The inflation lie!

Here we go! Are you excited about the way Obama has shown great leadership and appointed Princeton University professor Alan Krueger to head up the Council of Economic Advisers?

Way to go Obama!

At last you have appointed someone who knows something about economics to your jobs task force. And someone who specializes in labor economics.

Some talking heads have called the choice inspired...and have already started saying that a quick Senate approval is required and if it is held up it is the republicans wanting to destroy the economy etc etc....yada yada yada....excuse me while I snore this round of stupidity...

Anyway....back to Obama's savior on the jobs front. A Princeton Professor? Should we all be humbled in his presence and bow down to worship his greatness and the greatness of the man who had the foresight to appoint such genius?

Not on your damn life.

This man is a moron.

For two years he worked at the Treasury Department on such winning projects as Cash for Clunkers...and the first stimulus package...and other big government jewels that gave away trinkets in the hope of generating job and economic growth. I guess it was the great success of these programs that enticed Krueger back to his Professor role at Princeton...he couldn't hack the real world.

There is no doubt that Obama appointed this jerk because he will do Obama's bidding...he will direct the council toward more big money spending programs to generate jobs...bigger stimulus packages and simply more and more spending. This the how Obama deals with stuff... he throws money at it...and Krueger thinks the same way!

Obama has already planted the seeds by saying he intends to increase short term stimulus spending to be paid for out of long term spending cuts.

Yeah, right. We know he is the Liar-in-Chief...so this should not surprise us one bit.

Speaking of economists and lies, I want to talk a little about statistics (I hope I don't bore you too much)...

Statistics may be boring but they are important to understand what is happening in our economy. One of the most important statistics is the Consumer Price Index (or CPI). IT's importance to you and Obama and Krueger will become apparent as you read the rest of this article.

Tell me something…do you seem to have to spend more when you go to the supermarket for your weekly shop? You think you buy the same amount of product but it seems that everything is more expensive?

Do you stand at the check-out and shake your head as the numbers get bigger and bigger?

You know that you seem to be spending more, but the government keeps telling you that inflation is low…the current rate of inflation as at July 2011 is just 3.6%.

What does that mean? Well…if in July 2010 you spent $100 on groceries, then you would have to spend $103.60 today to buy the exact same items and quantities.

But you and I both know that we are spending more than that for the same things…so how does this happen?

How can the inflation numbers reported by the Bureau of Labor and Statistics not be what we see in our lives?

There is a simple reason….the government lies!!

I will come back to that in a minute…but first I want to show you some tricks that the marketers do to trick you about the real rate of inflation. (In fact the government has followed the marketers in working out how to deceive you, but for different reasons.)

Product manufacturers and marketers know that consumers have what is called price elasticity. That is, they will generally continue to buy a brand they like regardless of price….until the price becomes sufficiently painful to them that will be willing to try another brand.

The trick is in knowing what that price is. In the larger product ranges (cars, large appliances etc) this is known as sticker shock….but the same thing happens with the products you buy in your grocery store.

When the price pressures bring the product close to where the manufacturers think sticker shock will set in, they take some drastic action:-

1). they reduce the SIZE of the product. A 16 ounce jar will reduce to a 12 ounce jar selling for the same price. In some instances they will reduce the size AND the price so the consumer thinks the price has gone down.

Eg. a 16 ounce can of cranberry sauce sold for $1.60 a can (or 10 cents per ounce)

The can size reduced to 12 ounces. If it sold for $1.60 (the same price) it would represent a 33% price increase to 13.3 cents per ounce. If the price was reduced to, say, $1.50 a can you would actually be paying 25% MORE even though you think you are saving 10 cents a can. So be careful out there…the tricks work on unsuspecting buyers.

This technique is often seen with cereals…where the box sizes are increased but the amount of cereal inside decreases. Do not be fooled by this. It is price increases looking like cost reductions. ALWAYS look at the size of the contents, not the size of the packaging.

