. They lied about the Gulf of Ton kin. They backed Saddam in the 1980's against Iran a country that we supplied all of their weapons too under the Shah of Iran. They then attacked Iraq twice after building up their military. They sold out the country to China. Lied about weapons of mass destruction. Lied about the economy. It goes on and on.
inflation, one of the greatest scams of the 20th century. here's
hoping it wont persist long into the 21st.
more info, read a paper I wrote called "fractional reserve banking as economic
parasitism"
http://eco
endorsed by two phd economists. printed in nexus
magazine, 60k world circulation. #1 top downloaded
economics paper. used by economics
teacher in australia as standard classroom material.
more info on request.
recent supporting material:
The Shock Doctrine: Naomi Klein on the Rise of Disaster Capitalism
http://www
Confessions of an Economic Hit Man: How the U.S. Uses Globalization to Cheat Poor Countries Out of Trillions
http://www
John Perkins on "The Secret History of the American Empire: Economic Hit Men, Jackals, and the Truth about Global Corruption"
http://www
Video, senator/pres candidate Dennis Kucinich
at last years 2005 Monetary Reform Conference
http://www
Money as Debt, video by Grignon
http://vid
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