Almost overlooked in yesterday’s mess was the CPI data. It was a classic:
"Consumer prices were forecast to rise 0.3 percent, according to the
median estimate of 81 economists in a Bloomberg News survey. Estimates
ranged from gains of 0.1 percent to 0.5 percent. Prices excluding food
and energy were forecast to rise 0.2 percent, according to the survey
median.From a year ago, the cost of living rose 4 percent, compared with a 4.3
percent 12-month increase in January. The core rate was up 2.3 percent
in the 12 months to February, the smallest year-over-year gain since
October.Today’s report showed energy prices dropped 0.5 percent, the most since
August, after a 0.7 percent increase in the prior month. The cost of
electricity dropped by the most since December 2005. Gasoline and fuel
oil prices also fell, while natural gas expenses jumped."
Why? Despite Record gasoline prices, CPI was flat on falling gasoline prices — and that caused futures to spike until the Bear announcement).
The usual suspects claimed that the CPI data was the beginning of the end for inflation. Hey, maybe. But remember, a single data point — especially a suspect one — does not make a trend. And note that the folks calling for the end of inflation here are, by and large, the same ones who insisted there was no inflation over the past 5 years. These clueless pundits are the "inflation-enablers."
If you want to know why the CPI data was applauded, look no further than Tuesday’s Fed meeting. The odds "the Fed will lower its benchmark rate by a
full percentage point" jumped to 60% from zero. This may further pummel the dollar, and could help drive Oil to $125 (or even $150); Gasoline at over $5/gal is a very real possibility. And Gold? Your guess is as good as mine.
~~~
Why has the CPI lagged actual inflation for so long? Its one of the things I haven’t seen discussed too much — outside of John Williams’ Shadow Stats.
The short answer: Changes have been made in how we measure and account for inflation.Not only do we understate inflation, but we do so in a systemic manner which has led to the current disconnect between government stats and reality.
Have a look at the chart below, via Tim Iacono. Its pretty clear that by BLS’ prior methods of measurements, inflation has been running much hotter than officially recognized.
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What does this official falsification of data lead to? Big Trouble.
Here is what happens when we deny reality, purposefully misstate the truth, and try to hide beneath a series of obsfucations and misdirections: We make policy based upon this false reality.
The drumbeat of bad data, with the imprimatur of legitimacy, provided an undeserved credibility for the "low inflation meme." That creates a level of acceptance of elevated inflation that eventually lead to disaster.
We took rates down to levels that responsible people — who if they were aware of reality — would never even do.
There are obviously many many factors that are coming into play in today’s credit crisis — but I can draw a direct line from the Boskin Commission (who IMO, falsely claimed CPI overstated Inflation by 1.1%) to the Greenspan 1% FOMC rate, to the residential mortgage backed derivatives, to the Bear Stearns collapse.
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Pre Boskin CPI
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Actions have consequences. Denying reality, falsifying data, gaming the numbers, cooking the books, making believe inflation is more modest than it really is — has real world, unintended consequences.
(This latter discussion is worthy of more pixels, and if time permits, I will pull together a more comprehensive analysis).
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Sources:
US Manipulated CPI Inflation Statistics- Stagflation 1980 and Now
Tim Iacono
Mar 14, 2008 – 03:25 PM
http://www.marketoracle.co.uk/Article4018.html
The Consumer Price Indexes
U.S. Department of Labor, Bureau of Labor Statistics
http://www.bls.gov/cpi/
U.S. Economy: Consumer Prices Unchanged Last Month
Shobhana Chandra and Bob Willis
Bloomberg, March 14 2008
http://www.bloomberg.com/apps/news?pid=20601068&sid=at2gzTFCHXQk&
Barry, does it worry you that you are no longer very lonely on the oil-gold up call and dollar down forever pep squad? I am getting nervous that gold and oil are way overdue for a sharp correction/profit taking week and nothing I see in the daily candlestick charts of individual stocks in these two sectors is reassuring to me at all. Lots of folks have piled into these trades and perhaps some early birds may decide to ring the register next week????
Barry, you know as well as I do that mis-stating the CPI is a thinly veiled attempt to reign in entitlements.
I recently gave a presentation to a group of executives on the American automotive industry, and a fair portion was dedicated to discussing the real, as opposed to nominal, price of cars over the last twenty five years. Mind you, this was a group populated by a CFO, a CEO, senior VPs, etc, but not one of them even knew that the CPI had been recalibrated over the years, much less just how much it had been manipulated.
I know: anecdotates are nothing to build hard data on, but my strong suspicion is that a vast majority – maybe 98%+ – of the working population has no idea this manipulation is going on. What’s worse is that so many policy makers think (rightly so) that screwing senior citizens on their social security checks is a better alternative to allowing the deficit to mushroom.
What I find just as interesting, though, is that retirees are painfully aware of just how poorly their retirment checks are keeping up with the price of bread, milk, gas, etc. And, I know its anecdotal, but I’ve seen a ground swell of anger build recently, and I’d bet you a dozen Dunkin donuts we get a reality check on the CPI in the next two years due to a coming wave of political pressure from the largest voting block in this country.
Great post Barry.
The only problem that I have with Shadow Stats is how he recomputes the CPI. As far as I can tell, he is not actually computing using the old CPI methods. What he has done is taken some official (perhaps internal) report that says “the new CPI understates the old one by X%”. He then adjusts the graph by X%. That’s why the curves follow each other so closely.
In general, this is not a bad rule of thumb, provided that those estimates of X% were correct. However, I would much prefer that he actually computed the CPI using the old means. This would better allow us to see the effects of disproportionate inflation (e.g. greater change in oil, food that nonessentials).
Currently, denial of reality is at the core of our National psyche.
Everyone should understand this: All of the “official” numbers are fiction. Unemployment, inflation, budget, revenue, trade balances – all of it. Fiction. I’m not saying it’s intentional (I suspect much of it is), but it is the reality. If the numbers weren’t made up, we wouldn’t need revisions.
It’s “the numbers”, after all, that keep telling us we’re not in a recession.
This was a decent, meaty post…and I appreciate the thought that went into it. (Kind of compensates for the a la Cramer “SHE KNOWS NOTHING!” derision of the WSJ video piece the other day, which I’m hoping was a fluke–the Howard Stern youth brigade already has its heros.)
inflation has been running much hotter than officially recognized.
Louise Yamada has been telling clients this for years. And, yes, the govt. does it so as to avoid cost-of-living increases for Social Security.
What I found crazy about the reaction to the inflation numbers is that people think it is under control. However, when you look at a lot of commodity prices over the last month(oil, natgas, silver, copper, wheat), they have all moved up at least 10-15%. This doesn’t bode well for future reports.
One of the favorable items recently has been a significant decline lately in meat and cattle prices. However, there were two investors/analysts (different firms) on CNBC a couple of days ago saying that there is a glut of meat coming onto the market currently through inventory liquidation due to various processors scaling back operations or going out of business altogether. This is suppressing short term prices but at the expense of long-term cattle production. Once the current excess inventory is worked through, there will be inadequate future production at which point you should expect to see a future spike in cattle prices.
