CRASH 2008-09 -- first wave

Fed Stats--the deception

Quotes on our banking system: a forgotten struggle
U.S. Monetary Supply--the root of the Crash
Great Depression, causes and parallels--jk
The Second Great Depression--why-jk
Great Depression and the New Deal
Argentina's Collapse
Asian Crash 97--model for U.S. Crash
NEOLIBERALISM, the globalizers
Robber Barons
Fed Stats--the deception
More Debt no FIx--jk
Financialization and the Bubble/CRASH
Class nature of the CRASH--jk
Obama and the Second Great Depression--jk
Nobel Lauret on the Crash--Stiglitz
Second deed solution--jk
Three Crashes--Models
Financial Crisis, a socialist perspective
Fairness Doctrine overturned yields corporate media
Funny Money Solution--more fed debt
Why We Need Regulation of the Market Place
10 to 1, the Credit Expansion
Fed debt--the debt game
WaMu Give Away by Feds
Offshoring and the Auto Industry
Economic summit November 15th
Figures on the CRASH
Pod Cast of CRASH plus much more

from the Shadow government website
link to Shadow government website

The numbers for the CPI is off by at least 125% from what they would be if the 1980 standards were applied--the error is cumulative; viz. that each years gap is compound by the following year.  As of November the CPI for 08 has risen 13%, Bureau list it at 3.8%. 

Assume that the error averages 3% per year (actually it is more), over that period compounded daily $1,000 of goods and service would cost $$2,316 in 2008.  The CPI is the foundation for used to calculate the rise in social security benefits, some union contracts have a CPI pay-raise clause, and it makes low-interest investment returns seem like they are keeping up with inflation—banks love it.  It helps sell government t-bills, and it suggests that the politicians are doing a good job and should be re-elected. gov stats for 2008   

dollar 1776 to 2006

from the Shadow Government website
1976 ended the gold standard under Nixon

The Numbers Racket:  Why the economy is worse than we know

Kevin Phillips, Harper’s Magazine, May 2008


Almost four decades have passed since the United States scrapped its last currency ties to precious metals. Our cop­per and nickel coinage still re­tains some metallic value, but not nearly enough for the pur­pose of currency tampering— the historic temptation of inflation-plagued or other­wise wayward governments, including, at times, our own. Instead, since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American econ­omy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allow­ing us to maintain artificially low interest races, mas­sive government borrowing, and a dangerous re­liance on mortgage and financial debt even as real economic growth has been slower than claimed. If Washington's harping on weapons of mass de­struction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fair­er, more productive, more dominant, and richer with opportunity than it actually is.

         The corruption has tainted the very measures that most shape public perception of the economy—the monthly Con­sumer Price Index (CPl), which serves as the chief bell­wether of inflation; the quar­terly Gross Domestic Product (GDP), which tracks the U.S. economy's overall growth; and the monthly unemploy­ment figure, which for the general public is perhaps the most vivid indicator of eco­nomic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances—inflation measurements help determine interest rates, fed­eral interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our sta­tistics have political consequences too. An ad­ministration is helped when it can mouth ba­nalities about price levels being "anchored" as food and energy costs begin to soar.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent infla­tion (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anx­ious to mislead voters, coddle the financial mar­kets, and tamp down expensive cost-of-living in­creases for wages and pensions?

Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cyn­ical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the po­litical blame for the slow, piecemeal distortion is bipartisan—both Democratic and Republican ad­ministrations had a hand in the abetting of polit­ical dishonesty, reckless debt, and a casino-like fi­nancial sector. To see how, we must revisit forty years of economic and statistical dissembling. 





This apt phrase originated with John Williams, a California-based economic analyst and statisti­cian who "shadows," as he puts it, the official Washington numbers. In a 2006 interview, Williams noted that although few Americans ever see the fine print, the government "always footnotes the changes and provides all the fine detail. Nonetheless, some of the changes are nothing short of remarkable, and the pattern over time is what I call Pollyanna Creep." Williams is one of the small group of economists and analysts who have paid any attention to the phenomenon. A few have pointed out the understatement of the Con­sumer Price Index—the billionaire bond manag­er Bill Gross has described it as an "haute con job," and Bloomberg columnist John Wasik has dis­missed it as "a testament to the art of spin." In 2003, a University of Chicago economist named Austan Goolsbee (now a senior economic advis­er to Barack Obama's presidential campaign) pub­lished an op-ed in the New York Times pointing out how the government had minimized the depth of the 2001-2002 U.S. recession, having "cooked the books" to misstate and minimize the unem­ployment numbers. Unfortunately, the critics have tended to train their axes on a single abuse, miss­ing the broad forest of statistical misinformation that has grown up over the past four decades.

