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Bill Bonner founded Agora Inc. in 1978. It has grown into one of the largest independent newsletter publishing companies in the world. In 1999, along with Addison Wiggin, Bill founded The Daily Reckoning. Today, this daily e-letter reaches over 500,000 readers around the globe. Bill has also... More
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  • The Great Inflation Lie 3 comments
    Feb 8, 2013 11:04 AM

    Who are the bigger liars? Argentine feds? Or American feds?

    News flash from the pampas. From the Associated Press:

    Argentina announced a two-month price freeze on supermarket products Monday in an effort to break spiraling inflation.

    The price freeze applies to every product in all of the nation's largest supermarkets -- a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies' trade group, representing 70% of the Argentine market, reached the accord with Commerce Secretary Guillermo Moreno.

    The Argentine government moved to stop the price increases it previously denied were happening. It said inflation was running at only 10% a year. Turns out, it's more like 30%.

    But our focus today is not on the land of the gauchos; it's on the land of honchos, HoJos and bozos. The land north of the Rio Grande.

    Before we come to it, though, another glance south of the Rio de la Plata. From Russia Today:

    The International Monetary Fund has issued Argentina with a "declaration of censure" for providing inaccurate inflation and GDP data and has given it until September 29 to amend the problems or will impose sanctions.

    The IMF Friday called on Argentina to fix its statistics "without further delay."

    The IMF said it would review Argentina's progress in November and warned that if the problems are not sorted then it could impose sanctions on the country. This would bar one of South America's biggest economies from voting on IMF policies and accessing financing.

    America's Own Funny Numbers

    When will the IMF look at America's inflation figures?

    We never paid much attention to the claims that our own feds were intentionally falsifying the numbers. Too many honest statisticians at the Bureau of Labor Statistics. Many of them Republicans. A few Tea-Partiers, even. Too many different points of view to pull off a real conspiracy.

    Instead, the feds try to report the number correctly. Still, with so much fudge in the kitchen, they were bound to get some on their fingers. Not that anyone intended to defraud the public. It's just that institutions have biases of their own. Often the people working in them don't even notice.

    Adding up the cost-of-living numbers has built-in complications. People of reasonable intelligence and ordinary goodwill can come to different conclusions about how it should be done. Then even a small institutional bias -- like an old watch near a compass -- can lead you in the wrong direction.

    At first, the results differ little -- one way from another. And then, the institution takes "ownership" of the method used. Reputations are on the line. Careers depend on it. A whole legion -- with its own hierarchy, creed, orthodoxy, pensions -- develops.

    And then there is no retreating... no arrieres pensees. Because now too much depends on it. Changing it would cost billions... or trillions... of dollars to the state. And it would change the way people think too. Fessing up becomes unthinkable.

    That is what happened with America's consumer price index. Small, innocent distortions grew to become grotesque and monstrous. But the feds can't admit it. There's too much at stake.

    Peter Schiff describes what happened:

    Since the 1970s the preferred government inflation metrics have changed so thoroughly that they bear scant resemblance to those used during the "malaise days" of the Carter years.

    Government and academia defend the integrity and accuracy of the modern methods while dismissing critics as tin hat conspiracy theorists.

    But given the huge stakes involved, it's hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the methodology and the numbers, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.

    Beginning in the early 1980s the methodologies were altered to compensate for a variety of consumer behavior. The new "chain weighted CPI" for instance incorporates changes in relative spending, substitution bias, and subjective improvements in product quality.

    Essentially these measures report not just on price movements, but on spending patterns, consumer choices, and product changes. This is fine if the goal is to measure the cost of survival. But that is not the purpose for which these metrics are meant to be used.

    From New York to Buenos Aires

    The good intentions were there. But so was the road to Hell. Schiff took out the fiddles and tried to calculate how much prices had actually changed:

    We randomly identified price changes of 10 everyday goods and services over two separate 10 year periods, and then compared those changes to the reported changes in the Consumer Price Index (NYSEARCA:CPI) over the same period. The 10 items, which we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes and electricity.

    Between 1970 and 1980 the officially reported CPI rose a whopping 112%, and prices of our basket of goods and services rose by 121%, just 8% faster than the CPI.

    In contrast, between 2002 and 2012 the CPI rose just 27.5%. But our basket rose by nearly double that rate -- 52.1%! So the methods used in the 1970s to calculate CPI effectively captured the price changes of our goods, but only got half of those movements more recently. How convenient.

    Just to make sure, we ran the same experiment with 10 different goods and services. This time we chose: sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef and veal and prescription drugs. The results were notably similar. The basket increased 1% faster than the CPI between 1970 and 1980 and 32% faster between 2002 and 2012. In both cases we selected a random array of food and non-food items.

    Today, thanks to small course changes by the Bureau of Labor Statistics back in the 1980s, the CPI is far from where it ought to be. It set out for New York... and it arrived in Buenos Aires.

    If other alternative calculators -- such as John Williams and Chapwood Finance -- are right, the U.S. CPI is more off-course than the Argentines' heavily criticized numbers. Real price increases in Argentina are believed to be three times the official number. In the U.S., the feds say prices are going up at a 2% rate. Williams and Chapwood say the real rate is 10% -- or five times as much!

    But wait. If these numbers are correct, it changes everything. The feds use these crooked CPI numbers to deflate GDP. They use them to adjust Social Security and government pensions. They use them to tell you if you're making money on your investments... or losing money. They use them to keep tax rates even with inflation too.

    Like True North, every household financial pilot depends on them. And if the official CPI were significantly understated, the results would be catastrophic!

    Just for openers, the GDP would be in severe decline -- revealing that the U.S. economy has been in a depression for the last four years.

    More to come!


    Bill Bonner


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (3)
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  • Econovan
    , contributor
    Comments (171) | Send Message
    Excellent post, thanks!
    8 Feb 2013, 12:53 PM Reply Like
  • Bonner & Partners
    , contributor
    Comments (2) | Send Message
    Author’s reply » Appreciate the feedback!
    11 Feb 2013, 11:05 AM Reply Like
  • reliablemrb
    , contributor
    Comment (1) | Send Message
    May 2013. Two months ago the fed said inflation is 2%. Today they are saying its closer to 1%. Just how stupid do they think Americans are ? Food is over 100% higher from 5 years ago. Gas 300%. Electric 80%. Mechanics rates have doubled. Property taxes 50%. Health insurance 500% with no claims for me. On and on. How does this be 2% per year, now 1% ??????????????????????
    8 May 2013, 08:47 AM Reply Like
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