If the Fed does cut by 75-100bp, I can’t see how inflationary pressures won’t continue to build. If they cut by 50bp or less, this won’t bode well for the markets.
Even the nonpartisian 600,000 member business association that is NFIB has taken a side on this argument. They also believe the BLS is screwing up.
http://pbp.typepad.com/economy/2008/03/is-something-wr.html
On that link is a chart that their chief economist uses to talk about inflation. Their own survey used to perfectly match up with inflation for decades, but in the past 3-4 years no longer. The key is NFIB hasn’t changed anything, so that means the BLS must have.
NFIB believes actual inflation is much higher than stated.
Reign in entitlement true.
The soldiers, who are bleeding in Iraq, need to know thier retirement, if that is why they are there, is being blde just like social security.
The huge house of cards, what is there is save?
Excellent post by Paul Craig Roberts that touches on this topic:
“Watching the Dollar Die”
http://www.counterpunch.org/roberts03142008.html
Can someone please explain to me why the members of the AARP….supposedly one of the strongest lobbying groups in the country, do not descend on Washington like the villagers seeking out Dr. Frankenstein??
They must know their Social Security payments are tied to the CPI…
Barry,
That’s a pretty specious argument: official figures of inflation were much higher for 1980 than they are now, therefor today’s figures are hiding inflation.
Whenever someone’s argument rests on a complex conspiracy among politicians, bureaucrats, their spouses, their spouses friends, their spouses friends tennis partners, etc., it is deserving of a measure of skepticism.
The hysterical blogger you link to finds it inconceivable that care prices are down YoY. With sales down and inventories growing, doesn’t that seem perfectly reasonable? And he bemoans that the calculations used to measure the costs of homeownership were changed. But with the old calculation, wouldn’t they be negative now due to falling home prices?
There is a crowd of people at these blogs who predict a dire economic meltdown and with it uncontrollable inflation. Stagflation involved a mild slowdown. After the Volcker raised rates high enough, we had a severe recession and inflation fell rapidly.
Even Martin Feldstein, no Chicken Little, said this could well be the worse downturn since the depression.
~~~
BR: Bob, I never said this was a conspiracy. Indeed, the Boskin Commission was a “blue ribbon” panel — very public, fanfare, etc.
It was ot a secret they were trying to recalibrate CPI so as to cut COLAs.
But again, my argument is that we should have a backbone, and deal with SS — not fake our way thru.
No one I talk to in business or at family gatherings places any credence in the inflation statistics. Yes the reason for CPI manipulation is to contain benefit payments although most people don’t really understand this. This is perhaps all part of a tide of scepticism about govt info which has been brought about by the very obvious mendacity of the administration, there’s scarcely a day goes by when there isn’t some new example, and the rise of the internet. Today half the country is wired and there are lots of voices out there expressing scepticism about whatever info the govt puts out. The fools who have presided over the manipulation of the CPI as in so many other cases are only just starting to realize the host of unintended consequences that have flowed from it.
Finally on another matter what’s the big deal about the reaction by some(see dukeb above) to La Strassel’s Immelt interview. Just because BR and some of us think this lady has a slightly loopy agenda and was trying to skewer Immelt with it(unsuccessfully) doesn’t make us Cramerites or slavish followers of Howard Stern. Get some perspective here.
There’s a serious problem developing and the government has to take immediate action.
Prior to the depression people made bank runs in an effort to get their cash out because they were worried about losing their money. This prevented banks from making loans and the system started to collapse. But times have changed with the FDIC and SPIC right?
No, Bear Sterns clearly shows the weakness in the system. The investment banks and hedge funds don’t have protection because the investments are over the insured amount or they don’t want the cash to get stuck in a bank that goes under.
So what happens now? Well, everyone knows history and now we have a clear sign of depression signals, a bank run.
The government has no choice they must take some type of action on Monday. They can not wait for this to get worse. It’s already headlining many papers and the public is not dumb.
I think the Fed may step out first with a 1 point or more rate cut. The next step is to block up the futures market, release oil from the reserves or some other action to reduce commodity speculation.
As a regular guy with not much money I’m much more concerned about the banking problem than inflation right now.
If gas goes to $6 and food doubles again that’s much less of a problem than a economic collapse. A banking collapse with depression will cause all prices to go down, except for the precious metals which should stay flat.
Sorry, car prices are down, care prices are certainly higher. For instance, it would take a lot more to get me to care about someone on Wall St losing their job.
Herman Kahn wrote in his 1982 book “The Coming Boom” that inflation as measured slightly overstated the true rate. The reason for this was simply the way housing was accounted.
The true inflation rate is somewhere close to John Williams stats but not quite that high. Using hedonic and trade down theories probably help in reflecting quality and productivity improvements but why should we be ‘Taxed’ for productivity enhancments?
Kahn’s reason for wanting to state a close to true inflation rate was simple. Prior to the 1970’s corporations used historic accounting for book keeping purposes. Inflation distorts historic accounting and causes managers to make incorrect decisions.
Inflation cost accounting better evinced reality but better yet is replacement cost accounting.
Not trying to be too obtuse here but most analysts have no idea what the REAL returns to a corporation are these days.
I bit of irony but Bear Stearns was the first sell side firms to employ a forensic accountant to help their analysts sell research…
RE: cattle prices and the AARP
Cattle are being slaughtered at a high rate because of feed prices. I know some farmers who plowed their hay meadows to plant winter wheat this year. The cattle cycle runs about 2 years. Expect to pay up up up for your burgers and rib eyes in the coming 18 months.
AARP? The’re a bunch of insurance salesmen. Ma and Pa have been living off of MEW just like the others. The ‘greatest’ generation are still a bit too proud to storm the castle.
One of the more nefarious aspects of these manipulated (or if you prefer recalibrated) inflation numbers is that they allow the government to overstate real growth in GDP. We’ve been in (or close to) a recession for years. Anyone who works for a middle-class wage knows it, the decline in labor force participation shows it, and the manipulated inflation rate is allowing the government to hide it.
Cutting real entitlement spending may have been the reason to restate inflation, but the effect of denying reality ripples through every government statistic. It’s difficult to trust any of them.
Thanks for the great post Barry. Probably the best I’ve ever read.
If you think that the economic situation is serious (as I do), that we need innovative solutions (as I do), do not read Gail Collins OpEd in the NYT today entitled, George Speaks, Badly. It will raise your blood pressure to dangerous levels. seriously, the chance of developing innovative solutions to the most serious economic problem in our times, has to go through some simple minded ideologue. Fat chance for serious change, I say.
Barry,
That’s an interesting post but here’s another take on it.
http://seekingalpha.com/article/45720-how-owner-s-equivalent-rent-duped-the-fed
If OER manipulates shelter costs to stay in a range, as the blogger you linked to states, wouldn’t that be than overstating CPI now? That’s what the author in the link I provided is arguing. He’s throwing OER out and using the Case-Shiller price index as a proxy for home prices.
