By Bill Bonner
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 second-guessing…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 (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!
Regards,