The story starts after the inauguration of John F. Kennedy in 1961, when high jobless numbers marred the im­age of Camelot-on-the-Potomac and the new administration ap­pointed a committee to weigh changes. The result, imple­mented a few years later, was that out-of-work Americans who had stopped looking for jobs—even if this was because none could be found—were la­beled "discouraged workers" and excluded from the ranks of the unemployed, where many, if not most, of them had been previ­ously classified. Lyndon John­son, for his part, was widely ru­mored to have personally scrutinized and sometimes tweaked Gross National Product numbers before their release; and by the 1969 fiscal year, Johnson had orchestrated a "unified budget" that combined Social Security with the rest of the federal outlays. This innova­tion allowed the surplus receipts in the former to mask the emerging deficit in the latter.

     Richard Nixon, besides continuing the uni­fied budget, developed his own taste for statisti­cal improvement. He proposed—albeit unsuc­cessfully—that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Feder­al Reserve chairman, Arthur Bums, to develop what became an ultimately famous division be­tween "core" inflation and headline inflation. If the Consumer Price Index was calculated by tracking a bundle of prices, so-called core infla­tion would simply exclude, because of "volatili­ty," categories that happened to be troublesome:, at that time, food and energy. Cote inflation [2] could be spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called "inflation ex-inflation"—i.e., inflation after the inflation has been excluded.)


   In 1983, under the Reagan Administration, inflation was further finagled when the Bureau of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different "Owner Equivalent Rent" measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs. Because low infla­tion encourages low interest rates, which in turn make it much easier to borrow money, the BLS's decision no doubt encouraged, during the late 1980s, the large and often speculative expansion in private debt—much of which involved real estate, and some of which went spectacularly bad be­tween 1989 and 1992 in the savings-and-loan, real estate, and junk-bond scandals. Also, on the unemployment front, as Austan Goolsbee pointed out in his New York Times op-ed, the Rea­gan Administration further trimmed the number by ^classifying members of the military as "employed" instead of outside the labor force.

The distortional inclinations of the next president, George H.W. Bush, came into focus in 1990, when Michael Boskin, the chairman of his Council of Economic Advisers, proposed to re­orient U.S. economic statistics principally to re­duce the measured rate of inflation. His stated grand ambition was to move the calculus away from old industrial-era methodologies toward the emerging services economy and the expanding re­tail and financial sectors. Skeptics, however, countered that the underlying goal, driven by worry over federal budget deficits, was to reduce the inflation rate in order to reduce federal pay­ments—from interest on the national debt to cost-of-living outlays for government employees, retirees, and Social Security recipients.

     It was left to the Clinton Administration to implement these convoluted CPl measurements, which were reiterated in 1996 through a com­mission headed by Boskin and promoted by Fed­eral Reserve Chairman Alan

The blue (M3) shows the expansion of loans
The feds stopped a decade ago reporting M3

Greenspan. The Clintonites also extended the Pollyanna Creep of the nation's employment figures. Although ex­punged from the ranks of the unemployed discouraged workers had nevertheless been counted in the larger workforce. But in 1994, the Bureau of Labor Statistics redefined the workforce to in­clude only that small percentage of the discour­aged who had been seeking work for less than a year. The longer-term discouraged—some 4 mil­lion U.S. adults—fell out of the main monthly tal­ly. Some now call them the "hidden unemployed." For its last four years, the Clinton Administration also thinned the monthly household economic sampling by one sixth, from 60,000 to 50,000, and a disproportionate number of the dropped households were in the inner cities; the reduced sample (and a new adjustment formula) is be­lieved to have reduced black unemployment es­timates and eased worsening poverty figures.

Despite the present Bush Administration's overall penchant for manipulating data (e.g., Iraq, climate change), it has yet to match its predecessor in economic revisions. In 2002, the administration did, however, for two months fail to publish the Mass Layoff Statistics report, be­cause of its embarrassing nature after the 2001 re­cession had supposedly ended; it introduced, that same year, an "experimental" new CPI cal­culation (the C-CP1-U), which shaved another 0.3 percent off the official CPl; and since 2006 it has stopped publishing the M-3 money supply numbers, which captured rising inflationary im­petus from bank credit activity. In 2005, Bush proposed, but Congress shunned, a new, nar­rower historical wage basis for calculating future retiree Social Security benefits.


