- Most Americans have been led to believe that the Consumer
Price Index (CPI) actually measures, from one year to the next, the "cost
of maintaining a constant standard of living" as the prices for goods
we purchase increase. Indeed, we are foolish enough to believe that the
index is an accurate measure of the price increases for the same basket
of goods we buy every year.
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- If this were actually true, the index would show an honest
increase of 3% - 4% in price, there would be no productivity miracle, interest
rates would be much higher, and bond and stock prices would be lower. Of
course, with an election approaching, our elected officials don't want
the CPI to be an honest measure of the cost of maintaining the same standard
of living or quality of life. They want a politically convenient index,
cleverly devised to hardly ever rise at all!
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- What you should find unsettling and fraudulent are the
ways that the CPI is manipulated to ensure there is no inflation, regardless
of how high the prices rise for things we must buy to live. Manipulating
the CPI - specifically because the benefits to the retired on Social Security,
Medicare and Medicaid are tied to it - and making people believe that inflation
is low, will keep the "fraud" of monetary inflation alive. The
government simply can't afford to keep the promises it has made, and it
needs to use this clever accounting fraud. If productivity is really so
high, why isn't government policy pushing through a 10% flat increase in
Social Security benefits so that the retired can get their share of the
productivity miracle? (Maybe the real miracle is robbing them without them
noticing!) By changing the definition of "what inflation is",
our government won't have to pay nearly as much to retirees as they were
anticipating. The implications of defining inflation away are vast, and
the magnitude of the fraud is extraordinary!
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- The primary sources of manipulation are: 1) Making sure
the wrong items are in the index; 2) Taking "hedonics" to ridiculous
extremes; 3) Getting consumers to do more of the work and receive less
services; and, 4) Changing to a Chain Weighted Index.
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- First, it is not a coincidence that the CPI assumes that
everyone in the country rents their home. (Rents have been declining over
the last year in some major cities, such as San Francisco -6%; Denver -4.3%;
and, Atlanta -4.5%). Making sure that the CPI does not pick up the real
cost of housing is critical because the very reason that rents are soft
is that with easy mortgage credit available, former renters are leaving
the rental market and buying houses instead, which has pushed up housing
prices. Over the last four years, housing prices have risen 45%, so how
could the index possibly be kept so low if housing prices were actually
part of the "cost of living"?
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- The drop in rents is very material since the cost of
housing is a full 30% of the CPI. Unfortunately, for those 80 plus million
Americans with incomes tied to the CPI, 69% of households own their home.
So, over two-thirds of Americans are forced to use a Consumer Price Index
that has absolutely no relevance to them! To say the cost of living is
going down for homeowners is just ridiculous! If the CPI was honestly set
to measure the costs associated with owning a home for those 69% (vs. renting),
the index would be rising over 3% a year! Those 80 plus million Americans
who are short-changed include recipients of Social Security, Medicare,
welfare and food stamps, as well as retired military and many private pensions.
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- To take a closer look, my wife and I prepared a monthly
"nut" spreadsheet on our own personal expenses. We own our home
and car outright (so we don't have a mortgage or car payment), but we still
have all the usual expenses, including: Insurance for Health Care, Automobile
and property; electricity; DSL connection; telephone; property taxes; monthly
maintenance; etc. Before we have even purchased a gallon of gas, a piece
of clothing, or a single grocery item, our annual nut amounts to over $25,000
and it is rising around 8 to 10 percent a year. We recommend you do the
same and then compare your "housing cost" to the CPI. You'll
notice that you probably do not live in the world the government describes!
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- Second, the CPI is managed down by arbitrary decisions
made by bureaucrats on the "quality improvements" in goods and
services, pleasantly referred to as "hedonics". When you buy
a computer that has "more storage" or purchase a new car made
with more plastic rather than steel, the bureaucrats at the Bureau of Labor
Statistics, Bureau of Economic Advisors and the Federal Reserve, get all
excited because productivity and deflation can be "defined into existence"
the same way that the Federal Reserve can "print new money out of
thin air". While there are some benefits from quality improvements
in the cost of goods and services, the extent of the "arbitrary hedonic
adjustments" are breathtaking and, alone, are adding 1% to 1.5% of
real Gross Domestic Product (GDP) growth by "magically lowering inflation"
by the same amount. All you need to do is look at the actual number of
dollars spent on "technology equipment" in the GDP. Dollar spending
hardly changes, but "real spending" is rocketing up. Take a look
at the price deflator for tech equipment, falling from 90% to 60% over
the past few years, to realize how arbitrary these hedonic adjustments
are and how devoid the adjustments are of any common sense.
