12% Annual Inflation? Chris Martenson's Crash Course: Fuzzy Numbers

[Late2TheParty]

Remember, this video is several years old... but...
Crash Course Chapter 16: Fuzzy Numbers - Crash Course Videos at Chris Martenson - consumer price index, cost of living, data manipulation, deficit, economic statistics, economy,, GDP, growth rate, hedonics, Inflation, Medicare, recession, Social Secu

So I'm watching this video, chapter 16 of his crash course, titled Fuzzy Numbers.

It's talking about the debasing of official statistics since at least the 1960s.

He explains that inflations comes from expectations and amount of money floating around and that current policy is to control both.

Kennedy scrubbed discouraged workers to lower unemployment numbers. Johnson introduced the unified budget that took Social Securities surplus and offset the deficits. Nixon gave us the core inflation measure that takes out the food and fuel, or as some say: taking out the inflation from inflation. Clinton left us a statistical morass to measure inflation. Each admin contributed their own lies to our numbers. Chris argues that our measurements no longer match reality and we're just telling ourselves lies.

Bureau of Labor Statistics (BLS) reports CPI (inflation). Up to the 80s, inflation was measure with the same basket of goods. In 1996, Clinton pushed through the Boskin Commission suggestions which introduced:

Substitution: when the price of something rises, assume consumers will use a cheaper alternative. ex. Take a steak out of the basket and put in hot dogs. In this way, it underreports inflation and is out of sync with the Farm Bureau which does not do this. So from 2007-2008, the Farm Bureau says Food rose 11% while the BLS says only 4%.

Geometric Weighting: anthing that rises too fast in price will get a lower weighting under the assumption people will lose less of those things. Health Care which is 17% of the GDP gets only 6% of the CPI basket.

Hedonics: adjustments for the improving quality of certain things that "lead to greater enjoyment". Say a cell phone sells for $300 last year and an improved model sells for $300 this year but with a nicer screen. The BLS will argue that the screen improvement is worth $100 dollars, or the same as last year's model of phone was selling for $200. Then suddenly the basket sees a $200 "phone" offsetting inflation although everyone has to pay $300 for it. Of course, this only goes one way. If the phones of today only last a year while phones from 10 years ago lasted for 5 years, that is not factored in. Hedonice adjustment now apply to TVs, dishwashers, college textbooks, etc. and now adjust 46% of the CPI.

If we were to ignore this nonsense and do the CPI as it used to be done, what would inflation be at? Mr. Williams over at Shadow Stats does exactly that and in 2008 it would have been at 13%.

Today it seems to be running at 11-12%:
Alternate Inflation Charts

This also has a social cost, if CPI was calculated like it used to be, Social Security payments will have to be 70% higher than they are now and Medicare payments should be too. Instead we see seniors living in Poverty while we squandered the SS surpluses away on other budget items and hospitals are forced to close and deny services to the community...

Then Chris tackles the GDP. It has become inflated several ways. The 2003 GDP was $11T. But it contained:

$1.6T of Imputations. This is where it's assumed value having been created but no transactions occured. Ex. Imputations are added from "the value the owner of a house recieves by not having to pay themselves rent". The government figures out what you should be paying yourself in rent to live at your place and adds that to the GDP. They also add in the benefit of "free checking" some banks give you, it's imputed to have value because "if it weren't free you'd have to pay for it." Both of these example alone make up $1T of our GDP.

Hedonics, again. Ex. Because computers are ever faster each year, it's considered to be more productive, and recorded as having contributed more than it cost. So if costs $1,000, they might give it a fictitious GDP figure of $1,200. Note, this is opposed to the hedonics in the CPI which would be used to lower it's real cost. Hedonic adjustments to the GDP in 2003 was a whopping $2.3T.

In 2003, those two numbers combined for $3.9T of $11T. At least 35% of the GDP in that year were on transactions that you "could not witness, record, or touch", they were merely "modeled or imputed" or dare I say fictitious.

Now how to take statements such as "Debt to GDP are quite low" or "Income Taxes as a % of GDP are low..."? Now that the GDP is in the denominator of those figure, making the GDP bloated will lower those ratios.

Real GDP is inflation adjusted while pre-Inflation adjusted is called nominal GDP. Ex. Say the basis year is 2010, and the entire economy makes 1 car in 2010 that sells for $1000 and another car in 2011 that sells for $1100. Nominal GDP for 2011 would be $1100 while the real GDP would have been $1000 to reflect 0% growth.

There you can see another reason why politicians have the BLS understate inflation in the CPI, to overstate the real GDP. Each % point that CPI is understated equals a full % point that GDP is overstated.

I suggest watching it is better than reading my synopsis.

 

[HenryBHough]

In November I went shopping. With a list.

I noted the price for each item, including brand and quantity (ounces, pints, etc.).

I took the same list into the same store last Saturday. Noted all the prices, being careful to note packages of the same brand and content.

First thing I noticed:

About 1/3 of the items were no longer available in the same sizes as in November. Quart size bottles of mayonnaise, for example, now contained only 48 ounces but the shelf price was unchanged. That's tantamount to a major price increase so I used only the "unit prices" posted on the shelves (I had noted those in November as well).

A few items had actually decreased in shelf price but had gone up when figured by unit price.

Most had gone up appreciably.

Calculating the whole list, the increase from November, 2011 to March 10, 2012? 34%.

Thirty-four percent.

Some of that may be due to my remote location where everything comes by ferry boat or by air. Fuel prices, you know, a sure sign the economy is improving sayeth the regime. But not all due to fuel by any means.