By late last year, the Gallup Poll reported that public faith in the federal government had sunk below even post-Watergate levels. Whether sta­tistical deceit played any direct role is unclear, but it does seem that citizens have got the right general idea. After forty years of manipulation, more than a few measurements of the U.S. econ­omy have been distorted beyond recognition.



Last year, the word "opacity," hitherto reserved for Scrabble games, became a mainstay of the fi­nancial press. A credit market panic had been triggered by something called collateralized debt obligations (CDOs), which in some cases were too complicated to be fathomed even by experts. The packagers and marketers of CDOs were forced to acknowledge that their hyper-technical securi­ties were fraught with "opacity"—a convenient, ethically and legally judgment-free word for lack of honest labeling. And far from being rare, opac­ity is commonplace in contemporary finance. In­tricacy has become a conduit for deception Exotic derivative instruments with alphabet-soup initials command notional values in the hundreds of trillions of dollars, but nobody knows what they are really worth. Some days, half of the trades on major stock exchanges come from so-called black boxes programmed with everything from binomial trees to algorithms; most federal securi­ties regulators couldn't explain them, much less monitor them.

Transparency is the hallmark of democracy, but we now find ourselves with economic statistics every bit as opaque—and as vulnerable to double-dealing—as a subprime CDO. Of the "big three" statistics, let us start with unemployment. Most of the people tired of looking for work, as mentioned above, are no longer counted in the workforce, though they do still show up in one of the auxil­iary unemployment numbers. The BLS has six dif­ferent regular jobless measurements—U-l, U-2, U-3 (the one routinely cited), U-4, U-5, and U-6. In January 2008, the U-4 to U-6 series pro­duced unemployment numbers ranging from 5.2 percent to 9.0 percent, all above the "official" number. The series nearest to real-world conditions is, not surprisingly, die highest: U-6, which in­cludes part-timers looking for full-time employ­ment as well as other members of the "marginal­ly attached," a new catchall meaning those not looking for a job but who say they want one. Yet this does not even include the Americans who (as Austan Goolsbee puts it) have been "bought off the unemployment rolls" by government pro­grams such as Social Security disability, whose re­cipients are classified as outside the labor force.

Second is the Gross Domestic Product, which in itself represents something of a fudge: federal economists used the Gross National Product un­til 1991, when rising U.S. international debt costs made the narrower GDP assessment more palat­able. The GDP has been subject to many further fiddles, the most manipulatable of which are the adjustments made for the presumed starting up and ending of businesses (the "birth/death of businesses" equa­tion) and the amounts that the Bureau of Economic Analysis "im­putes" to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in one's own home, or the benefit one receives from a free checking account, or the val­ue of employer-paid health- and life-insurance premiums). During 2007, believe it or not, imputed income accounted for some 15 per­cent of GDP. John Williams, the economic statistician, is briskly contemptuous of GDP numbers over the past quar­ter century. "Upward growth biases built into GDP modeling since the early 1980s have rendered this important series nearly worthless," he wrote in 2004. "{The recessions of 1990/1991 and 2001 were much longer and deeper than currently re­ported (and] lesser downturns in 1986 and 1995 were missed completely."

Nothing, however, can match the tortured evolution of the third key number, the some­what misnamed Consumer Price Index. Gov­ernment economists themselves admit that the revisions during the Clinton years worked to re­duce the current inflation figures by more than a percentage point, but the overall distortion has been considerably more severe. Just the 1983 ma­nipulation, which substituted "owner equivalent rent" for home-ownership costs, served to un­derstate or reduce inflation during the recent housing boom by 3 to 4 percentage points. [5] Moreover, since the 1990s, the CPI has been subject­ed to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and ser­vices in which costs are rising most rapidly get a lower weighting for a presumed reduction in con­sumption), and, most bizarrely, hedonic adjust­ment, an unusual computation by which addi­tional quality is attributed to a product or service.

The hedonic adjustment, in particular, is as hard to estimate as it is to take seriously. {That it was launched during the tenure of the Oval Of­fice's preeminent hedonist, William Jefferson Clinton, only adds to die absurdity.) No small part of the condemnation must lie in the timing. If quality improvements are to be counted, that count should have begun in the 1950s and 1960s, when such products and services as air-conditioning, air travel, and automatic trans­missions—and these are just the A's!—improved consumer satisfaction to a comparable or greater degree than have more recent innovations. That die change was made only in the late Nineties shrieks of politics and opportunism, not integri­ty of measurement. Most of the time, hedonic adjustment is used to reduce the effective cost of goods, which in turn reduces die stated rate of in­flation. Reversing the theory, however, the de­clining quality of goods or services should adjust effective prices and thereby add to inflation, but that side of the equation generally goes missing. "AH in all," Williams points out, "if you were to peel back changes that were made in the CPI going back to the Carter years, you'd see that the CPI would now be 3.5 percent to 4 percent high­er"—meaning that, because of lost CPI increas­es, Social Security checks would be 70 percent greater than they currently are.

