Wednesday, February 8, 2012

The Economy: "We Lie With Statistics: MSM (Inflation)"

"We Lie With Statistics: MSM (Inflation)"
by Karl Denninger

"It just never stops, does it? "The numbers are proving Federal Reserve Chairman Ben S. Bernanke’s critics wrong. More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4 percent for the 12 months ending in December, near the central bank’s 2 percent target."

Near?  And second, what part of this target is difficult to understand? "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." 

Notice the repeated use of the words "long run"? Why is this important?  Because you live in the "long run."  Your life is, typically, about 85 years.  So what is the difference in lifetime price inflation between 2 and 2.4%? 438% .vs. 651%, or close to 50% more lifetime inflation. Incidentally, did those numbers make your eyes pop out of your head?  They should; those are the actual numbers over a lifetime with "2% inflation", and put the lie to the claim of long run "stable prices." The latter also means that you have about 13 cents of purchasing power for a dollar left over that same 85 years, and indeed that's about what you do have.  "Stable prices" my ass.

Second, what's "moderate" about long-run interest rates where they are now (10 year Treasuries @ 2%)?  That's not "moderate", it's eye-popping, floor-shattering ridiculously low. “The statements were politically motivated,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. With unemployment stalled above 8 percent for three years,“I don’t see how anybody in their right mind could form a strong argument for persistent, rapid inflation in the United States without the participation of the labor market.” A wage-price spiral does indeed require the labor market to "participate."  Destruction of the purchasing power of the common man, especially those with under-median incomes, however, does not.

Bloomberg, like the rest of the media and Bernanke himself, love to cite "core" inflation as well. But you don't live in a "core" world; you consume both food and energy.  The CPI index says that for a "median" family about 15% of your budget will go to "food and beverages", with 7.8% of it being "food at home."  For a median income of $50,000 this is $3,900 a year, or $325 a month.  I can buy that number. But what's it look like if you're making $12/hour and have $24,000 a year in income - over the poverty line, but rather typical of "modern" blue collar wages?  Is it still 7.8% of your budget or is it much higher?  Of course it's much higher. This is very important because all food at home went up 6% last year.  Over ten years this is an inflation rate of 79% and over a working man's 45 years in the workforce it's a total inflation of nearly 1,300%!

This is "stable prices"? Motor fuel (for your car) was up 10.3% over the last year.  Don't run that number out 45 years.  Just don't.

Here's the thing - the rich, and I'm sure our intrepid writer for Bloomberg (along with the fat cats on Wall Street and in DC) falls into this category when compared against the median income level, feel much less of this than the working man that comprises the majority of the country does.  That's simply because as a percentage of their income (and mine) food and energy comprise far less in the way of expenditures.  Once I buy my steak, eggs and bacon I've bought them - I don't wind up with a bill that 3x as large for food as I did when I was a broke guy just out of school even though my income is much more than 3x what it used to be.

Core inflation works just fine for the 1%ers, and for that matter it works well as a measurement for the guy who's making $150,000 a year (not into the 1% territory, but getting there.)  But for the working stiff - the fully half of the nation that earns the median income and below, core inflation is a bad joke, as their expenditures on food and energy, as a percentage of their income, is much higher than the CPI weighting table suggests.

This, incidentally, is one of the key points I make in "Leverage":  CPI statistics are not only flawed due to things like hedonic substitution, they're also flawed for anyone who isn't right at the median income, as the use of "core" inflation numbers, in particular, severely understates the impact that price changes have on lower-income families. Further, as I have repeatedly pointed out, "2% inflation" is not "price stability" at all.  It is in fact an outrageous level of inflation over a person's lifetime, and even over simply your working-age life (45 years) it amounts to a 144% total inflation rate - that is, a double and then half more, roughly, in the average price level from where it starts from your 20th birthday until you turn 65.

Libertarians (and others) love to talk about the "free market", especially so-called "capitalists" and "republicans."  But there is no "free market" when one adopts a policy of intentional destruction of purchasing power and then uses measurement of "price stability" that (1) reflects that intentional destruction but calls it "price stability" and (2) intentionally directs the bad effects of that price inflation at those who can least afford it. “There’s been an extraordinary amount of misinformation about inflation circulating,” Gertler said. “We have not had any sign of sustained inflation.”

We have had ridiculously-sustained inflation for 100 years.  The laws of mathematics make that "tiny" 2 or 3% inflation in fact ridiculously large over the long run.  The explicit statement of The Fed's policy goals as ensconced in law, is the impact of their policy decisions over the long run, and in this regard The Fed has serially and intentionally violated the law every single year since it was founded, and Congress has serially and intentionally refused to enforce that law.
Bernanke deflected a question from a reporter at his Jan. 25 press conference about whether he’d resign if a Republican were elected president in November and asked him to do so. “I’m not going to get involved in political rhetoric,”Bernanke said. “As long as I’m here, I will do everything I can to help the Federal Reserve achieve its dual mandate of price stability and maximum employment.”

That a lie.  The Fed has never in its history met its mandate and still isn't, as defined by the mandate for long run price stability.  Any percentage of inflation over zero fails this essential test due to the laws of mathematics. Just don't expect the MSM, including Bloomberg, to tell you the truth. They won't.”

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