I’m not saying he’s right or wrong but when people argue that inflation is less or more than the BLS figures, they often use their own methods to manipulate the figure to reach a desired result.
BLS does a poor job capturing what the true costs of shelter are.
OER is flawed, but I cannot tell you what by how much. I can say that when Home prices are rising, OER understates the price increases. When Home prices are falling, they skew the other way.
Indeed, when House prices drop, OER will make CPI higher.
However, given that we don’t know the true baseline cost of shelter is compared to OER, I cannot tell you if it overstates, moves it towards neutral, or understates it. We only know the OER bias reverses — but not the deviation off of true price.
At TBP, we’ve been railing about OER for a long, long time.
Click this!
Jim Rogers has been complaining about the CPI calculations for years. I agree that the falsification of data and the adoption of such false figures leads to suboptimal decisions, which we are now paying for and will for a long time.
I saw a segment on CNBC yesterday
if I heard it right (looked for qualifier)
World Derivatives = 570 Trillion
on
Real World Assets = 50 Trillion (give or take a T)
it does work out to be less than 10%(so its legal right)
but
520 Trillion is a lot of interest moolla to pay
even at 1%
I’m not an investor and don’t have an economic background, so perhaps this explains it, but I think the Iocano article did a horrible job of conveying just exactly how the calculations differ today from 1980. Barry, I hope at some point you could clarify things for the unsophisticated proles like me.
Perverting and distorting the statistics for inflation appears to be leading toward consequence never intended nor foreseen by the Boskin Commission. All of it done in the name of trying to pare off a percentage point or two from SocSec benefits. God, what a disaster we’ve created for ourselves.
I’ve always felt that the most upstanding way of dealing with the CPI adjustments to SocSec is to base it on the real CPI less an adjustment for what the working population is paying as an actual tax rate. So, if the CPI were running at 5% and the effective tax rate were 20%, the net CPI adjustment would be 4% to the SocSec benefits. The purpose of the CPI adjustment should not be to willy-nilly increase the SocSec benefits. The adjustment should be designed to keep the benefits whole relative to the entire population’s standard of living. If the working population should be driven in penury, no reason exists for the retired cohorts to exist in a sheltered enclave. We’re all supposed to be in this together.
“Currently, denial of reality is at the core of our National psyche.”
Marcus Aurelius, not only were you my favorite character in “Gladiator” (I thought Richard Harris did a great job of portraying you), but you have also echoed my exact thoughts. Yes, denial really isn’t just a river in Egypt.
The falsification of economic data is endemic to our instant gratification society, where problems are swept under the rug so that we can fool ourselves into thinking that they don’t exist at all. Instead, our politicians pursue idiotic and reckless policies so they can have sound bites for their reelection campaigns. Our central bank is run by a bunch of bumbling fools who couldn’t find moral hazard with both hands and a flashlight, although they seemingly have no problem finding a printing press.
I could go on and on about the rank incompetence of Bernanke, Bush, Paulson, et al. but I’m sure most of you have heard that song and dance before. Suffice it to say that these clowns are doing their level best to ruin our economy – not on purpose, but simply because they’re too dumb to know any better.
To paraphrase Josh Lyman from “The West Wing”: “I’m so tired of the Fed I could vomit.”
The CPI is old school.
It ignores the changing value of currency and how that influence prices. It implies all prices are controllable, which is not the case any more. It ignores supply and demand effects and implies all increases are ‘inflation’. It ignores the effects of asset inflation except for possibly that rent assumption. It ignores changing behavior as a result of price changes.
Except for the fact that it is the only game in town, it is not very good.
It probably needs to be scrapped and replaced by several different measures, each intended for a different purpose.
One would be for price adjustments for Social Security recipients and the like who need actual living costs measured. Changes in a market basket will do just fine here.
One need to be a measure of controllable vs uncontrollable price increases. The amount of credit in circulation setting forest fires would be a part of this one. Oil is part speculative frenzy, part supply and demand. Perhaps a by product of this measure would allow policy makers to measure and adjust the amount of frenzy credit. This might possibly be tailored to affect ‘bad’ prices inflation vs other items requiring credit. For example, crash oil prices without crashing housing.
This is about more than COLAs for seniors. Actually it has been a brilliant method of transferring wealth from the working / middle class to the investor class. The game was set up to condition people to consider their incomes and wealth relative to inflation, then the rules were changed with little fanfare midstream. What a great con.
“Gasoline at over $5/gal is a very real possibility.”
If that happens along with the rest of The Mess, it won’t matter. We’ll be headed for something far worse than a recession. Try Super Depression on for size.
My family was chosen last week to participate the C.P.I. study for 2 weeks. It’s interesting to see how the gov’t compiles some of these numbers. I spoke with the interviewer at length at our home. Apparently there are 3 month studies, 1 year, etc. The study we are in, just doesnt seem to cut it… 2 weeks is not long enough. We go to Costco or Walmart about every 3-4 weeks, so they might miss our trip, where our bill is easily $300-$500. Its very easy to forget a bill or 2 when you are filling the study out. (luckily my wife is very diligent). Can you imagine maybe some or most, not so dilligent? If anything this is just another reason to think that the Fed’s numbers are lower than reality.
What you see on the Wall Street Journal opinion page are quotes from Obama’s some-time minister from half a decade ago and missives characterizing the TSLF as “not a bailout.” On the tube, Joe Kernan’s sophistic attempts to link Spitzer to Wall Street’s current problems and Larry Kudlow searching for something to replace “the greatest story never told” slogan.
The anomie in financial markets has one, root cause: BR accurately claims “Actions have consequences,” it’s also true that voting has consequences.
“Gasoline at over $5/gal is a very real possibility.”
… and consumer spending skyrockets!
Owner’s Equivalent Rent is indeed not a true measure of the cost of a home, but it is extremely difficult to tease out the investment portion of a house. The fact is, the BLS measure is probably the most accurate gauge for the population. Not everyone owns a home and of those who do only about a 1/4 purchased thier home during the bubble phase. For everyone else their personal rate of inflation for housing was likely similar to the BLS number.
This criticism is interesting, but not to a “real” economist. There is an existing forum for debate, academic journals. However, most people lack the requisite credentials to make a worthwhile addition to the literature.
The BLS and other Government Stat. agencies employ some very smart Economists and Statisticians. The BLS alone employs more economists than any other government agency, including the FED.
The Boskin Commission’s recommendations were not wholly adopted by the BLS, and of those that were some alterations were made. If you want real insight to how price indexes operate I suggest reading the ILO manual and BLS Manual of Methods. If you want to make a truly informed critique having an advanced degree in Econ would help.
A lot of economists in professional associations such as the NFIB freely criticise but rarely make any useful contribution to the literature. Never forget that they have a special interests agenda at heart and are truly biased.
pity the poor suckers who think that TIPS will protect them from weimar ben! and i suppose we should expect an intervention in the dollar at some point, too. so not only is the CPI a lie, and bonds pitifully overpriced, but holding true inflation protection requires a strong constitution. hopefully, foreign debt holders won’t go along with the inflation charade for much longer. or perhaps paul volker will be induced to return to his former post when the sheeple find inflation more objectionable than recession.
