Monday, November 19, 2007

What Inflation? - Soybeans And The Lying CPI

That is a side-by-side pic of the bottle of soy sauce I just bought and my penultimate purchase. I don't know how long it's been (6 months?) but the price tags tell the story of this post.

Last time it cost $2.29 while this week, the same exact bottle cost $2.89.

I am 33 years-old and I must admit, I have never contemplated anything about soybeans until a couple of months ago. But these days, as a fledgling commodity trader, any tiny 60 cents (26%) increase in my grocery bill jumps right to my attention.

I never realized how many foodstuffs contains soybeans, soy oil, or soy meal until I started scanning food label ingredients on account of my son's little allergies. Soy, is seemingly everywhere. Good luck substituting this rising cost out of your diet.

China has started to import soybeans which obviously implies that they can't produce enough domestically to sate the national appetite. Jim Rogers has said that eventually China, as it prospers, will start drinking coffee and eating cocoa and will therefore become an importer of those commodities as well.

As for overall "inflation". Let's say there are two kinds. One is nerd/government inflation. They call it the CPI - consumer price index. The other we can call "personal inflation". It will refer to the rising costs of your household/personal budget. Obviously, if a person is more concerned with the former than the latter, they are a blithering idiot.

Now the government, via its CPI, has been telling us for years that inflation hovers around 2%-3%. That's BS and we all know it. Food inflation alone was 8% last year. Gasoline has more than doubled in the past four years. Heating oil is up a few hundred percent over the past six years. I hardly need to go on.

The government can add up 2% numbers anyway it pleases but it'll never add up to the total increases in anyone's personal inflation index over the past several years.

I learned something the other day. I knew that the government always plays games with the stats so as to smooth out official inflation statistics, but I didn't know this specifically (link will be further down):

One of the things he points out that during the Clinton administration, the way the BLS calculates inflation was changed. He calculates his own inflation number using the old pre-Clinton inflation model. Using that methodology suggests that inflation is at 7%. And if you use other methods, inflation might even be substantially higher. Look at the chart below.

There you have it. By the government's own "old" metric, today's rate of inflation is around 7%.

Now is this the fault of President Clinton, of Congress, or of an apathetic, econo-illiterate American public?

Check "D" for "all of the above".

By the way, did y'all get a 7% raise last year to mitigate these higher prices?

Why would the government lie about inflation? Well, it's been the tack of governments since the beginning of modern society to debase their currency. Acknowledging "inflation" with an accurate CPI would be to officially admit as much.

For one LARGE thing, Social Security benefits are indexed to CPI figures. I will let John Maudlin and Walter Williams do the talking:

"Shortly after Clinton took control of the White House, however, attitudes changed. The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

"Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third."

Then to confuse the process even more, the BLS uses something called hedonics, from the root word hedonism. Essentially, the adjust the price of an item based on the "pleasure" or increased value you get. Thus, they don't price automobiles based on the sticker price, but on what you get for your money. If the manufacturers load in more items like new electronics or anti-locking brakes that were not standard the year before that means you are getting more value for your dollar, so therefore the price in terms of inflation goes down even though you may be paying the same or even more to get out of the car show room.

The same is true for computers. We clearly get more power every year, so for the BLS the price of computers are going down, although it seems to me that the price I pay for a top of the line computer is about the same as it was five or ten years ago.

If the government mandates an additive to gasoline that costs 10 cents more, that is not included in the inflation numbers, because we get a new, improved gasoline that pollutes less. Supposedly the pleasure of breathing cleaner air reduces the costs to our pocket book, or something like that.

My health insurance costs have tripled over the last ten years, and I know that is the experience of many of my readers. Yet, the BLS has medical costs rising by less than 50% for the last ten years. Their data suggest the cost of housing has risen by about 30% over the last ten years. Again, that is not the experience of many of my readers.

Social Security expenses are $657 billion per year. If Williams is right (and I think he is) that under the old methodology that expenses would have risen by a third, then that means we are spending $200 billion a year less. Add $200 billion to the deficit. And then watch politicians panic.

I am not one to suggest conspiracy, but if the CPI reflected the real world, the US government would be spending far more money on Social Security and a host of other pension programs. The crisis we will be experiencing in about 8 years would have already hit us. Thus, there was an incentive for leaders to find economists who could argue for new, more "progressive" methods for calculating inflation. Notice that this was done by the BLS without any protest from Congress.

Do you know what TIPS are? They are Treasury Inflation-Protected Securities; they are bonds that supposedly protect the lender against inflation. I remember when they came out back in 1997. Over the years I have heard several people recommend buying them. Here's the problem - the "inflation" is measured by the dubious CPI.

WHY the heck would anyone buy a government bond that is not only issued by the thugs but is also valued by lying government statistics?

Right from the get-go in 1997, I thought one had to be a complete Moron to buy TIPS.

If someone really wants protection against inflation, then the only protection is to buy what is inflating. In other words, figure out how to get long commodities and definitely, short US Treasury bonds.

Now getting back to measuring true inflation. I submit that it is impossible. The changes that the Clinton BLS made aren't without theoretical foundation. But all theory falls forfeit to economic and political history. The fact remains that all governments have debased their coinage, all of them waste money, and they all lie about the malfeasance. The question is begged - why does the government even need to compute a CPI? Why do we need the government to tell us how much goods and services cost?

Oh, that's right, they need, or think they need, an official measure of prices to conduct policy - to mete out Social Security benefits, and to give raises to government employees.

How about this? The government just prints money and stays away from economic "policy", they get rid of entitlements, and they only give raises to government agents when they get promoted and take on more responsibility?

I must say that it's not so surprising that the CPI formulation was changed under the reign of, let's just call him the man who has THE MOST flexible relationship with the truth.

1 comment:

Taylor Conant said...

I've never understood why "conspiracy" is such a dirty word.

Great write-up.