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Lies, (Darn) Lies and Government Statistics Print E-mail
General Investing Articles | Written by Dr. Van K Tharp |

Lies, (Darn) Lies and Government Statistics

I think the actual quote goes something like "Lies, Damned Lies, and Statistics"; however, my personal feeling is that government statistics are absolutely the worst. Today, I want to talk about some of the government's economic statistics they use to tell us how the country is doing.

Back in the late 1980s inflation was in double digit figures. Interest rates rose as high as 14%. Basically at this point, our government said, "We never want to see interest rates that high again." We won't do anything fiscally responsible or anything like that. We certainly won't curtail government spending. We certainly won't get rid of the debt. And we certainly will not stop the printing presses. However, we can assure that the government will never again have double digit inflation rates because we'll simply change how we define and determine inflation.

In the 1980s, the government published the CPI (the Consumer Price Index) to determine the level of inflation. For example, according to government statistics (i.e., the worse kind of lies), our CPI in 1982 was 100. (Incidentally, the first lie is that they keep changing the year in which the base is calculated. It used to be 1967 = 100). Anyway, despite that lie, today (as of November 2007) the CPI is about 210. Now do you really believe that the price of things has only doubled since 1982? Wasn't gasoline only a dollar a few years ago? And doesn't the price of energy affect almost everything connected to our economy?

The following data shows the available CPI data since 1913 from the web site, http://inflationdata.com.

Month CPI Index 12 Year Change
January 1913 9.8  
January 1924 17.3 76.5% (11 years)
January 1936 13.8 (real deflation) (20.2%)
January 1948 23.7 71.7%
January 1960 29.3 23.6%
January 1972 41.1 28.7%
January 1982 101.9 149.3%
January 1996 154.4 51.1%
January 2007 202.7 (Nov 07 = 210) 26.4%

The way to make sure we don't have double digit inflation again is to change how we calculate inflation. Elements of the CPI were first introduced in the 1880s, but it wasn't formally calculated until 1921. And, of course, the above table shows data back to 1913. You'd probably be shocked to compare 1921 with now, so there is no comparison. In fact, the CPI wasn't really formally used by the government until after World War II when it was used to adjust auto union contracts for inflation. Later, it was used to adjust social security payments and that was its downfall because the government could not afford to make payments that high so it started to "adjust them."

Originally, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period. When the next period was calculated, usually at the end of the next month, then the new cost of that basket of goods was assumed to be the change in inflation.

But let's look at how we can adjust the basket. Notice how much the basket went up from 1960 to 1972. But at that point, the government said we cannot tolerate such rates of inflation. What can we do? Well, we can adjust how we calculate it. And notice that the last 11 years is the third lowest shown. But that's just because of how its calculated. So what changes could the government make?

First, they could decide that technological changes can be used to reduce the price of the basket. For example, I've bought many computers over the years, and I've usually spent about $2,500 to $3,000. My first, computer was a Kaypro. It was a big metal portable computer. It ran on the CPM operating system, and I believe its memory was 64K. I think we also had big 8 inch floppy disks that were about 80K, so they could hold everything that was in the memory. I wouldn't have been able to start this business or write the Peak Performance Course without that computer. But I replace my personal computer every three or four years, with each one costing about the same. Today my $3000 will buy me a core-dual processor with a 500GB hard drive and about 4 GB of memory. So we've moved from KB to MB to GB … and the local electronic store has 1 TB hard drives now.

How does the CPI handle such technological advances? Well, if your basket of goods has a $3000 computer in it, but it will now do 10 times as much as the one you bought 5 years ago, then you are really only paying $300 for that computer. That's right, technological advances have a deflationary effect on how the CPI is calculated. You still pay the same for the computer, but the CPI goes down. Such concepts were brilliantly added during the Reagan administration.

What else happens to the CPI? Well, government officials in their wisdom said that if prices went up too much, people would buy cheaper things. Thus, if steak increased from $1/lb to $10/lb, then people who could no longer buy steak would buy hamburger instead. That is, because people could do that, the government could now make adjustments to how the CPI was calculated. If something became too expensive because its price went up too much, we'd just put something cheaper in the basket. When this idea was first thought of, it was unconscionable.

However, when Bill Clinton took office, it suddenly became the way to do things. But they really didn't substitute hamburger for steak, instead, they just changed the weighting of each item. For example, if steak was 2% of the basket, the government would simply change the weighting if it got too expensive and make it 1% of the basket. This was the Boskin/Greenspan concept. Wasn't our former Federal Reserve Chairman brilliant? He went from being a strong supporter of a gold standard in his early years to figuring out ways to adjust the CPI so that a gold standard is not necessary. This kind of geometric weighting reduces the CPI by 2.7% each year. So if inflation is reported at 2%, it is really 4.7%, but you don't really know that, right?

The Bush administration has introduced a new measurement called the CPI-U. This makes a further adjustment of around 0.4% to the CPI. Why? Well, it's simply another adjustment to make the figures lower.

According to John Williams, who publishes a shadow statistics web site, traditional inflation rates can be estimated by adding 7.0% to the CPI-U annual growth rate (3.8% +7.0% = 10.8% as of August 2006) or by adding 7.4% to the C-CPI-U rate (3.4% + 7.4% = 10.8% as of August 2006). Graphs of alternate CPI measures can be found as follows. The CPI adjusted solely for the impact of the shift to geometric weighting is shown in the graph on the home page of www.shadowstats.com.

Incidentally, if the government adds a new tax, like an increase of 10 cents to the price of a gallon of gasoline, then this new tax, is subtracted from the CPI. After all, the tax was put there by the government, so even though you have to pay it, they figure that they do not have to account for it in their CPI statistics.

Now if you don't like all of this government manipulation, you could probably figure out the inflation rate indirectly through M3, which directly measures all the new money being pumped into the system. However, several years ago, the government stopped publishing M3. They said it wasn't a very useful statistic and no one really paid attention to it.

So what is the impact of all of this?

  • We are in an inflationary secular bear market. But you are not supposed to know that.
  • Over the last 10 months the official CPI went from 202.7 to 210 for a 3.6% inflation rate.
  • But adjusting back the government statistics, according to John Williams, it is now running over 10%. And that probably seems more like your personal experience of inflation.
  • And based upon the M3 data, our money growth (real inflation) is running at about 15%.

Now all of this has some real impact on another set of government statistics, the GDP. The GDP is the way the government measures growth. When we have two negative quarters of less than zero growth, we are considered to be in a recession.

However, GDP growth is the growth of the economy above the inflation rate. If the government says the GDP is increasing by 2%, while inflation is 3%. It really means that growth was 5%, with a 3% adjustment for inflation. However, what happens when real inflation is running above 10% (or 15% if you want to measure M3)? It really means that the government manipulation of inflation is really masking a massive recession. In fact, according to John Williams, except for one quarter of 2003, we've been in a recession since the secular bear market started in 2000.

I've been using other measurements of inflation in my monthly update because I didn't trust the CPI. However, in the future, I plan to report John William's statistics for the CPI, M3, as well as the CRB index and the price of gold.

Dr. Van K Tharp
TradingEducation.com

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