We Lie With Statistics: MSM (Inflation)
The Market Ticker ® - Commentary on The Capital Markets
Posted 2012-02-08 07:48
by Karl Denninger
in Editorial
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We Lie With Statistics: MSM (Inflation)
 

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 (and another reason you ought to read it if you haven't already -- look to the right to get your copy); 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.”

smiley

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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User Info We Lie With Statistics: MSM (Inflation) in forum [Market-Ticker]
Mayorquimby
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Hey, next year is the anniversary of the almighty Federal Reserve system. Break out your party hats!

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Gold is theft.
Stuart
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What is interesting about inflation in the modern world is that our leaders choose to have inflation over deflation.

The argument always seems to be a non-starter with people when you tell them it is possible to have zero to minus inflation (a little deflation) and their lives would actually be much better. They would make less "money", but things would cost much less.

I think about those silly commercials where people are carrying around a large number so that they can "retire". It never needed to be this way.
Delapaz
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The Fed has failed at maintaining stable prices. Unless 2-3% core inflation is stable, which of course it isn't. And the Fed actually destroyed the idea of stable housing prices intentionally over the last ten years by creating a RE bubble.

The Fed has failed at maintaining max employment. This is inarguable, by any definition.

Rhetorical question: What were the consequences of failure again for the Fed? If they fail in their mandates do they still get to keep their jobs and charter?


Mayorquimby
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We have to stop talking about all this in any other context other than this one...THIS IS WHAT PEOPLE WANT. So this is what they get!

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They who wish to hurt you, work within the law.
- Morrissey

Gold is theft.
Jwm_in_sb
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Lets not dance around the elephant in the room...the Fed was never really intended, by its true controlling members, to do any of the official public goals of the Fed. Its there to act as a cartel effectively...a. criminal organization from the outset of a smoky room on Jekyll Island almost 100 years ago.
Jwm_in_sb
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No Mayor, its that most don't understand and that is by design.
Rjsasko
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"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."

$3900 a year for a family of four works out to $0.89 per person per meal. Top Ramen & Kool-Aid. I think this number is way unrealistic.
Riceday
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Ever read that beautiful economic treatise "Frog and Toad" ?
To quote Toad...
"Tomorrow! I'll do it all tomorrow!"

The "long-run" argument is justification for doing the opposite today and will also be used tomorrow.
Genesis
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Quote:
$3900 a year for a family of four works out to $0.89 per person per meal. Top Ramen & Kool-Aid. I think this number is way unrealistic.

The average household size in America is ~2.3 people.

365 days in a year is $10.68/day. Divided by 2.3 people is $4.65/day. Stop buying expensive crap and that's quite achievable.

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What part of "shall not be infringed" was unclear?
Iou
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Quote:
The average household size in America is ~2.3 people.

365 days in a year is $10.68/day. Divided by 2.3 people is $4.65/day. Stop buying expensive crap and that's quite achievable.


So you're saying the system over the last 100 years is working?

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"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."- Frédéric Bastiat
Tsk
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Quote:
Motor fuel (for your car) was up 10.3% over the last year. Don't run that number out 45 years. Just don't.


Worth repeating!

Great line!
Genesis
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Iou: Did you actually READ the article or are you trying to see if you can poke a fire ant nest at 7:45 in the morning and survive it?

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I don't care if it makes sense -- only if it makes money. -- Me
Bank (n): See scam, fraud and theft. Eat a bankster -- they're low-carb.
What part of "shall not be infringed" was unclear?
Kiber
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Why do you think the dawler menu at MCD is doing so well...just look at MCD's earnings this AM...duh...
Riceday
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Quote:
Stop buying expensive crap and that's quite achievable.


Bingo. Family of 5 (3 of which are 5 and under)
<$250/month - including all food and toiletries, etc.
Genesis
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Incidentally if you bothered to read the article I said that the CPI is realistic if you have a median family income ($50,000) and a median family size (~2.3 people.)

For the working poor it definitely does not work as food, energy and shelter are monstrously larger as a percentage of expenditure than the CPI assumes, and for the rich they don't give a **** about the 6% food inflation as it's a trivial part of their overall spending profile.

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I don't care if it makes sense -- only if it makes money. -- Me
Bank (n): See scam, fraud and theft. Eat a bankster -- they're low-carb.
What part of "shall not be infringed" was unclear?
Iou
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I read it and agree with you. Just trying to wrap my head around the fact that after a 100 years the system is still working based on the current averages. I would have expected the true numbers to be much worse at this point. Not trying to start anything.

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"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."- Frédéric Bastiat
Delapaz
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Riceday: I know that's achievable because we used to do groceries on $50-60 a week when the kids were little. But now we can barely do groceries for $700/mo. We do however try to eat healthy, with plenty of greens and protein, but still, there is rampant price inflation in groceries and fuel and it is very noticeable. Yeah we could scale back by focusing more on rice/beans, but I do not yet have to sacrifice my health for Bernankes money printing.
Tallystick
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I believe the system is working as it's founders intended.
Iou
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This ^^^

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"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."- Frédéric Bastiat
Blow_off_top
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From a top down approach, these arguments make perfect sense and I completely agree. But looking from the bottom up, in light of the constant refusal of the Fed to stabilize inflation and the MSM constantly lying about it, those families making $50k or less per year need to better align their spending priorities - a shift from "nice to have" like cable tv, iphone, etc to "must have" like food and shelter. Unfortunately, they won't and will be forced to.
Drjerry
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Gen's article should be on every schoolkid's desk.
Mortgageguymn
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http://www.shadowstats.com/inflation_cal....

Room, board, books, tuition & fees at my liberal arts college totaled $5,600 in 1980. It "should" now be $15,000. It's three times that.

Tuition, home prices and medical expenses are up way over official "inflation".

About the only things that are cheaper than the official inflation rate would dictate are microwaves and IBM 286's.
Randy123
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It can't continue, just like medical costs as you have written. Black swan ending to all of this is coming.

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New Normal. Same As The Old Awful.
Bagbalm
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I remember when I was fairly new in the work force President Nixon imposed wage and price controls because the inflation rate was a national emergency.
Interest rates then were somewhere around 4% I recall. They had actually come down a bit, but you know how slow government reacts - once they decided to take control it wouldn't have mattered how far they fell.

But with the 90 day freeze and then imposition of central planning they managed to drive them up to around 12%

I'd also point out Nixon was opposed to controls right up to the time he imposed them.
I could see Obama doing the central planning thing easily - easier than Nixon actually. He just has to be pushed in the corner a little harder than at present. He already has an executive compensation Czar.

Obviously the interest rates can't be taken much lower - but if price inflation gets to the point it can't be covered up they could set prices by decree. You know what happens then - the shelves go empty.
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