No Inflation Friday: The government admits its own statistics are phony
September 4, 2015
In an article that first appeared inFortune magazine on December 10, 2001, Warren Buffett penned a great letterabout falling prices:
“When hamburgers go down in price,we sing the ‘Hallelujah Chorus’ in the Buffett household. Whenhamburgers go up in price, we weep. For most people, it’s the same witheverything in life they will be buying-- except stocks. When stocks go down andyou can get more for your money, people don’t like themanymore.”
He’s right. Any rational humanbeing actually LIKES falling prices.
We enjoy getting a great deal, and welike it when our money goes further.
To Buffett’s point, investors area major exception and prefer investing when prices go up, i.e. their money buysless of a high quality asset.
But there’s one more giantexception that Buffett didn’t mention: economists.
Economists quiver in fear at theprospect of falling prices.
They call it ‘deflation’,and it’s a force so dreaded that central bankers have threatened to dropbricks of cash from helicopters in order to prevent it.
Instead, economists prefer INFLATION,i.e. that the things you buy become more expensive.
We can look at official statistics toget a sense of inflation, but these numbers are totally meaningless.
When I was a kid, my father earnedenough money to support his family with a single salary.
We had a house, a car, an occasionalvacation, and we never missed a meal. All on one income.
But those days are long gone. Nowit’s almost obligatory to live in a dual-income household just to makeends meet.
The official statistics never paint thispicture.
They focus on some palatable number,telling us the inflation rate is 2%, and then adjust their computationalmethods to derive that figure.
In fact, the US federal government haschanged the way it calculates inflation at least twenty times since the mid1980s.
And it’s obvious that they have ahuge incentive to do so.
The #1 expense of the federal governmenttoday is the mandatory entitlement programs that are paid out to seniors in theUS-- primarily Social Security.
It’s nearing $1 trillion annuallyand eats up a third of all tax revenue.
The government is required by law toincrease the amount of money paid to Social Security recipients each yearthrough what’s called a COLA, or cost of living adjustment.
Essentially they’re adjusting yourmonthly Social Security payment to keep up with inflation. Or at least, theinflation that they’re willing to admit.
This is where they have a huge incentiveto fudge the numbers.
If the real rate of inflation is 5%, butthey only give a 2% COLA, the government saves 3%. That’s almost $30billion.
(Ironically this is 3x the size of theannual budget for the Department of Labor, which is responsible for calculatingthe inflation statistics.)
But by doing this the government iseffectively stealing from seniors.
There’s actually been a new lawproposed in Congress to prevent this from happening anymore.
It’s known as HR 3074, and it waswritten “for the purpose of establishing an accurate Social SecurityCOLA. . .”
So even the government admits that theirinflation numbers are a bunch of baloney.
But sadly, according to the legislativewatchdog GovTrack.us, this bill has a 0% chance of being passed. So Iwouldn’t expect a solution anytime soon.
In fact, this problem will likely getworse given how transfixed economists are on the deflation threat.
Their concern is that the Chineseeconomic slowdown and currency devaluation will cause a wave of falling pricesaround the world.
But there’s a very curious effectat work here that most people forget:
It’s entirely possible (and nowvery likely) to have BOTH inflation AND deflation. At the same time.
Assets and investments can fall, whileat the same time the prices of retail goods and services rise.
In other words, the value of yourinvestment portfolio goes down, but your grocery bill goes up.
It’s also important to point outthat not all prices rise and fall equally.
Gas prices may be down from a year agoin the US. But as the recently-released Hotels.com Hotel Price Index shows,hotel prices are up sharply.
Salt Lake City: 8%. Raleigh: 5%.Portland: 9%. Washington DC: 5%. Los Angeles: 8%.
I’ve seen the effects of this dualinflation/deflation phenomenon as I’ve traveled around the world inplaces like Argentina, Greece, and Indonesia.
It is a very real threat. And it may nowbe coming to US shores.
But everyone is focused exclusively onthe deflation side.
You’ll get laughed at in financialcircles if you mention the word ‘inflation’ anymore. It’sbeing completely ignored... even denied.
They’re pretending like half theproblem doesn’t even exist, which is seriously foolish.
Inflation is a long-term disease.Quarter by quarter the numbers may change. But over the long run it’slike a cancer, slowly eating away at your lifestyle.
It’s not a question of either/or.It’s not a debate over inflation VS. deflation. It’s only a matterof WHEN we’ll end up with BOTH. And how well you’re prepared forit.