2) the second technique is pure marketing hype. They will redesign the packaging to emphasize something that was not emphasized in the previous packaging. The size remains the same. The product remains the same. But now they tell you it includes some newfangled anti-oxidant that makes your teeth brighter or your clothes cleaner or your belly smaller. The fact is, that new “thing” was always there in the older product (and if you compared content labels you would find nothing different). What they have done, however, is make you think you are buying a better product and are therefore willing to pay more for it. This simply hides the price increases so you don’t get sticker shock. You are happy to pay a small premium for that "something extra" that helps keep you arteries clean!

3) the third technique is to take the product off the market and relaunch it with a different name and new packaging. This is an expensive option and will only be done when the consumer has refused to buy the product at all…ie. the other tricks have been tried and now the price is simply too high for the consumer. By relaunching the same product with a different name and at a higher price, manufacturers can get maybe a couple more years of life out of that product line before it literally dies.

So, when you do your shopping, watch out for these three marketing tricks. You are probably paying way more than you really thought you were. The fact that you have to replace that cereal more often is not because you are eating more like most people think….it is because you are buying less!

Ok…I know you are asking this ….how does this impact what the government calls inflation, and why do you say the government lies about this?

Let me answer the first part first…

The government measures inflation through what they call the Consumer Price Index (CPI). This index is calculated by the Bureau of Labor and Statistics (BLS). The change in the index over a period of time represents the inflation rate.

The CPI has been regularly reported since 1921 and is  based on a “basket” of consumer products that was a representative sample of the spending habits of consumers. The value of CPI as a measure of inflation started to decrease in 1974 when America left the gold standard and has worsened ever since.

In simple terms the difference in price for the same quantity of the same product becomes the CPI.

I must make note here that the BLS is not fooled by the marketing tricks shown above, so that has no bearing on the calculation.

Now, here is where it gets interesting.

Over time, in an (ahem) attempt to be more accurate, the BLS determined that the CPI should more closely represent the actions of the consumers and their real buying habits; not simply be a reflection of price increases.

So the stupidity begins.

The first thing to happen was the concept of substitution.

Substitution

When a product becomes too expensive, the consumer will often substitute a lower priced product. That makes sense to me, and fits with the marketers knowledge of consumer actions when sticker shock sets in.

So, let’s look at an example.

Let’s assume that fresh wild sockeye salmon was in the basket of goods for CPI purposes. Last year it cost $10 a pound…this year it costs $15 a pound. – a 50% increase.

Let’s also assume that farm raised salmon sold for $8 pound last year and this year is $12 a pound – a 50% increase.

Now, the government looks at the buying patterns of the consumer and finds that at $15 a pound consumers will substitute for the less expensive farm raised fish. Since the less expensive farm raised fish was not previously in the basket, it will be brought in at it’s current price of $12 pound and therefore the CPI calculation shows NO percentage increase.

The fact the fresh fish has increased by 50% becomes irrelevant and will not form a part of the CPI calculation because consumers buying habits have changed. The fact that the changed buying habits were CAUSED by the higher price is totally ignored.

Does this seem like a fair measure of inflation to you?

The second thing they do is look at product improvement.

Product Improvement

This is where the BLS looks at a product to determine if it is the same quality as last years product.

This is easily explained if we look at big screen TV’s.

Let’s assume that the basket included a Visio 55” HD TV at a price of $1500

This year there is also a Visio 55” TV, but it’s price is $1,800, representing a 20% increase in price.

BLS looks at the features to ensure similar quality and finds that this years model can directly access Netflix and various other online tools whereas last years model could not. They arbitrarily apply a value to this new feature, and in this case, let’s assume the value they apply to the convenience of direct access to Netflix is $300.

They then take last year’s price and add $300 to it to bring it to $1,800 which is the same as the current price therefore there is no increase. And yet, when you buy that TV you have to pay $300 more than last years model even if you don’t want that feature because you cannot buy it without that feature.

In my books, that TV has gone up $300 or 20% because that is what I HAVE to pay if I buy a 55” Visio TV.

Doesn’t sound to me that product improvement adjustments truly reflect price increases. What do you think?

