- Most Americans have been led to believe
that the Consumer Price Index (CPI) actually measures, from one year to
the next, the "cost of maintaining a constant standard of living" as the
prices for goods we purchase increase. Indeed, we are foolish enough to
believe that the index is an accurate measure of the price increases for
the same basket of goods we buy every year.
-
- If this were actually true, the index
would show an honest increase of 3% - 4% in price, there would be no
productivity miracle, interest rates would be much higher, and bond and
stock prices would be lower. Of course, with an election approaching,
our elected officials don't want the CPI to be an honest measure of the
cost of maintaining the same standard of living or quality of life. They
want a politically convenient index, cleverly devised to hardly ever
rise at all!
-
- What you should find unsettling and
fraudulent are the ways that the CPI is manipulated to ensure there is
no inflation, regardless
- of how high the prices rise for things
we must buy to live. Manipulating the CPI - specifically because the
benefits to the retired on Social Security, Medicare and Medicaid are
tied to it
- - and making people believe that
inflation is low, will keep the "fraud" of monetary inflation alive. The
government simply can't afford to keep the promises it has made, and it
needs to use this clever accounting fraud. If productivity is really so
high, why isn't government policy pushing through a 10% flat increase in
Social Security benefits so that the retired can get their share of the
productivity miracle? (Maybe the real miracle is robbing them without
them noticing!) By changing the definition of "what inflation is", our
government won't have to pay nearly as much to retirees as they were
anticipating. The implications of defining inflation away are vast, and
the magnitude of the fraud is extraordinary!
-
- The primary sources of manipulation
are: 1) Making sure the wrong items are in the index; 2) Taking
"hedonics" to ridiculous extremes; 3) Getting consumers to do more of
the work and receive less services; and, 4) Changing to a Chain Weighted
Index.
-
- First, it is not a coincidence that the
CPI assumes that everyone in the country rents their home. (Rents have
been declining over the last year in some major cities, such as San
Francisco -6%; Denver -4.3%; and, Atlanta -4.5%). Making sure that the
CPI does not pick up the real cost of housing is critical because the
very reason that rents are soft is that with easy mortgage credit
available, former renters are leaving the rental market and buying
houses instead, which has pushed up housing prices. Over the last four
years, housing prices have risen 45%, so how could the index possibly be
kept so low if housing prices were actually part of the "cost of
living"?
-
- The drop in rents is very material
since the cost of housing is a
- full 30% of the CPI. Unfortunately, for
those 80 plus million Americans with incomes tied to the CPI, 69% of
households own their home. So, over two-thirds of Americans are forced
to use a Consumer Price Index that has absolutely no relevance to them!
- To say the cost of living is going down
for homeowners is just ridiculous! If the CPI was honestly set to
measure the costs associated with owning a home for those 69% (vs.
renting), the index would be rising over 3% a year! Those 80 plus
million Americans who are short-changed include recipients of Social
Security, Medicare, welfare and food stamps, as well as retired military
and many private pensions.
-
- To take a closer look, my wife and I
prepared a monthly "nut" spreadsheet on our own personal expenses. We
own our home
- and car outright (so we don't have a
mortgage or car payment),
- but we still have all the usual
expenses, including: Insurance for Health Care, Automobile and property;
electricity; DSL connection; telephone; property taxes; monthly
maintenance; etc. Before we have even purchased a gallon of gas, a piece
of clothing, or a single grocery item, our annual nut amounts to over
$25,000 and it is rising around 8 to 10 percent a year. We recommend you
do the same and then compare your "housing cost" to the CPI. You'll
notice that you probably do not live in the world the government
describes!
-
- Second, the CPI is managed down by
arbitrary decisions made by bureaucrats on the "quality improvements" in
goods and services, pleasantly referred to as "hedonics". When you buy a
computer that has "more storage" or purchase a new car made with more
plastic rather than steel, the bureaucrats at the Bureau of Labor
Statistics, Bureau of Economic Advisors and the Federal Reserve, get all
excited because productivity and deflation can be "defined into
existence" the same way that the Federal Reserve can "print new money
out of thin air". While there are some benefits from quality
improvements in the cost of goods and services, the extent of the
"arbitrary hedonic adjustments" are breathtaking and, alone, are adding
1% to 1.5% of real Gross Domestic Product (GDP) growth by "magically
lowering inflation" by the same amount.
