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.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
Devastating. In 2006, the NYT reported:
With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.
http://www
So not only have wages been stagnant during "the good times" but workers were also getting beaten by inflation and retirees were being cheated -- while incomes of those at the top ballooned. The guys who crashed the economy walk away with millions and the rest of us get stiffed.
At least the robber barons built the rail roads and the steel mills. These guys have left us nothing but debt that our great grandchildren will be paying off.
W is the worst taxer that we have had in recent memory and his taxing device is the beloved war in Iraq! I hate hidden taxes much more than overt ones! It's time for a tea party!
You rang? Both parties are corupt and have no interest in us between campaigns. Washington warned us what would happen if they gained too much power, here it is! I support Obama, but I don't believe the change we need is possible untill we find a way to break both parties. Our founders called it our "DUTY," but most of us don't have the stomach for it. instead we have chosen to sit on our hands and because of that our children and grandchildren will not inherit the Nation we have been given! Look into the eyes of your kids tonight and tell them "You just aren't worth it!" THAT is what our actions say!!
Henry Blodget also has some interesting views on the business climate we will be facing come election time posted in the "Business" section of Huffpo. Check it out.
People may very well be looking for the party they think has the best answers to bad times come November. Dems have to be ready.
Thank you for this post. Mark Twain pointed out there are three kinds of lies: lies, damned lies, and statistics.
The jiggering of the inflation rate hadn't been so clearly on my radar. I just knew food and fuel were up. I suppose, depending on how you factor in the collapse of housing prices over the past year, inflation could look low but not really BE low in terms of a real family's real monthly outlays.
Keven Phillips IS a national jewel. Listened to his guest appearance on the Diane Rehm Show last week, and find him to be the clearest, no nonsense, plain talk economist in a time where smoke and mirrors is the norm.
As I senior, I am in fear of the future... and worried that my "secure" retirement ... isn't.
As we see the manipulation of commodiities to reduce supply (thru collusion of the major conglomerates) in almost the entire commodity market, the projection of 10 to 20% inflation threatens my savings. A check of a five year history of the commodities show that almost every one has risen from 150% to 500% in just the last five years.
I believe we are in for hyper inflation.
Prices never go down. SS and most pension plans have a negligible cost of living increase, given the CPI "Lie" .
Those who are still in the labor market probably won't suffer as much as seniors in the long run, since wages will eventually catch up.
Saddest thing is that there's nowhere to turn... when the congress is complicit in the deregulation and pandering to special interests that allowed the current situation to occur .
The Federal Reserve sets interest rates at 1.5% and they print money for their money-lender friends who prey on the country with criminal credit card practices, criminal home lending , criminal lending to co-horts who can have access to cash to leverage buyouts of our mega media conglomerates and in so doing control our politicians right up to the Oval Office.
Last nite I saw a TV clip of Senator Dodd who sits like a puppydog on a powerful Senate Finance committee ....talkin
A few weeks ago I saw the Senate production of the 'Bernake and Bear Stearns' bailout smokescree
So that week we (The Fed) bails Wall Street to yhe tune of arround 30 billion ....and this week we bail the homeowners (yea), and Wall Sreet at a cost of 300 Billion. (Hang on Snoppy...o
How'd you like to punch that guy out! (Imagine this sick puppy wanted to run for President)
They've lied about everything else, why would you trust them to tell the truth about the economy?
Has anyone ever wondered why our GDP is so high, when we no longer produce anything? It seems that all we offer is services, much of it financial stuff, pure paper, gambling in what we call "markets."
I wonder if Mr. Phillips could address that next. Is the United States economy nothing but a paper tiger, propped up by our creditors who fear calling us for what we really are worse to them than carrying on the charade? I mean, does the rest of the world pretend that we reallly have an economy, because if they expose us, they'll go bust on the loans they've given us?
Mr. Phillips, please. Address this. I have a feeling our nation is an economic fraud. I mean, if we just don't produce anything, then, well, what do have that is so valuable?
He's already addressed them. Read "Wealth and Democracy", "American Theocracy" and "Bad Money".
I picked up the following snippet on Rush Limbaugh today riding around in my beater:
According to Rush there is 44 billion barrels of oil on the continental shelf of the USA which is untapped because of liberals. He said this was enough to heat every house in America for 100 years.