But this is all good for you. You won't drive as much so are less likely to be hurt in an accident. You'll be cutting back on food purchases, so will avoid obesity. Now that surely means Michelle will be buying iceberg lettuce instead of arugula and Our Kenyan President will think twice before junketing off on Air Force One.

Doesn't it?

 

[Late2TheParty]

We don't have leadership in America, just a bunch of assholes on top that tell us we need to sacrifice while they give themselves ever higher pensions/payraises/healthcare/etc.

I don't care what party they're from, if they're in WaDC, it's 99% likely they're cheating us.

 

[pinqy]

Kennedy scrubbed discouraged workers to lower unemployment numbers.

No, the Gordon Committee was formed under Kennedy, but didn't take effect until 1967.
And while discouraged workers were sort of included, it wasn't consistant and it was left to the interviewer's discretion. The definition read:

would have been looking for work except that they were temporarily ill or believed no work was available in their line of work or in the community. Persons in this latter category will usually be
residents of a community in which there are only a few dominant industries which were shut down during the survey week. Not included in this category are persons who say they were not looking for work because they were too old, too young, or handicapped in any way.

Note the restrictions on area and that the current definiton of discouraged does include people not looking for work because of believed discrimination.

Most of the changes made in 1967 were to tighten up the definition to make things more objective.

Nixon gave us the core inflation measure that takes out the food and fuel, or as some say: taking out the inflation from inflation.

"Core Inflation" is just a special index used by finance types (and used to be used by the Fed) because food and energy fluctuate greatly on a month-to-month basis and stripping them out makes it easier to look at longer run trends. The headline number (CPI-U) and the version used for Social Security adjustments (CPI-W) both include food and energy.

Bureau of Labor Statistics (BLS) reports CPI (inflation). Up to the 80s, inflation was measure with the same basket of goods.

And that caused a big problem when personal computers were introduced, but not included in the basket until many years later.

Substitution: when the price of something rises, assume consumers will use a cheaper alternative. ex. Take a steak out of the basket and put in hot dogs.

Doesn't happen. The Chained CPI (which is not official) does take into consideration substitution, but that's based on the weight of expenditures...what people are actually buying and in what quantities. Which is not what you're saying.

. So from 2007-2008, the Farm Bureau says Food rose 11% while the BLS says only 4%.

I'd need a link for that. What I found at The Farm Bureau states

The year-to-year direction of the Marketbasket Survey tracks with the federal government’s Consumer Price Index

So they're not claiming any such discrepency.

Geometric Weighting: anthing that rises too fast in price will get a lower weighting under the assumption people will lose less of those things. Health Care which is 17% of the GDP gets only 6% of the CPI basket.

The weights used both for LaSpeyres indexes (arithmetic mean) and geometric means are Price * Quantity as a percent of total expenditures. But while an arithmetic mean sums PQ*w, the geometric mean multplies PQ^w which does result in a lower change. The reason is that a LaSpeyres index assumes people will buy the exact same quantity of everything irrespective of relative price changes. Which is of course not true.

A LaSpeyres index tends to OVERSTATE inflation.

As for the health care claim, Health Care is 7% of the CPI and I have no idea which table of the NIPAs the 17% figure comes from, but my guess would be OVERALL spending...which would include payments from Insurance companies. The CPI only covers Consumer spending.

Hedonics: adjustments for the improving quality of certain things that "lead to greater enjoyment". Say a cell phone sells for $300 last year and an improved model sells for $300 this year but with a nicer screen. The BLS will argue that the screen improvement is worth $100 dollars, or the same as last year's model of phone was selling for $200. Then suddenly the basket sees a $200 "phone" offsetting inflation although everyone has to pay $300 for it. Of course, this only goes one way. If the phones of today only last a year while phones from 10 years ago lasted for 5 years, that is not factored in. Hedonice adjustment now apply to TVs, dishwashers, college textbooks, etc. and now adjust 46% of the CPI.

You have to adjust for quality. If a can of tuna sells at $1 for 6 oz and then changes to 5.5 oz but stays at $1, BLS would record that as a price increase. Similarly, if quality improves, and you're getting more for less, you have to adjust for that. Hedonics is simply a model for when things aren't as straightforward as a size change.

Example: Year 1 Car, we're pricing the base model, no options, and it costs $20,000. Year 2 the base model now includes Bluetooth as standard when it was a $200 option in Year 1 and the base model in Year 2 costs $20,400. Well, it's not the same car because it has a different feature (one that does make a price difference). You can't say the car costs $400 more because if you had bought the same car, with bluetooth, it would have cost you $20,200. So the price change is a $200 increase

If we were to ignore this nonsense and do the CPI as it used to be done, what would inflation be at? Mr. Williams over at Shadow Stats does exactly that and in 2008 it would have been at 13%.

Since Mr. Williams does not collect his own data and relies entirely on BLS data and since by himself he certainly couldn't do all the reweighting and recalculating, what it looks like is that he just tacks an arbitrary % onto the CPI. He doesn't publish his methodology and no one can duplicate his work.

Hedonics, again. Ex. Because computers are ever faster each year, it's considered to be more productive, and recorded as having contributed more than it cost. So if costs $1,000, they might give it a fictitious GDP figure of $1,200. Note, this is opposed to the hedonics in the CPI which would be used to lower it's real cost. Hedonic adjustments to the GDP in 2003 was a whopping $2.3T.

The GDP uses reweighted CPI data for the PCE index. The hedonics are the same.