Suisse Bear has posted a link, in this message, to a very important article.http://boards.fool.com/Message.asp?mid=23746963This article is by an economist, who reveals the real economic situation, by peeling away generations of politically-inspired "adjustments" to the CPI, the GDP, employment numbers, etc. by the Bureau of Labor Statistics.While this article is infuriating and frightening, on many levels, it affects fixed income investors where we live. Understating the rate of inflation cheats us on the interest on our I-Bonds and TIPS.There have been many articles about the ways that the government understates inflation, but this article has much more than that.Please rec Suisse Bear's post. I have recommended this article, for a Post of the Day, since I think that all Motley Fools should read it. If Suisse Bear's post gets many recs, it will support it for POD.Wendy
Wendy,I share your concern about obtaining reliable data, but I would humbly suggest you are asking for something that isn't going to happen. Let me use an analogy. If I measure a table using a yardstick and then a meterstick, has the table changed size? If the BLS is forced to tinker with the methods they use to report inflation, has inflation changed? If Social Security is indexed to the CPI and the CPI is changed (to accommodate the wishes of people who want more free money from the government), will Social Security payments be adjusted, or will they be set to a new index?For anyone to claim they are being “cheated” by the government on this one issue is hugely naive. All of government is a process of using force to expropriate and redistribute income and wealth. The “underpayments” made by SS due to the way the BLS constructs the CPI is the least of the economic problems of this country. Furthermore, as bad as the BLS might be, it is at least a fairly consistent yardstick that knowledgeable users of its data know how to adjust to meet their own uses. Again, I appreciate your concern, but follow the money, the big money, and then rally around stopping those abuses. The “inaccuracies” of the CPI are well known and they are minor economic noise. Charlie
Charlie,I couldn't recomend the post twice so I'll just add "Well said"jack
I thought the more interesting topics of the article were the over-reporting of the GDP and under-reporting of the deficits and the possible problems for the dollar as a result.That worries me,JG
I read this on Mish's board - The SB post and the article, but it just does not sit with me!Well, lets look at this - 8%At 8% over the last 25 years means that things would be ~6 times what they were in the early 80's. I bought a new Ford Thunderbird - 1982 for ~$12,000, that would make one today about $72,000 - and now even the most expensive 50th anniversary was only about $45,000 - and this is a much nicer car.Fast food - friend and I used to go to a national fast food chain in high school and get lunch - cost a little more than a buck for a cheeseburger, med drink and fries, now is it $6, about half - All are on the dollar menu - $3.00.Lets look at some of the worst items and how they have really gone up over the last few decasesOne of the worst items - lets say gasoline:http://www.eia.doe.gov/emeu/25opec/sld004.htm5.2% unadjusted for inflation. But don't forget higher octane and detergent additives - no lead!!!!Why change the CPIThe method for calculating the CPI must change and adapt, because our spending habits change. My parents bought a Television Set (19" Black and White), I bought a slightly bigger model, more features-even had color, now my son is going to buy a 52" Plasma. They are all TV's but what is the cost of inflation and what is the cost of difference in technology?1960 - $801980 - $5602006 - $4999The military developed picture phones back in the early 60's, and they cost around $500,000. Demonstrated when I was in college as a business tool early 80's. AT&T was ready to go - $25,000. Today you're into one for a $1000 - Computer-Monitor-Camera - How do you measure the cost of inflation for that?1960 - $500,0001980 - $25,0002006 - $1,000So, for some one to "peel away" the adjustments and claim we are at 8% to me is actually more meaningless then the actual numbers. While CPI is not the best indicator for any one individual - it seems to me that it is a whole lot closer to what I have actually experienced than some economist's 8% rant.DrTarrI know others experienced more - some less, depending on area, lifestyle, income..yada yada, but ~3-3.5% seems to be what my pocket book has felt.