Furthermore, when discussing price pressure, government officials invariably bring up "core" inflation, which excludes precisely the two cate­gories-—food and energy—now verging on an­other 1970s-style price surge. This year we have al­ready seen major U.S. food and grocery companies, among them Kellogg and Kraft, report sharp de­clines in earnings caused by rising grain and dairy prices. Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor Department acknowledged that in January, the price of imported goods had in­creased 13.7 percent compared with a year earli­er, the biggest surge since record-keeping began in 1982. From Maine to Australia, from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years of rapid growth in the supply of money from the world's central banks (not least the U.S. Federal Reserve), as well as by massive public and private debt creation.



The real numbers, to most economically mind­ed Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is some­where between 9 percent and 12 percent; the in­flation rate is as high as 7 or even 10 percent; eco­nomic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion. For what it would re­veal is a nation in deep difficulty not just do­mestically but globally.

Under-measurement of inflation, in particular, hangs over our heads like a guillotine. To ac­knowledge it would send interest rates climbing, and thereby would endanger the viability of die massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. More­over, the rising cost of pensions, benefits, borrow­ing, and interest payments—all indexed or relat­ed to inflation—could join with the cost of financial bailouts to overwhelm the federal budget As inflation and interest rates have been kept ar­tificially suppressed, the United States has been in­dentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.

Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University of Denver, pointed out last September, the sub* prime lending crisis "can be directly traced back to die [1983] BLS decision to exclude the price of housing from the CPI.... With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the ex­pectations of ever-rising home prices, but home buyers by the millions have been tricked into buy­ing homes even though they only qualified for the teaser rates." Were mainstream interest rates to jump into the 7 to 9 percent range—which could happen if inflation were to spur new con­cern—both Washington and Wall Street would be walking in quicksand. The make-believe econ­omy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down an even rockier slope.

The credit markets are fearful, and die finan­cial markets are nervous. If gloom continues, our humbugged nation may truly regret losing sight of history, risk, and common sense.

Blue is real, arrived by using correct CPI figures

1985-08 Blue is actual unemployment rate

Consumer Price Index  October 1st, 2004


A Series Authored by Walter J. "John" Williams

"The Consumer Price Index" (Part Four in a Series of Five)

October 1, 2006

(September 22, 2004

_____, John Williams site, Shadow Government Statistics:  Analysis Behind and Beyond Government Economic Reporting.   


This installment has been updated from the original 2004 version to incorporate additional research on earlier changes to the CPI. The source for most of the information in this installment is the Bureau of Labor Statistics, which generally has been very open about its methodologies and changes to same. The BLS Web site: contains descriptions of the CPI and its related methodologies. Other sources include my own analyses of the CPI data and methodological changes over the last 30 years as well as interviews with individuals involved in inflation reporting.


Payments to Social Security Recipients Should be Double Current Levels

Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year. This is due to recent redefinitions of the series as well as to flawed methodologies, particularly adjustments to price measures for quality changes. The concentration of this installment on the quality of government economic reports will be first on CPI series redefinition and the damages done to those dependent on accurate cost-of-living estimates, and on pending further redefinition and economic damage.

The CPI was designed to help businesses, individuals and the government adjust their financial planning and considerations for the impact of inflation. The CPI worked reasonably well for those purposes into the early-1980s. In recent decades, however, the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval.

In particular, changes made in CPI methodology during the Clinton Administration understated inflation significantly, and, through a cumulative effect with earlier changes that began in the late-Carter and early Reagan Administrations have reduced current social security payments by roughly half from where they would have been otherwise. That means Social Security checks today would be about double had the various changes not been made. In like manner, anyone involved in commerce, who relies on receiving payments adjusted for the CPI, has been similarly damaged. On the other side, if you are making payments based on the CPI (i.e., the federal government), you are making out like a bandit.

In the original version of this background article, I noted that Social Security payments should 43% higher, but that was back in September 2004 and only adjusted for CPI changes that took place after 1993. The current estimate adjusts for methodology gimmicks introduced since 1980.

Elements of the Consumer Price Index (CPI) had their roots in the mid-1880s, when the Bureau of Labor, later known as the Bureau of Labor Statistics (BLS), was asked by Congress to measure the impact of new tariffs on prices. It was another three decades, however, before price indices would be combined into something resembling today's CPI, a measure used then for setting wage increases for World War I shipbuilders. Although published regularly since 1921, the CPI did not come into broad acceptance and use until after World War II, when it was included in auto union contracts as a cost-of-living adjustment for wages.