Well, let's do the simple math:
Daily consumption in USA 25 million barrels of oil
Multiply by 365 days and you get just over 9 billion barrels of oil annual consumption.
So you run through 44 billion barrels in 5 years.
What do we do after 5 years? Move to Iran?
Sure... right after we bomb it back to the stone age!
And that assumes our current rate of consumptio
Kevin Phillips is a national treasure. Your biting critique of modern America--cutting across party lines--has been a light in the heart of darkness. Continue your prescient and indispensable work. We need more.
These factS about the government figures have always been obvious to me, glad someone else is voicing an opinion about this. Isn't IT painfully obvious that the American people are being taken for a huge ride, down the tubes. VOTE THE BUMS OUT IN NOVEMBER, ALL OF THEM!!!
The difference between 10% real inflation and 2.5% core rate inflation (7.5%) is how much the government is able to cut social security each year, and federal retirement pensions and state retirement pensions, and military pensions, and private pension tied to core-rate. How low do you want social security to go?
The Federal Reserve ceased publishing M3 statistics in March 2006
M3 is the total measure of the money supply. = Inflation. They can pump up the money supply all they want without obvious numbers jumping out. Yes, we should have Congressional hearings.
After Viet Nam inflation was insane but the official news denied it for at least a year while prices climed 20%.
Yes, but they had a really good reason for not continuing to publish M3 data, "it was too difficult". All bullshit of course!
Personally, I think they killed M3 because it provided a glimpse of the out of control leveraging occurring in the financial system. Derivatives, Hedge funds, were showing values that were more than 10X the actual money supply. The similarity between the growth pattern of the money supply and the common pyramid scheme was easily recognizable. So to cover their tracks the FED killed it.
It would not be surprising to hear a proposal to reinstate some M3 equivalent measurement after the current recession is acknowledged and dealt with. As Kevin Phillips suggests, lying about the inflation rate, allows lying about a whole range of statistics.
this sort of corruption is very unbecoming of an allegedly Christian conservative government. Shame on them! And shame on us for allowing them to do this to our nation!
And, just like every single pyramid scheme in history, it will collapse when the people on the bottom can no longer pay. Then the people in the middle won't be able to pay. And the people at the top will have nothing.
Oh wait! Except they knew this all along, and have been hedging their bets and diversifying their international portfolios, kept reserves of other currencies, and invested in essential commodities. Like surfers, they will ride the crest of this wave until it crashes, and paddle back out to find another...
Mr. Kevin Phillips. In human history you will be recalled as one of the few forlorn writers who repeatedly warned a democratic citizenry of the perils of dismantling domestic producing and innovating tor the interests of financial interests and concentrated monopoly and wealth. You are an extraordinary American patriot.
The ultimate shock is coming ... like an after-shock
Foreign debt holders and those countries with large U.S. dollar reserves are at some point going to start reacting by dumping the U.S. dollar for the Euro or Yuan etc.
As the author aptly noted :
"It is not a happy prospect. "
"It is not a happy prospect" - Understatement mode: enable!
The larger fundamental question your article should ask is can we believe anything our government tells us now? Since the disastrous current administration that is in office has been at the helm we have had revelation after revelation of half truths, manipulated intelligence, opportunistic interpetation of codes and statutes and civil rights abuses that make the old Soviet Union look like Mayberry. I have long suspected as the real estate crisis has been unfolding.
Skindoggy
Who you gonna believe? The Gummint or your own lyin' eyes?
What I mean is, you say 6 to 9 %, some say 10%. Maybe we should average these two together and call it 9.5%?
No matter who the President is they are going to keep the inflation numbers artifically low, let me guess no one here has a clue why except the Bush is evil . . .
How about because social security increases are tied to inflation rates meaning if they give out a bigger inflation number, more money has to be handed out and thus putting more of a strain on social security.
They use the funds in Social Security against the debt on every budget, to help mask the true size of the deficit. The bushies have doubled the country's debt in less than 8 years. Was 4.5 trillion when he came in, just about 9 trillion now. They fudge unemployment rates, inflation rates, EPA findings, crime statistics, poverty rates.....
Don't forget also, lower inflation figures make the gubmint look better, whatever side of the aisle they're on. Same thing when they fudge the unemploynebt numbers. And, yeah, they all do it, dem, repub, commie, fascist, socialist, nazi... they all know the same math tricks.
You must be logged in to comment. Log in or connect with