JG,Bill Gross of PIMCO has been commenting on the over-stating of the GDP and the understating of the CPI for what seems like years now in the various monthly newsletters he writes or the interviews he gives.Plus, the various Austrian school economists who typically get quoted at www.lewrockwell.com also have been hammering on these topics. Also, EverBank's Chuck Butler who writes the free, daily currency newsletter, "The Daily Pfennig" scoffs at US government reports and tries to estimate how traders will react.And on the other side of the issues, there are a lot of smart, persuasive people pointing out genuine positives in the current situation. To say the least, the situation is murky. So one has to ask where are the risks? If the doomsayers are wrong, then they merely look like fools. And the smartest of them genuinely do hope they are wrong.If the cheerleaders are wrong, everyone is in a world of hurt. So I prefer to guard against the downside. But that's just me and how I deal with risk. Charlie
"So, for some one to "peel away" the adjustments and claim we are at 8% to me is actually more meaningless then the actual numbers. While CPI is not the best indicator for any one individual - it seems to me that it is a whole lot closer to what I have actually experienced than some economist's 8% rant....I know others experienced more - some less, depending on area, lifestyle, income..yada yada, but ~3-3.5% seems to be what my pocket book has felt. I would totally agree. I'm a superhawk against inflation and see it popping up its head from around every corner I look. But 8% as the across-the-board average? No way, Jose.The BLS constructs CPI indexes for the major metro areas. Mine is Portland. Since 1940 when persistent inflation became to appear in this country, the average (for Portland) can be calculated to be 4.8%. By my own budgeting in which every single item is assigned an inflation projection based on the rcord of my actual expenses, I come up with 4.75% as my working figure. And that's a very aggressive, worst-case scenario.I use 5% when I'm doing 30-40 year projection for the sake of testing the survivability of my retirement assets, but 8% is so far-fetched as to be worse than useless. It's dangerous, because it creates too many dislocations and distortions of otherwise trustable data.
Charlie,Thanks for your perspective and the Everbank email letter reference.JG
JG,Yes, do track down that currency newsletter, "The Daily Pfennig". What he provides is a global perspective on matters that should be important to fixed-income investors.Actually, there is too much out there to read, all of it potentially important, all of it vying for one's attention. So what you have to do is pick a very limited number of resources, then allot a judicious amount of time each day or each week, and then try to lead an otherwise normal life. Otherwise, you'll drive yourself crazy (or else lapse into paralysis by analysis) and be of no help to anyone. Balance. It's all a matter of balance, and a bit of fun and humor, too. Charlie
but 8% is so far-fetched as to be worse than useless. It's dangerous, because it creates too many dislocations and distortions of otherwise trustable data. It also scares people into taking on levels of risk they don't understand and thus can't mitigate. It creates unneccissary doom and gloom sleepless nights. jack
"It also scares people into taking on levels of risk they don't understand and thus can't mitigate. It creates unneccessary doom and gloom sleepless nights."A few sleepless night might do a lot of people some good. If they're getting that upset about economic numbers that they can't sleep that would imply they are reading and thinking about the broader issues. So, maybe, they'll actually sit down and run a budget of their own numbers and try to see for themselves what their particular situation is and whether they could improve it.It is not as if doomday is happening tomorrow or a lot of the supposed misery couldn't be avoided by a couple years of knuckling down and putting their finances in order. That would be a good result of their present and temporary discomfort. They could make a plan to deal with their future. Then, if things turn out benign, they'd be sitting pretty and be able to coast on their hard work. Instead, the real danger isn't the numbers or their meaning, but the perception of their meaning. That's the stuff of panics. Not the grimness of any situation, but the loss of the willingness to fight back and to turn what might appear to be a hopeless situation into a manageable problem.Did you ever read the story "Mama's Bank Account" by Kathryn Forbes? That's as much an antidote to doomsday economics as anyone needs.
"some economist's 8% rant."Some self-emplyed "economist" "publishing" on his own web site. There is a reason why academia has, for centuries, used jouried publications. The system is very far from perfect, but at least if something gets published as an academic article, you know it has been reviewed by people with relevant expertise who are not just fellow-travelers of the author (unlike in so-called "think-tanks"). We probably do better with peer review on this board than what happens in self-publishing.I've paid some attention to the unemployment issue, where the BLS stats are clearly not a good measure and where we know, since the numbers are lower than other measures, politicians aren't going to want to seek alternatives. It's not, as this guy suggests, some conspiracy, and there are reputable labor economists regularly publishing numbers using different measures, so anyone paying attention to the news should be aware of the issue.Basically, basing unemployment figures on those who can be easily counted as actively seeking work was probably a reasonable approach in an econmy heavily dominated by manufacturing/construction (lots of folks on unemployment insurance). The current economy has many more self-employed, temporaries, part-timers, and in general service jobs, which tend to be fluid. On top of this, a disproportionate segment of unemployed is urban "hard core" (and some rural underclass, though that has been around forever) that isn't seeking work and doesn't get measured (in some places, unemployment among young African American men is well over 50%). So, other methods of counting, that rely on demographics and actual numbers of workers, probably provide a better picture of employment. Of course, none of this reveals quality of employment/pay and benefits.There are ways of being critical and challenging assumptions and exposing reasons for biasing information that are useful. The problem is there are always people trying to show off or make a buck by being sensational, even when they are just repeating, or worse exaggerating, what has already been said quietly. There are enough real reasons for worrying about our economic future (that deficit isn't going away though moronic Optimism and baby boomers are not going to stop being a demographic time bomb and new energy resources are not on the verge of some sensational breakthrough, as in Bush's latest "yes I am the stupidest man on earth," hype). But let's try to stick to worrying about the real problems.