Wall Street crashes. The US has another Great Depression. Currency becomes worthless. Treasuries default. Military becomes vulnerable. US soil gets attacked and taken over. Dynasty=over. And we all go home. At least we have the right to bear arms.
‘Atlas shrugged’ 1957 ‘Shanghai shrugged’ 2008
‘Shanghai shrugged’ portrays USA crony capitalism and derivatives that grew into a massive bubble, from about $100 trillion in 2000 to $516 trillion by 2007, as systemically and fatally flawed and a ‘ticking bomb’ that started to go off in blowback stages in early 2008.
Someone please send advance copy to Alan Greenspan.
The macroeconomic picture in this country is not good. Those of us who are old enough, realize that this shatstorm has been developing for more than FORTY years.
Lyndon Johnson’s escalation of the Vietnam War, without paying for it, is often cited as the beginning. But it really doesn’t matter. To blame it on L. Johnson or G. Bush is simplistic. We are all to blame, one way or another. We have become a nation of spoiled children, always clamoring for more.
I feel sorry for younger people (I suspect Cinefoz is one) who seem to have no inkling that the party may well be over. Or, maybe not, maybe this game of living beyond our means can go on a little longer.
But it will certainly end badly and when it does it will come as a big surprise to many, if not most, of our citizens. They’ll be crying for the government to do something, not realizing that the government has been complicit in the whole thing. After all, in a democracy ultimately WE are the government.
I find it interesting the number of posters who discuss social security allowances with regards to the recalculation of the CPI. As someone who is 25 years-old, I wonder where these ideas of strict entitlements come from? The reality of the situation is that while Baby Boomers will lose some wealth, some security, and some prosperity over this economic fallout it is nothing compared to the suffering my generation will endure as a result of pure greed.
– Want to buy a home? Sorry. Prices ballooned out of your price range. Sorry. The market crashed, no credit available to you. Sorry. We are going to bail out these irresponsible homeowners and banks in order to keep our ship afloat.
– Want to keep some of your money? Sorry. We have Social Security entitlements to consider here. Sorry. We have an enormous debt to service due to an irrational war we supported.
– Want a secure retirement yourself? I hope you have a 401K.
Barry, I would love for you to consider this specific area. How does the current situation bode for my generation? Am I wrong in my above assumptions? If so, please advise.
“Denying reality, falsifying data, gaming the numbers, cooking the books, making believe inflation is more modest than it really is — has real world, unintended consequences.”
what makes you think they’re unintended?
i’m incredulous at the level of credence that remains in this country after 7 years of neo-fascist (Corporate/Gov.)rule.
“Today’s inflation report suggest that inflation remains in check”…and my mind drifts to WWII Germany or the Soviet Union, only with soothing American accents for the comfortable recital of our daily propaganda.
(“The surge is working” –“Growing american exports will save us as the dollar tanks etc.–“Rumors (not bad bets at hi leverage) brought down Bear Stearns in 24 hours”)
At this point, I’m amazed at the acceptance of the “FED will save us with massive rate cuts/They NEED to cut rates and increase LIQUIDITY!!” meme.
I’ve never seen such levels of propaganda in my lifetime (50 y.o.) but who would have thought the country could have been brought so low by such men, these corporate ticks and Vampires and their cheezy political enablers.
Chart would be even better if you used weights from say 1909. And included cost of a mint condition model T and a Honus Wagner rookie card.
Fixed weight indexes always show higher inflation than updating the weights, but doesn’t necessarily mean they’re more accurate.
Measuring inflation is tricky. Doesn’t mean there’s a conspiracy.
shadow stats? LOL
http://www.shadowstats.com/imgs/sgs-gdp.gif
1990-2000 was 1% GDP growth, right? SURE!
Bimadene,
I’ll sum up my investment advice to you in two words……Marry Well.
Today’s Fed actions led me to further think about the current state of our economic system. I have gone over in my mind numerous time about one fundamental question. Under what kind of system are we living? Is it Capitalism, Totalitarianism, Fascism, Communism or Socialism? Today’s action provides the most direct evidence that our system has devolved back to FEUDALISM, or FEDALISM as it could be more aptly called today. This remarkable act of bailing out one investment bank so that their derivatives wouldn’t have to be marked to market proves the oligarchical nature of our society. The Lords of Wall Street are under the protectarate of the FEDal system. We the fifes must go about our daily lives and hand over increasingly large sums of our hard earned “money” to ensure the “stability of the markets”. What bonus should Mr. Schwartz receive from the taxpayers largesse? As the new Sheriff of Nottingham, Ben Bernanke, and his sidekick, Hank Paulson, go about their daily adventures in destruction of our savings by debasing our currency, we the fifes can only look upon these actions with disbelief. This is a supposed to be a democracy, yet all these decision take place behind closed door under dubious circumstances and have unknown future consequences. This has gone far enough. We should demand the immediate resignation of Ben Bernanke and Hank Paulson, and start having some transparency in our markets. These ridiculous anti-Capitalism, anti-competitive, anti-free market, Save our Crony friends at any cost policies MUST STOP! Robin Hood, where are you?
Today’s Fed actions led me to further think about the current state of our economic system. I have gone over in my mind numerous time about one fundamental question. Under what kind of system are we living? Is it Capitalism, Totalitarianism, Fascism, Communism or Socialism? Today’s action provides the most direct evidence that our system has devolved back to FEUDALISM, or FEDALISM as it could be more aptly called today. This remarkable act of bailing out one investment bank so that their derivatives wouldn’t have to be marked to market proves the oligarchical nature of our society. The Lords of Wall Street are under the protectarate of the FEDal system. We the fifes must go about our daily lives and hand over increasingly large sums of our hard earned “money” to ensure the “stability of the markets”. What bonus should Mr. Schwartz receive from the taxpayers largesse? As the new Sheriff of Nottingham, Ben Bernanke, and his sidekick, Hank Paulson, go about their daily adventures in destruction of our savings by debasing our currency, we the fifes can only look upon these actions with disbelief. This is a supposed to be a democracy, yet all these decision take place behind closed door under dubious circumstances and have unknown future consequences. This has gone far enough. We should demand the immediate resignation of Ben Bernanke and Hank Paulson, and start having some transparency in our markets. These ridiculous anti-Capitalism, anti-competitive, anti-free market, Save our Crony friends at any cost policies MUST STOP! Robin Hood, where are you?
Bimadene,
Try saving part of what you earn and not living maxed out on credit. Pay cash for as much as you can. Buy a smaller house and not a keep up with the Jone’s monster. Try to live on one salary and save the other. Forever. Learn to cook and shop. Don’t drop thousands on vanity vacations.
Then, when you are 50, you will feel as if you own the world.
Otherwise, you will be a pauper who needs government socialism to get by as you get older. And I damn well won’t give any of my stash of cash to you.
When consumer spending now that borrowing is out of reach, reveals a sharp drop attribute it to understated inflation. That is, economists who follow the official inflation numbers will be surprised how sharp discretionary consumer spending falls. Then add the effects of increased unemployment, and you get an even sharper drop.