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- Looking forward, the good news is all the attention being
paid to the rising cost of health care, but these costs may prove to be
"embarrassing" in an election year. So much so, that the CPI
is in the midst of a major "make-over" to include all those tremendous
"hedonic improvements" in health care that granny is getting
from her HMO. The government staticitans have entered the world of science
fiction: "Please beam me up Scottie".
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- Third, every time we pull into a gas station in the rain
and have to swipe a credit card and pump our own gas, we remember the old
days when a gas station attendant actually provided service, checked the
oil, and cleaned the windshield free of charge!
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- In my own business, travel reservations are made over
the internet which is convenient but time consuming when researching flights.
For other services, just try and get through to technical support (which
is generally a fee-based service) or speak to a customer service rep; the
whole day could be spent on hold waiting to speak to someone in Bangladore
or Calcutta. Everywhere we look, the consumer is now providing a portion
of the labor in order to receive normal services. Yes, this holds measured
prices down but the downside is the loss of the purchaser's valuable time.
The government masters of the CPI who welcome "hedonics" turn
a "blind eye" to this significant cost phenomenon. Moreover,
we spend an additional 30 minutes a day cleaning ìspam off of our
computers. Not one minute of this lost time shows up as a cost and drain
in productivity.
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- Remember, "Only the good stuff counts." Do
you honestly think the time you spend delayed in traffic, on a train, or
on an airplane, would be calculated in the CPI? What about the extra hour
we get to spend at the security gate at the airport? What does that do
for your "productivity"? Isn't that a real material cost?
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- Fourth, in order to guard against anyone actually seeing
inflation, the Bureau of Labor Statistics, at the Federal Reserve's urging,
wants to use an "Expenditure/Chain-Weighted Index." This price
weighting idea works something like this: If you consume a very small amount
of something and its price goes up a lot, it will affect the CPI very little
because it has a very small "Weight in the Index". This, of course,
is correct. What the Federal Reserve and the Bureau of Labor Statistics
want to do next is insidious and should be criminal fraud ñ the
Fed wants the Bureau of Labor Statistics to change the weights as the prices
change. This is the way the Index will be constructed: As the cost of some
items goes up and you can no longer afford to buy them, you are then forced
to use that item less and find a less expensive alternative. Then, the
weight of that expensive item goes down, but the weight of the less expensive
item goes up, resulting in prices that have hardly changed at all! (George
Orwell would simply love this!) Indeed, think about Granny in the kitchen:
She used to buy steak and croissants but the price got so high that she
now has to eat spam and dough balls fried in lard. Since she doesn't buy
steak anymore and now eats spam and uses lard (items she never used to
buy) her cost of living has gone down! (Grannyís weight for steak
is now zero.) Obviously, Granny's standard of living went down when the
price of steak went up. What matters in today's world is not Granny's standard
of living, but her cost of living! Granny's costs need to be kept down
and the way to do that is to keep her CPI down! If Granny receives $400
a month to live on, it is truly convenient to make sure her "cost
of living" stays the same even if surviving on $400 a month means
she freezes in the dark, cancels cable, and eats what her dog eats. Yet,
she should feel good because the CPI tells her that costs haven"t
gone up. The real miracle in America isn"t the productivity miracle;
it"s the never rising Consumer Price Index.
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- The Federal Reserve wants to run an easy money policy
and keep interest rates down; the Treasury wants to short-change social
security recipients and buyers of TIPS and I-Bonds. Fudging the CPI is
the way to go; however, this strategy is intellectually dishonest, morally
fraudulent and will remain quite effective until Americans start looking
at their actual cost of living, or discover one day that what's good for
Rover is good for them.
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- - Richard Benson is president of Specialty Finance Group,
LLC , offering diversified investment banking services.
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- Copyright David W. Tice & Associates LLC 2003
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- http://www.prudentbear.com/archive_comm_article.asp?content_idx=31899
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