This article in Harpers is a must read for anyone who wants to understand the real current state of the American economy. The US government has manipulated and modified economic statistics for the past 40 years in an effort to hide from the American people what the true state of the economy is. This has significant consequences on every citizens’ life, from those collecting lower Social Security checks because the inflation rate has been drastically under-reported to those who own Treasury Inflation Protected Securities which underperform because the government can conveniently leave out inflation numbers they don’t like to pensioners whose pension plans invested in collateralized debt obligations which very well could be almost worthless instead of risk-free.
The inflation numbers are particularly egregious because they affect lower and middle class citizens more than they do the upper class. Thousands of Americans are given raises based on cost of living numbers and when inflation is significantly under-reported, these Americans get smaller raises. Social Security recipients get checks based on inflation in much the same way. The individual investor is hurt because when true inflation runs at 6-7% instead of the published 2-3%, he may actually be losing money on most investments. If you have a money market account paying 2.5%, you most certainly are losing money because the cost of living increases not measured in the CPI, specifically food and energy, are consuming all of those gains and more.
This is all made worse by the central banks of the world printing money at will. Because we operate on a monetary system based on government fiat, our money is only as good as the government promise behind it. If the government decides to print more money and send it into the economy, each dollar that already existed is automatically worth less. Over time, this can lead to runaway inflation because it takes more dollars to buy the same things.
If you’re in debt, the situation is even worse because you are trying to pay back for things you bought when the dollars you own were worth more than they are now. So even though you bought the TV for $800 on credit, it will now cost you not only the extra 16 to 22% in interest, it will also cost you the amount that inflation has added to the price tag.
The government numbers, CPI and GDP specifically, are at the heart of all of these problems. However, it would be political suicide to suggest changing these to more accurately reflect reality. We are much more likely to have an economic crisis akin to the Great Depression than we are to change the numbers now. The chance of an economic crisis like that happening is much greater than we are led to believe because we cannot trust the economic measurements that the government provides. I think that, contrary to many people who think we are at or near a bottom now, we are in danger of tipping much farther into recession.
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August 21, 2008 at 1:51 pm
ScotchDrinker said: If you’re in debt, the situation is even worse because you are trying to pay back for things you bought when the dollars you own were worth more than they are now. So even though you bought the TV for $800 on credit, it will now cost you not only the extra 16 to 22% in interest, it will also cost you the amount that inflation has added to the price tag.
I disagree. Inflation is good for the debtor. As inflation eats away at the value of money, you are paying the creditor back with dollars that are worth less. Acquiring any sort of debt is sort of like a short sale of the dollar: Borrow when the value is high and pay back when the value decreases. One must consider interest costs of course, but that has nothing to do with inflation.
In the TV example you added inflation to the price tag of the TV. Why? If you already bought the TV inflation would only add to its replacement cost, in effect making the TV you bought worth a little more.
Imagine living in Weimar Germany when it took a wheelbarrow full of cash to buy a loaf of bread (perhaps an exaggeration). Did that inflation increase mortgage balances? Nope. Those people could take that worthless cash to the mortgage company and pay off their loans. What a deal!
Also: Remember that wages, while they lag a bit, inflate along with prices.