The Kudlow’s of the world will scream for more tax breaks for the wealthy, but the wealthy and corporations are not going to compensate for the core consumer who is under water. This is the end of trickle down.
A couple of points. I dont see housing as an everyday purchase so I wonder about its inclusion in the cpi. Second BR is not a conspiracy wingnut, so you’ll have to do your ranting and raving in front of the mirror please. Third on the WSJ/Immelt thing its pretty clear that Immelt is smarter, more responsible to his shareholders and a better world citizen than George Bush.
“We have the right to bear arms”
You mean like we have a right to privacy?
Bimadene
You need to realize that you are a citizen of a dying empire. However your generation has a chance to do better than the Baby Boomers who will suffer greatly.
The US currently resembles the USSR in the late 80s, with an ossified, entrenched political/military/industrial elite that has stripped the economy for personal gain. Now that top heavy, lezze faire militaristic system is becoming unstable. How ironic that the US, like the USSR will ultimately fail due to the cost of military madness and the quest for empire.
The promises that have been made to the Boomers, such as Social Security and Medicare cannot be met. We will resemble the pathetic pensioners of the collapsed USSR. Your generation, although dealt a weak hand, will at least has the time to plan ahead and try to secure your future. Good luck.
Carmen said, “This is the end of trickle down.”
Big problem is that it is also the beginning of trickle up.
John Mauldin showed a chart of M1 data (Maybe M2 or peceived M3, I cant remember what they all stand for) a few weeks ago. He explained that the fed has not increased the total amount of money in the economy. They have only been selling bonds. Which has convinced him that demand is the over all drive in commodities, not inflation. Anyone else convinced that this argument is true?
Has anyone else noticed how uncharacteristically quiet Greenspan has been this last week?
Sean wrote, “They have only been selling bonds. Which has convinced him that demand is the over all drive in commodities, not inflation.”
There could be made an argument that recent instability has moved commodities into the realm of currency – a valued commodity is always exhangeable, i.e., not so much a demand for commodities as an unwillingness to hold paper currency.
I feel I must stick up for Bimadene a bit. In the interest of full disclosure, I’m 34, so I guess that means I’m part of the generation about to screwed. Having said that, I trade actively and am not worried about my own financial security. I’m confident that I’ll be OK.
However, there is some credence to the argument that future generations have gotten the shaft. While I would be one of the first to argue that my generation is as addicted to credit as any and have been very fiscally irresponsible, I’d also argue that we haven’t been handed over the most fiscally sound economy. However, I’m not ready to blame the boomers and any group of average Americans.
I’d say that the fault lies with our government, the Fed and their incestuous relationship with Wall Street. It is crony capitalism at its finest and it is destroying the fabric of this country. The true shame of it is that future generations will pay for this, whether it is my generation or the generation of our children.
All of us live in what is supposedly the greatest capitalist society in the world, but when the layers are peeled back, the ugly truth is revealed. I wonder if my children will live in a country which actually has a free market, and not the sad imitation that currently passes for one.
Bimadene, I’d like to feel sorry for you, but I just can’t. You can blame the Boomers all you want, but consider a couple of things.
First, most of the Boomers graduated into an economy which was being whipsawed by price and supply variations in energy from 1973 to 1982. You haven’t yet had to wait out in line in the morning twilight to buy your allowed ten gallons of gasoline. Only on odd and even days.
Then, of course, we had the political uncertainty for two years, which allowed the Fed to play all sorts of games leading up to the great stagflation and malaise of the late 1970s and early 1980s. Just wait until we get a “misery index” in the mid-twenties as we had in 1980 and 1981. You’ll love it.
That was followed by St. Ronnie Ray-gun’s ascendancy and the first destruction of the US dollar (we haven’t touched the lows against the yen we saw then). Plus, Greenspan pushed through the changes in paying for Social Security in which the Boomers would pay for the Greatest Generation AND themselves, because they knew the cohorts following the Boomers would be too small. So, the Boomers have been getting a double dose of BOHICA for the last twenty years and now we’ve got damned little time to adjust for the total hash that the Greatest Generation’s policies have left us in. You at least have the benefit of some time to plan and adjust.
Did I mention that the leadership of corporate America decided to adopt the operating philosophy of “Neutron” Jack Welch, may his name be blessed. Go talk to the folks in the river valleys of the Midwest about what happened between 1985 and 1995. The building remained but all of the people were gone. We’re just seeing the final endgame of that philosophy playing out. You should just be prepared to turn out the lights when you leave.
Dear Cinefoz,
I appreciate your “advice”, lucky for me (and you) I happen to live by those rules already. Think about it — if I am 25 years-old and posting on this blog, I may have a my own financial house in order. (Though if the past year have taught us anything it is that presuming such things is stupid.) My concerns reside more on the macro-economic side of the life.
Barry, methinks you and others calling for letting financial insolvencies play out in proper free-market, Darwinian fashion may underestimate the domino effect, and more importantly truly believe that you yourself are somehow insulated from the fallout. There seems to be an assumption in this “stop denying reality & let things play out” sentiment that you know what reality is, and how events sans bailout would unfold. There is a premise there that there exists a solid foundation supporting our systems, that everything above could be burned down to, but not thru. That is very presumptuous IMHO. In a country with 1 out of 100 of its citizens already behind bars, who’s to say how well the “rule of law” functions post a major economic FUBAR…
Rock on Barry.
Here’s a little course for the new initiates.
http://www.youtube.com/watch?v=0_8Zq_iWuFg
This is hotter than hot and a MUST READ for both long or short.
Check this out guys:
http://www.reuters.com/article/ousiv/idUSN1546284420080315
Pay attention to who’s meeting the president monday morning.
Here’s the clip.
“The working group is led by U.S. Treasury Secretary Henry Paulson and also includes Federal Reserve Chairman Ben Bernanke as well as the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.”
Now, who knows the working name of this particular group? I bet not many know this.
Who kept the market S&P @ 1280 Friday buy buying hundreds of millions of shares across many markets.
TADA! The Plunge Protection Team.
Yes, the Plunge Protection Team is meeting the President Monday morning!
Don’t believe it. Check Wikipedia:
http://en.wikipedia.org/wiki/Plunge_Protection_Team
All these players. 100% of the plunge protection team.
To jojo and others re: denial and credulity of the public
Here is an interesting link:
http://www.humorwriters.org/startlingstats.html
A quick excerpt:
1/3 of high school graduates never read another book for the rest of their lives.
42 percent of college graduates never read another book after college.
80 percent of U.S. families did not buy or read a book last year.
70 percent of U.S. adults have not been in a bookstore in the last five years.
Barry – Give credit to a blogger who calls himself “Harm”, over at Calculated Risk. He writes: “It’s really quite simple, people. When the current fomulation of “core CPI” starts to rise above the Fed’s “comfort zone”, they just hedonically adjust it by dropping a radiply inflating commodity or two (housing, energy, food education, etc.) and/or adjust for new “quality improvements” in the existing basket of goods.”