So…we have seen how the BLS can manipulate the CPI to keep it as low as possible. If substitution doesn’t work, they can use product changes, or they can use both techniques together to get the CPI as low as possible. In fact the Consumer Price Index is far less akin to inflation as it is to a Cost of Living Calculation. Cost of Living calculations represent the expected costs of a particular socio-economic group based on average buying habits and comparing that with a different group in a geologically different location. This is has nothing to do with inflation but is a tool used to compare spending habits and costs. When the CPI has trended toward Cost of Living it is no longer relevant as a measure of inflation.

And yet it is still used as the basis for a number of government actions.

I said earlier that the government lies to you. And they do!

Some statisticians (true statisticians who do not work for the government) have calculated that the CPI is understated by approximately 7% each year. If this is true, and it certainly "feels" true when I look at my bank account, then the current real inflation rate for 2011 is in the 11% range....and that is also not accurate as it does not reflect increased energy costs.

There are several reasons why it is in the best interests of the government to lie to you about the real inflation rate, and to use these concocted rates:-

1. Social security and other government payments are linked to CPI. The higher the CPI rates, the larger the social security payments become. If the government can identify lower CPI rates, it saves huge amounts of money in social security payments alone. (Of course SS recipients cannot buy as much with the dollars they receive so are being screwed by this.)

2. Gross Domestic Product (GDP) is a measure of economic growth most widely used by economists to predict and discuss the state of the economy. Part of the calculation of GDP uses the CPI to estimate costs that have not been specifically measured and would reduce GDP. So, by reducing CPI, the government is able to increase GDP and claim the economy is actually doing better than it is.

Put another way...the lower CPI is, the higher GDP becomes. The government can manipulate reported economic growth simply by manipulating the CPI.

3. Inflation is the result of too much money chasing too few products…often seen in times of high economic growth. Except, in times of unemployment and economic slow down, it is usually caused by too much money being printed by the government to provide stimulation for the economy. In times of slow economic growth, the government devalues its currency by simply printing more money and circulating it in the economy in the hopes of “kick starting” the economy. The inflation is caused not so much by the product price going up….but by the value of the dollar going down. This is what is happening to your dollars today.

The government wants to HIDE this fact from you so it reports incorrectly low CPI rates using the techniques above.

If everybody actually understood that it was the government’s fault they were paying much more at the store than they used to, a people’s revolt would not be far behind.

The whole concept of CPI tells some terrible stories. Not only is the inflation rate totally understated, the GDP is overstated. Why is this important? Because growth in GDP is what is used as a measure to determine whether we are in growth mode, in a recession, or in a real depression.

If we adjusted GDP for the REAL inflation figures, there is no doubt in my mind that America is in the depths of a real depression...not a recovery as Obama would have you believe, not a recession that some economists would want you to think...and certainly not "looking at the possibility of a double dip recession" crap that pundits talk about. We are in a depression....we have bee in a depression for a long period already and will remain in a depression for a long time yet. When economic growth is only being measured using lies and deceit, then there is definitely a real depression.

Governments continually seek ways to redefine the terminology used  to trick you into believing that hope and change are real. Don't believe the lies.

A country in depression cannot borrow cheap money...so the government hides the facts using the same forms of trickery that a good marketer understands.

There is no need to go into detail about the methods of calculation....all you have to do is look at your bank accounts, your spending habits, your job security, the level of unemployment...and if you are honest, you KNOW we are in a depression.

Now...I would bet that Obama and his minions have no idea how this works. I would bet he has no interest in knowing....but Krueger...that is a totally different story. Krueger knows what is happening and will choose to ignore the truth and in fact will create more lies to deceive the people. He knows that his stimulus packages will do no more than reduce the value of the dollar....but as long as the BLS continues to manipulate the CPI he can cover his tracks and keep the deception going.

So the government does the one thing it can do…it lies.

And this administration is worse than any that came before it!

“He uses statistics as a drunken man uses lamp posts - for support rather than for illumination.” 

……………Andrew Lang

Stupid is as stupid says…

………………….devereaux