The CPI found its way not only into other union agreements, but also into most commercial contracts that required consideration of cost/price changes or inflation. The CPI also was used to adjust Social Security payments annually for changes in the cost of living, and therein lay the eventual downfall to the credibility of CPI reporting.

Let Them Eat Hamburger

In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush Administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System.

Although the ensuing political furor killed consideration of Congressionally mandated changes in the CPI, the BLS quietly stepped forward and began changing the system, anyway, early in the Clinton Administration.

Up until the Boskin/Greenspan agendum surfaced, 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, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

The Boskin/Greenspan concept violated the intent and common usage of the inflation index. The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it. The CPI was one number that never was to be revised, given its widespread usage.

Shortly after Clinton took control of the White House, however, attitudes changed. The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.

The BLS publishes estimates of the effects of major methodological changes over time on the reported inflation rate (see the "Reporting Focus" section of the October 2005 Shadow Government Statistics newsletter -- available to the public in the Archives of Changes estimated by the BLS show roughly a 4% understatement in current annual CPI inflation versus what would have been reported using the original methodology. Adding the roughly 3% lost to geometric weighting -- most of which not included in the BLS estimates -- takes the current total CPI understatement to roughly 7%.

There now are three major CPI measures published by the BLS, CPI for All Urban Consumers (CPI-U), CPI for Urban Wage Earners and Clerical Workers (CPI-W) and the Chained CPI-U (C-CPI-U). The CPI-U is the popularly followed inflation measure reported in the financial media. It was introduced in 1978 as a more-broadly-based version of the then existing CPI, which was renamed CPI-W. The CPI-W is used in calculating Social Security benefits. These two series tend to move together and are based on frequent price sampling, which is supposed to yield something close to an average monthly price measure by component.

The C-CPI-U was introduced during the second Bush Administration as an alternate CPI measure. Unlike the theoretical approximation of geometric weighting to a variable, substitution-prone market basket, the C-CPI-U is a direct measure of the substitution effect. The difference in reporting is that August 2006 year-to-year inflation rates for the CPI-U and the C-CPI-U were 3.8% and 3.4%, respectively. Hence current inflation still has a 0.4% notch to be taken out of it through methodological manipulation. The C-CPI-U would not have been introduced unless there were plans to replace the current series, eventually.

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 The CPI adjusted for both the geometric weighting and earlier methodological changes is shown on the Alternate Data page, which is available as a tab at the top of the home page.

Hedonic Thrills of Using Federally Mandated Gasoline Additives

Aside from the changed weighting, the average person also tends to sense higher inflation than is reported by the BLS, because of hedonics, as in hedonism. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them. That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.

When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air. The same principle applies to federally mandated safety features in automobiles. I have not attempted to quantify the effects of questionable quality adjustments to the CPI, but they are substantial.

Then there is "intervention analysis" in the seasonal adjustment process, when a commodity, like gasoline, goes through violent price swings. Intervention analysis is done to tone down the volatility. As a result, somehow, rising gasoline prices never seem to get fully reflected in the CPI, but the declining prices sure do.

How Can So Many Financial Pundits Live Without Consuming Food and Energy?

The Pollyannas on Wall Street like to play games with the CPI, too. The concept of looking at the "core" rate of inflation-net of food and energy-was developed as a way of removing short-term (as in a month or two) volatility from inflation when energy and/or food prices turned volatile. Since food and energy account for about 23% of consumer spending (as weighted in the CPI), however, related inflation cannot be ignored for long. Nonetheless, it is common to hear financial pundits cite annual "core" inflation as a way of showing how contained inflation is. Such comments are moronic and such commentators are due the appropriate respect.

Too-Low Inflation Reporting Yields Too-High GDP Growth

As is discussed in the final installment on GDP, part of the problem with GDP reporting is the way inflation is handled. Although the CPI is not used in the GDP calculation, there are relationships with the price deflators used in converting GDP data and growth to inflation-adjusted numbers. The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported.

1986-08 blue is dolla's buy power overseas

Teddy Roosevelt's advice that, "We must drive the special interests out of politics. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains."

Don’t miss the collection of Pod Cast links


Nothing I have seen is better at explaining in a balanced way the development of the national-banking system (Federal Reserve, Bank of England and others).  Its quality research and pictures used to support its concise explanation set a standard for documentaries--at  The 2nd greatest item in the U.S. budget is payment on the debt.