http://www.huffingtonpost.com/kevin-phillips/wa****ngtons-great-no-infl_b_100719.html
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
owner****p 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 Wa****ngton's over-favorable and
self-serving ****traiture 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 Wa****ngton 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
cor****ations, 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
re****ter, 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. Re****ts 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 Wa****ngton 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, com****ts 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 Wa****ngton'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, Singa****e and
Saudi Arabia as part of their ongoing study of just how much longer
they can continue to sup****t 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.
--
"Now, by the way, any time you hear the United States government
talking
about wiretap, it requires -- a wiretap requires a court order.
Nothing has
changed, by the way. When we're talking about chasing down terrorists,
we're
talking about getting a court order before we do so"
-George W. Bush, April 20, 2004
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