“The core CPI will ALWAYS hover around a constant 2%, no matter what it takes. If that means only measuring big-screen TVs and Chinese lawn furniture, so be it”.
Barry, without trying to sound too damn obsequeious, give youself a gold star for this one. For two (2) reasons. One, for keeping the issue of patently phony statistics on the front burner & in the national discourse. And, two, for being prescient enough to realize that this sort of “clever by half” goverance will in long term lead to disaster.
I have to say I find Cinefoz comment quite revealing. The notion that everyone could, and should, be completely independent of everyone else is fine in theory. But what happens when people in spite of this choose to band together? Just as a winning sports team, or an army platoon working together achive more than the sum of it’s parts, people who co-operate will gain an advantage versus anyone who doesn’t.
Thus, it becomes logical to “divide and conquer”. While the lone rangers squabble amongst themselves, guys like GW.B and Guliani get to the top by working the system. Ergo: Socialism for the connected (and, most probably, rich)!
So, let’s assume that Shadow Stats is right and its re-formulated CPI is correct.
Inflation was at just about the same level in 2005 and again in 2006 as it is now.
Q: So why didn’t that high level of inflation crash the economy long before now?
And this follow-up: How did the economy ever recover from the last recession when “actual” inflation was so much higher than “official” inflation?
If it’s because everyone was effectively deceived by the “official” inflation rate, why shouldn’t that trick continue to work? If it’s because Shadow Stats’ re-formulated CPI doesn’t actually reflect real-world inflation, why shouldn’t official CPI-U continue to work?
Sebastian
Bimadene –
Be prepared to move back in with your boomer parents. (As I suspect my 23-year-old will have to do with the way things are going.)
Get out and vote.
“I wonder where these ideas of strict entitlements come from?” From 25% unemployment, and what the hell do we do with the old people so young people can get in the workforce, among other things.
Don’t expect much from buy and hold investing for a few years. The Dow touched 1000 in ’68; closed above it in ’72 and did nothing until finally cracking 1000 for good in ’82. Twelve years of pain brought on by idiot politicians (Johnson/Nixon) who started a senseless war and increased gov’t spending (guns and butter stuff). Sound familiar? At least they only started one war.
Your generation needs to think about what kind of capitalism is best for society. Hopefully you’ll understand that current notions of “free-market” capitalism are flawed and led us to this mess. They will lead to our demise if not changed.
My concerns reside more on the macro-economic side of the life.
Posted by: Bimadene | Mar 15, 2008 1:47:15 PM
reply: That’s nice. Unless you are going into public service, worry about yourself. People will disappoint you. They lie. A lot are stupid and lazy. The others will steal if you let them. All will try to appear larger than life and most will be rather pitiful. They will stab you in the back and then laugh at you for letting them do it.
Some people manage to attract only those who travel the high road. Most don’t. If you have clarity of vision and a willing to express it, you will be crucified by people who surround you.
Note how many here don’t preach self reliance. They moan about the government letting them down and spout economic theories that decry how things are deteriorating. These are the losers. Don’t emulate them.
Sorry.
Roubini:
http://www.rgemonitor.com/blog/roubini/249737
So the question is: if Bear Stearns screwed up big time – as it did – with huge leverage, reckless investments, lousy risk management and massive underestimation of liquidity risk why should the US taxpayer bail out this firm and its shareholders? First fully wipe out those shareholders, then fire all the senior management and have the government take over such a bankrupt institution before a penny of public money is wasted in bailing it out. Instead now the use of public money to bail out financial institutions is spreading from banking ones to non banking ones. The Fed should at least give a clear and public explanation of why such extremely exceptional – and almost never used – intervention was justified.
Unless public money is used on a very temporary basis to achieve an orderly wind-down or merger of Bear Stearns this is another case where profits are privatized and losses are socialized. By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.
PrahaPartizan
“I’ve always felt that the most upstanding way of dealing with the CPI adjustments to SocSec is to base it on the real CPI less an adjustment for what the working population is paying as an actual tax rate. So, if the CPI were running at 5% and the effective tax rate were 20%, the net CPI adjustment would be 4% to the SocSec benefits.”
The federal “effective tax rate” of the vast overwhelming majority of the “working population” is about 5%.
.
BuffaloBob,
“The promises that have been made to the Boomers, such as Social Security and Medicare cannot be met.”
Nonsense.
The treasury securities held by the Social Security Trust Fund are and will always be a comparatively small portion of the total federal government debt. By 2015, they will peak at about 14.4 percent of GDP, whereas the interest on the debt currently held by individuals and corporations is more than triple the burden that the government bears.
Medicare’s singular problem is that it is purchasing medical care from a failed private-sector healthcare system.
.
Barry,
Thanks for bringing that 1980 versus 2008 chart before this group. Many here have benefited from the gamed currency and many have been victimized by it.
I’m a boomer and I’ve been there on both sides of the economy. To people like Bimadene I have some advice: Think of all human economic activity as a race to achieve a comfortable position on a Maslow’s hierachy of human needs and wants. For me it is easiest to picture where I’m at and where I want to go by the “Treadmill Mountain” metaphor. Imagine several treadmills stacked one on top of the other. Each treadmill represents a position in some life need or want. Since all the treadmills are stacked, the most important one is the bottom one. Name each treadmill and you’ll begin to see reality.
Measuring inflation is tricky. Doesn’t mean there’s a conspiracy.
Posted by: curmudgeonly troll | Mar 15, 2008 12:40:21 PM
___________
Balancing anything is tricky, but propping-up is not the same as balancing, is it?
When the numbers are fudged to meet a pre-determined outcome, selling the numbers becomes the tricky part. You can’t do so in a vacuum – you have to have others willing to go along. This is the classic definition of a conspiracy.
Let me ask you, curmudgeonly troll, if you know the numbers are false and I know the numbers are false, yet the “official” source of the numbers insists they’re accurate, and that they are being used to make policy decisions, whom will you trust, the officials or your own lying eyes?
Denial Ain’t Just A River In Egypt
Barton Biggs:
Biggs, a former Morgan Stanley strategist who now runs the $1.5 billion hedge fund Traxis Partners LLC, said stock markets from Germany to Hong Kong may bottom out soon after tumbling this year.
BLOOMBERG LINK
.
I’m beginning to think Cinefoz works for the Bush Administration.
“…Note how many here don’t preach self reliance. They moan about the government letting them down and spout economic theories that decry how things are deteriorating…”
As Cinefoz mints his own money (along with generating his own private weather and gravity), he is not subject to the same pressures we feel when the government “lets us down” by debasing our currency.
“…People will disappoint you. They lie. A lot are stupid and lazy. The others will steal if you let them. All will try to appear larger than life and most will be rather pitiful. They will stab you in the back and then laugh at you for letting them do it.
Some people manage to attract only those who travel the high road. Most don’t. If you have clarity of vision and a willing to express it, you will be crucified by people who surround you…”
The wailings of the victimized.