- All you need to do is look at the
actual number of dollars spent
- on "technology equipment" in the GDP.
Dollar spending hardly changes, but "real spending" is rocketing up.
Take a look at the price deflator for tech equipment, falling from 90%
to 60% over the past few years, to realize how arbitrary these hedonic
adjustments are and how devoid the adjustments are of any common sense.
-
- Looking forward, the good news is all
the attention being paid
- to the rising cost of health care, but
these costs may prove to be "embarrassing" in an election year. So much
so, that the CPI is in the midst of a major "make-over" to include all
those tremendous "hedonic improvements" in health care that granny is
getting from her HMO. The government staticitans have entered the world
of science fiction: "Please beam me up Scottie".
-
- Third, every time we pull into a gas
station in the rain and have to swipe a credit card and pump our own
gas, we remember the old days when a gas station attendant actually
provided service, checked the oil, and cleaned the windshield free of
charge!
-
- In my own business, travel reservations
are made over the internet which is convenient but time consuming when
researching flights. For other services, just try and get through to
technical support (which is generally a fee-based service) or speak to a
customer service rep; the whole day could be spent on hold waiting to
speak to someone in Bangladore or Calcutta. Everywhere we look, the
consumer is now providing a portion of the labor in order to receive
normal services. Yes, this holds measured prices down but the downside
is the loss of the purchaser's valuable time. The government masters of
the CPI who welcome "hedonics" turn a "blind eye" to this significant
cost phenomenon. Moreover, we spend an additional 30 minutes a day
cleaning ěspam off of our computers. Not one minute of this lost time
shows up as a cost and drain in productivity.
-
- Remember, "Only the good stuff counts."
Do you honestly think the time you spend delayed in traffic, on a train,
or on an airplane, would be calculated in the CPI? What about the extra
hour we get to spend at the security gate at the airport? What does that
do for your "productivity"? Isn't that a real material cost?
-
- Fourth, in order to guard against
anyone actually seeing inflation, the Bureau of Labor Statistics, at the
Federal Reserve's urging, wants to use an "Expenditure/Chain-Weighted
Index." This price weighting idea works something like this: If you
consume a very small amount of something and its price goes up a lot, it
will affect the CPI very little because it has a very small "Weight in
the Index". This, of course, is correct. What the Federal Reserve and
the Bureau of Labor Statistics want to do next is insidious and should
be criminal fraud - the Fed wants the Bureau of Labor Statistics to
change the weights as the prices change. This is the way the Index will
be constructed: As the cost of some items goes up and you can no longer
afford to buy them, you are then forced to use that item less and find a
less expensive alternative. Then, the weight of that expensive item goes
down, but the weight of the
- less expensive item goes up, resulting
in prices that have hardly changed at all! (George Orwell would simply
love this!) Indeed, think about Granny in the kitchen: She used to buy
steak and croissants but the price got so high that she now has to eat
spam and dough balls fried in lard. Since she doesn't buy steak anymore
and now eats spam and uses lard (items she never used to buy) her cost
of living has gone down! (Grannyís weight for steak is now zero.)
Obviously, Granny's standard of living went down when
- the price of steak went up. What
matters in today's world is not Granny's standard of living, but her
cost of living! Granny's costs need to be kept down and the way to do
that is to keep her CPI down! If Granny receives $400 a month to live
on, it is truly convenient to make sure her "cost of living" stays the
same even if surviving on $400 a month means she freezes in the dark,
cancels cable, and eats what her dog eats. Yet, she should feel good
because the CPI tells her that costs haven"t gone up. The real miracle
in America isn"t the productivity miracle; it"s the never rising
Consumer Price Index.
-
- The Federal Reserve wants to run an
easy money policy and keep interest rates down; the Treasury wants to
short-change social security recipients and buyers of TIPS and I-Bonds.
Fudging the CPI is the way to go; however, this strategy is
intellectually dishonest, morally fraudulent and will remain quite
effective until Americans start looking at their actual cost of living,
or discover one day that what's good for Rover is good for them.
-
- - Richard Benson is president of
Specialty Finance Group, LLC , offering diversified investment banking
services.
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- Copyright David W. Tice &
Associates LLC 2003
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- http://www.prudentbear.com/archive_comm_article.asp?content_idx=31899
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