DrTarr:You've stacked the deck. You didn't consider buying a new home and the increase in property taxes. I know some areas of the country have not had property increases but they certainly did where we lived in northern Virginia. Our home cost $29,000 in 1969. About a dozen years ago we put in about $70,000 of improvements about a dozen years ago and sold the house last year for $484,000. We now have moved to North Carolina and seemingly beat the system by building a much larger home for more than $100,000 less, even after improvements we didn't have in northern Virginia (e.g., an emergency generator). Our property taxes were $3,400 in northern Virginia and will drop to about $1,200 in North Carolina. But believe me, there was a lot of sweat equity in this move (e.g., I'm recovering from a strained back.). My wife's cottage on a lake in North Carolina has had similar increases as northern Virginia in property appraisal and property taxes (Admittedly the year-round residents have not had nearly the property tax increases as us summer residents who don't vote.).Then there are health insurance costs. Medicare was increasing at 8%/yr when I retired more than 10 years ago, but the increases now are in double digits and are averaging about 15% the last three years. Our backup insurance averaged 12%/yr until about three years ago but then became more than 15%/yr. They then changed the name of the plan we had to "high option" and came out with a "standard option." The main difference is costs of pharmaceuticals, but with the Medicare Plan D coming out this year, they changed the cost of drugs to a percentage (copay for generic). We converted to the standard option where we will pay 50% of the prescription costs whereas last year in the "high" option we paid $25 for a 3-mo supply (but this changed to a percentage this year also). fortunately, we have no donut hole. Yes, if our prescriptions stay the same as last year, we will save about $2,000. Let's hope they do remain the same.Our main broker has converted from "no charge" for maintaining an account to now charging us $50/yr because we don't trade enough. An IRA account has taken to charging us $40/yr because it has dropped under $10,000 because of mandatory withdrawals.Not everything is cheaper where we live in North Carolina (near Pinehurst). Groceries are at least 10% more expensive than in northern Virginia and the sales tax is 7% (rather than 5%) on non-food items (this includes restaurants).So yes, we may be beating the inflation system, but only by taking some pretty drastic actions. My own estimate of inflation is that it is closer to 10% than 3%.brucedoe
"So yes, we may be beating the inflation system, but only by taking some pretty drastic actions. My own estimate of inflation is that it is closer to 10% than 3%.Bruce, You ought to be ashamed of yourself for putting forth that kind of wildly inaccurate estimate. You were trained in the hard sciences, if I'm interpreting your profile correctly. Use that training to make careful measurements of what your economic situation really is. That means creating an item by item budget that then tracking each of those expenses and multiplying them by their dollar weigth to obtain a picture of your total expendatures. Yes, some key itms in your budget (and mine) ae showing double digit increases, cheifly medical expenses and property taxes. But lots of other items are at the 3% average and some are even below it. The total picture is what matters. Yes, this is going to be different for each person. But it is irresponsible to cry wolf on the basis of fragmentary information. Run your numbers and then report your experience. Don't make guesses. As Loki, Jack, and others suggest, the matter is serious, but it also has to be dealt with seriously, which means careful data gathering and carefully drawn conclusions.Charlie
Bruce:[DrTarr] stacked the deck. ________________*,*______________Not sure how?? My reply mentioned an item that would show hyperinflation, (TV) one that would show hyperdeflation (VP) - unless we adjust the CPI.Then I summarize with, --some ones peeled away number is more meaningless to an individual.-- Some what for the exact reasons you specify. If you break down the CPI into categories, some are going to be hit harder by different categories - say if you retire and now are traveling in an RV, well energy costs are going to be more. IF you were a traveling salesman and now you are retired "at home" that category would have less of an impact. Health Care? what if you have a retirement plan that includes health care and not increasing premiums that fast, (other than counting your blessings) you will not experience the retiree who now has to find their own. Even real estate taxes, sure they are going up, and that is really area dependent. But when I retire and move to a lower tax area (which may or may not happen) then that will actually show "deflation." Take your 65% decrease and I amortize that over some period of time-- compare the cash flow if you had not moved to what you expect with the move and see what the difference in "returns" are. If you read my conclusion:I know others experienced more - some less, depending on area, lifestyle, income..yada yada, but ~3-3.5% seems to be what my pocket book has felt.I think I have dealt quite fairly.DrTarr
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