Ok GOLD AND OIL AND COMMODITIES are putting a good looking top here.Stocks I am going to be very bullish as we take out the lows in SPY.Mr Market giving another opportunity.Luv it.
I dunno, Marcus Aurelius, is there a law that says I have to trust somebody? The current weights are bogus. The old weights are bogus. The quality adjustment is bogus, not having a quality adjustment is bogus when you get more for the same price. You pays your money and you takes your chances.
Nobody can implicate me in their own degradation, as you yourself said, back in the day…
Bidamene,
To quote Eclectic’s play on the “pinching pennies” metaphor: “squeeze the (buffalo) nickel until the buffalo sh1ts.”
Do a good job at work, live beneath your means, convince those around you to do the same, pay attention to politics, and help elect competent, honest people. (The cost of electing a jackass very much affects your bottom line.) If you see a business opportunity, work on it on your spare time instead of sitting in front of the tube.
And if you’re going to steal, steal big and make sure it’s all legal. (I have not gone this route. But, it seems to be the most lucrative.)
Dollar has nothing to do with interest rates. Dollar has been going down for 5 years even as we were raising the interest rate.
This argument that lower fed rates lower the dollar is without merit.
“…People will disappoint you. They lie. A lot are stupid and lazy. The others will steal if you let them. All will try to appear larger than life and most will be rather pitiful. They will stab you in the back and then laugh at you for letting them do it.”
-Cinefoz
“The wailings of the victimized.”
-Marcus Aurelius
Indeed. Hasn’t it been said that a neo-con is a communist mugged by reality? World’s a shitty place, and to retrench like this into cynism and paranoia is pretty sad. But somehow telling. In the end we all do what we can to stay sane(-ish).
Can someone recommend an alternative to Briefing.com? I am ready to cancel my subscription after the Page One article from yesterday that was titled “Excellent Inflation News”. I am looking for the news feed and market technical analysis portions of Briefing.com, not the cheerleading that passes for economic analysis.
Keith
Bespoke
http://bespokeinvest.typepad.com/
Seeking Alpha
http://seekingalpha.com/
VJ
I have no doubt that the Government will continue to send out checks, but I question their future value considering inflation,if we understate COLAs (cost of living adjustments) for, say, the next 20 years. I am just hoping my SS payment covers my Medicare deductible.
VJ posted on 15Mar2008 at 2:44:42 PM:
“The federal “effective tax rate” of the vast overwhelming majority of the “working population” is about 5%.”
That may be true, but it doesn’t address the point I was making. COLAs for SocSec benefits should reflect the effective increase in earnings which the overall society has seen. Otherwise, SocSec benefits recipients benefit from COLA adjustments relative to other members of society. This is a separate discussion from whether SocSec benefits are too low or too high.
For now, we’ve opted to suppress SocSec benefits increases through a sleazy, back-handed method which has polluted the rest of our decision-making stream. We’re making bad decisions because the data is suspect. Why wouldn’t a transparent process be more acceptable?
Here’s the link for the bls report in every detail.
http://www.bls.gov/news.release/pdf/cpi.pdf
According to the report, durables make a negative contribution to the inflation reading, with a relative importance of 10, while food is 15.
Marcus Aurelius wrote, “…the same pressures we feel when the government ‘lets us down’ by debasing our currency.”
Actually, there isn’t a mechanism to “debase” a debt-currency. What happens to this type currency is doubt about the collateral which backs it – the debt – which causes holders to flee the currency and also to refuse to support it without substantial premium. So far, we have not seen the second aspect, i.e., refusal to support without premium. Treasuries are still considered ultra safe and the risk-abhorent entities are fleeing to that safe haven.
What appears to me to be happening is better classified a “capital squeeze”, as capital is being redirected from assets perceived as too high-risk into a narrowed channel of investments.
This is what is driving pricing imbalances, as commodities and bond prices rise while securities prices and housing prices fall.
buffalo bob – Dont mistake me for Clara Bell. I didnt buy the domino theory and my BS meter as well as my agnostic market approach is alive and well. Heres a shout out to Clarence Curtis Owsley and Warren Buffet’s recent long piece at beearly.com.
cinefoz – Our entire “science” of modern economic policy theory is old school, like two grand dames sipping tea and sniffing Redbook perfume samplers, with a bilious elephant standing quietly in the anteroom, farting up a smoggy day in Beijing.
“Edith, I don’t like this one, it smells like damp hay and my old pickle crock.”
“Oh, you’re right, Ethel, not very flowery at all, is it? Here, try the Cozcot musk.”
What’s to keep China, India, Saudi and Russia from letting their US Treasuries mature, putting them into commodities futures in great whooping buy-on-dips, supplemented with US$ windfall profits
from their last oil trades, meanwhile toppling the traders and pension funds’ momentum play scrum pile with carefully worded press releases about production cuts, going out high on the next peak?
Whipsawing the tail of the tiger.
They’re all martial economies with huge
strategic investment plays in commodities,
tic by tic, lighting in a bottle chasing
a rainbow around the globe at 1300mph.
Back in Freidman’s day, all they had was a
tickertape, for cripes’s sake, and were still doing psychotherapy on a chaise lounge. So now we’re stuck with horse and buggy economic policy theory, in a global market running like a MiG-31 on SAM-e.
Did you listen to those dolts at Davos?!
Have you read a recent Fed transcript?!
But it’s like Spitzer, they too think they can get away with it.
So, let’s assume that Shadow Stats is right and its re-formulated CPI is correct.
Inflation was at just about the same level in 2005 and again in 2006 as it is now.
Q: So why didn’t that high level of inflation crash the economy long before now?
And this follow-up: How did the economy ever recover from the last recession when “actual” inflation was so much higher than “official” inflation?
If it’s because everyone was effectively deceived by the “official” inflation rate, why shouldn’t that trick continue to work? If it’s because Shadow Stats’ re-formulated CPI doesn’t actually reflect real-world inflation, why shouldn’t official CPI-U continue to work?
Sebastian
1. It’s not about crashing the economy. Even when your economy is running Nigeria levels of inflation it doesn’t crash it flat out, it just makes it a terrible place to live. The only thing that will “crash” your economy is Weimar style inflation in combination with a war and even then it’s more a symptom than a cause.
2. People can be tricked for quite a while about the “real” inflation number and that will directly affect their habits. Eventually, though, when the shit hits the fan and people start looking around things like this start to hit the popular consciousness which, again, also has a real effect. It’s not a joke that “inflation expectations” have a real effect.
Shadowstats has been online for years. Alot of us reading this blog have been arguing for years that inflation statistics were improperly calculated and citing Shadowstats and some other sites that re-constituted M3 as part of our evidence. The fact that this idea is hitting the mainstream only goes to show that a. said people were right and b. if it’s hitting the mainstream now, after years of neglect, just goes to show you that it’s been in existence for years.
The question is not if it will crash the US economy–it can’t, we’re the superpower–it’s if you will lose money or make money betting on it… or not betting on it, as most people tend to do.
Although I think official inflation data is distorted, that provided by shadow statistics is suspicious if you see that both inflation indexes, real and fake, are identical unlees a factoring(both lines in the picture are the same , I mean pararell)
No way inflation was as high as the shadow stats people claim or there would have been no economic growth in the last several years and unemployment wouldn’t have been as low as it was etc.
No way inflation was as high as the shadow stats people claim or there would have been no economic growth in the last several years and unemployment wouldn’t have been as low as it was etc.
Don’t you, though, remember the “jobless recovery”?
Inflation can rise and GDP can decline and the US stock markets can move sideways for a decade at a time. In fact, they’re still sideways since 2000-2001.
Give up the ghost?
I do not trust shadow stats SGS CPI numbers, and based on my own rough calculations suspect real CPI is somewhere between SGS and BLS, which seems to be roughly what he calls pre-Clinton Methodolgy which is not reported in his calculator (he says pre-Clinton 1990 methodology is 7.3% for February and that sounds about right)
I heard that the Fed starts each meeting with BLS stat jokes. I don’t believe Sir Bubbles or Helicopter Ben ever made a decision based on the CPI we get fed, but use it to justify what they are doing, and they may have their own set of numbers (might be classified). Thats why they raised interest rates when CPI was telling us there was no significant inflation.
Anyways, what is the effect of understating CPI on the economy. Well, we have 4 economies, A) one is the economy which produces stuff of value and hires engineers and creates good paying jobs for blue collar workers, B) the non-financial service economy, whose jobs include handling bed pans and serving fries, and greeting you at Wal-Mart, C) Big Government and D) the bubble economy, which creates money out of thin air and converts it to debt, and 412 trillion in derivate bets over the last 6 years, not to mention sub-primes and other bubbles, health care insurance, etc.
Much of our GDP growth has been in C) due to defense and homeland security spending and D) which has been overstated as a result of understating inflation and the housing bubble.
A good chunk of the A) economy has been moved away along with good paying jobs. The B) economy is booming, but the jobs created for the most part do not provide a living wage and lacks HC insurance.
There is actually another economy I forgot, E) which is the retired folks economy, people living on fixed incomes and who rely on CD interest rates exceeding inflation and COLA’s. This is a growing population.
In DC and Wall Street and places like that in the “C-D” economy, life might be good, at least for the higher level employees. We are a pretty big country though, and just because you get some local sun-shine, don’t expect the sun is shining everywhere.
Here is where understating inflation is killing our economy though. It has for 15 years suppressed wages/social security payments and household incomes from wages and CD’s, and lowered the average Americans standard of living by deflating real income. This forced them to assume more debt to MAINTAIN their living standards, and so even with low interest rates they paid more interest to the delight of the D) economy, since they borrowed more.
So those working in the “A-B-E” economy get hit hard by understating CPI.
Now the credit crunch will end that, and it is going to get ugly, since our GDP growth has essentially relied on the fleas (D’s)being able to bite the dog, and they done killed the dog. May good old Consumer RIP. She was dumb, but loyal to the end.
Now the fleas have a problem. Some of the bigger ones will get get bailed out by the Fed and get on a plane to London, Shanghai or the Cayman Islands to search for more food. Those left behind might go hungry, but might pick on old Consumers bones a bit to survive.
As for Oil and Gold, Cheney is in the Middle East, Bush has called for a PPT meeting Monday, the Fed is poised to cut. Oil and Gold with either go up or down dramatically. Free advice so go flip a coin. But when MSM is selling Gold, you have to worry that the Gold and Oil Bugs are set to be crushed, since they tango together.
>> Indeed. Hasn’t it been said that a neo-con is a communist mugged by reality?
No, to my recollection, that has not been said. Ever. It’s a very “surprising” statement. :-)
Conservatives and liberals alike fought communism. And, within their ranks, you can find people with a good grasp of reality. In contrast, neocons seem to have no sense of reality. To repeat, the neocons, that is, the people who in 1999 brought you the Project for a New American Century, seem to have no grasp of reality.
I’d sooner accept that the moon is made of cheese.
Bimadene,
“How does the current situation bode for my generation? Am I wrong in my above assumptions? If so, please advise.”
I know that you asked Barry, but here’s some unsolicited advice from a 38-year old.
1) Stop bitching. And please, I don’t mean that in a bad way. I bitch all of the time, and it does no good, so learn from my mistake and save yourself the trouble. Each generation thinks that they’re unique in that they’ve been handed a shit sandwich by the prior generation.
2) Your generation may actually benefit immensely from what is going on right now. Your future will entail a complete switch to renewable energy sources, along with the stability and wealth creation associated with it. Furthermore, there will be an increased call for proper regulation of the markets and industry, as well as better financial stewardship of our government. In other words, better that things deteriorate now then later. I see the future US modeling itself more after the EU in terms of public investment, and that’s not a bad thing. It’s clear that our current way of governing is not the correct path.
3) Finally, invest in yourself instead of others. There are way too many “investors” in this country and not enough people that actually create real wealth. Become an expert in something that actually produces something of value, and invest in you. Being only a passive investor with no other skills will turn you into a sad, little person whose life revolves around money.
BubbaloBob,
“I have no doubt that the Government will continue to send out checks, but I question their future value considering inflation,if we understate COLAs (cost of living adjustments) for, say, the next 20 years.”
Although I certainly have concerns about the general understatement of the CPI, you may have overlooked the fact that Social Security benefits, in addition to being adjusted by the CPI, are also adjusted for wage growth.
As an example, even if one utilizes the ridiculous assumptions adopted by the current Social Security trustees, that after the trust fund is depleted in 2052, there will only be enough revenue collected to provide 73 percent of promised benefits, those new future beneficiaries would still receive more, in inflation-adjusted dollars, than today’s beneficiaries do.
.
PrahaPartizan,
“That may be true, but it doesn’t address the point I was making.”
I wasn’t attempting to address your other point. I merely made note that your example of an effective tax rate was off by 400%, which has a tendency to skew resulting assumptions.
“COLAs for SocSec benefits should reflect the effective increase in earnings which the overall society has seen.”
As I related in the post previous to this, Social Security benefits are also adjusted for wage growth.
“For now, we’ve opted to suppress SocSec benefits increases through a sleazy, back-handed method which has polluted the rest of our decision-making stream. We’re making bad decisions because the data is suspect. Why wouldn’t a transparent process be more acceptable?”
Quite.
.
Nice article. Why a comparison of 2008 to 1980. Based on historical Fed funds trends I’d offer 1973~2006, 1974~2007, 1975~2008. This aligns better the vietnam era spending with iraq war spending. Both prime causes of dollar decline. Fall of 2006 saw the first major oil shock $75 barrel oil as in 1973. This analogy would suggest that late 2008 t0 2009 might see lower inflation amid a recession as in late 75 to 76. Gold in 2011-2013 at 10x 2006 prices or about $6000 per ounce. Appreciate your comments.
The almost 5% decline in the CRB index and flight to safety US Treasury buying, has coincided with a sharp drop in the implied inflation rate in the 10 yr TIPS. They are right now 2.27% vs 2.46%, the lowest since early Feb.
3.17.08