Doc's Daily Commentary
Mind Of Mav
You’re Being Lied To: Inflation Is HIGHER Than Reported
Today, we heard a new statistic:
The politicians, economists, bankers, commentators, and talking heads on TV have all said inflation during this time of COVID would be transitory.
They were all wrong.
Gas prices, food, milk, rent everything is going up and people will need to spend more money to survive.
Some say this is due to supply chain bottlenecks, others fear something far more foreboding – an economic model gone wrong.
Today it was announced by the Bureau of Labor Statistics that inflation in the United States, year-on-year, has hit a 40-year high of 7.5 per cent.
Taking out food and energy prices (core inflation) prices went up by a whopping six per cent between January 2021 and January 2022. Food prices have gone up seven per cent while energy prices have jumped by 27 per cent.
So, let’s dig into how CPI is bogus and why it matters.
If you aren’t familiar, CPI (Consumer Price Index) is the measure of inflation that everyone always refers to. CPI measures the change in price of a ‘basket of goods’.
CPI is a statistics created by the BLS (Bureau of Labor Statistics) and is supposed to measure the cost-of-living for the average American. Here I make the case that it is purposely understated by a large margin.
The chart above shows the percentage change in CPI each year. From January 2021 to January 2022, CPI increased 7.5% that’s the fastest increase since 1982. This means that in just 12 months, the value of your money decreased by 7.5%.
The short term spike can be attributed to supply shortages and massive money creation. This short term increase has been discussed a lot recently, but the problem of inflation goes much deeper:
1. CPI is a terrible way to measure inflation
2. Inflation is much higher than 7.5%
Why would the Bureau of Labor Statistics lie?
I am not a big conspiracy theorist. That being said, some conspiracy theories are true – especially when it comes to government transparency.
If you don’t believe that government officials ever lie, you have a rude awakening coming. From the Pentagon Papers to Saddam’s “weapons of mass destruction” to the Golf of Tonkin … the US government misleads the public about much more significant issues all the time.
What incentive would there be to understate inflation?
1. High CPI means lower GDP
CPI is used to deflate GDP – so if the goal is to give the appearance of a booming economy, a high level of inflation would cancel out some of the increase in GDP. Politicians have an incentive to make the economy appear better than it is in order to get re-elected.
GDP is also a terrible measure of an economy. If the government creates and spends money while understating CPI, GDP will continue to rise regardless of the actual state of the economy.
2. Secretly inflate away the debt
The US government is in $30 trillion of debt. When there’s inflation, the value of each dollar decreases and debt becomes easier to pay off over time.
This debt is in the form of government bonds and treasuries, 60% of which is owned by domestic and foreign investors. If investors believe that bonds protects them from inflation, the government can continue to inflate away their debt, deficit spend, and issue even more debt.
The government can only make money in 3 ways: taxes, creating more money, or issuing more bonds – going even further into debt. As long as the system doesn’t collapse on their watch, going further into debt doesn’t matter to politicians because they’re spending our money.
3. High CPI means more government debt
8% of the government debt is in the form of TIPS (Treasury Inflation-Protected Assets). This means that a whopping $2.4 trillion in government debt increases every year based on the CPI numbers. If CPI reflected the true devaluation of the US dollar, the government would not be able to inflate away this debt.
4. High CPI requires more government spending
Many government expenses are increased yearly to follow CPI. Social Security, food stamps (SNAP), military benefits, and Medicare all increase based on CPI numbers.
Social Security alone makes up ~17% of government spending (~$1 trillion every year). If CPI were measured to track inflation more accurately, Social Security spending would have to be more than double what it is today.
How does this all work? Who manipulates CPI and how?
CPI and many other government statistics are created by the Bureau of Labor Statistics (BLS). The BLS is a government organization and the commissioner of the BLS is appointed by the President and Congress.
We now know why they would manipulate CPI, now let’s look at how:
1. Substitution and Calculation
Since the 1940’s, the way they calculate CPI has been changed 8+ times. The BLS even admits that they changed the way CPI is calculated in order to make it lower. One of the biggest changes came in 1980:
This change allowed the BLS to substitute goods at will. Rather than choosing one constant basket of goods and measuring the price over time, they could choose to substitute one good for another if the first one rose in price.
Example: If the price of filet mignon increases 10%, the BLS can substitute hamburger meat instead, thus keeping the inflation numbers low
If the way CPI was measured was the same as in 1980, inflation numbers would look a lot different. Shadowstats is a great resource if you want to learn more.
If CPI were measured the same way as in 1980, it would be over 15%. Rather than the 2–3% we normally see, inflation would fluctuate ~8–9%. That’s a huge difference.
2. Housing Prices
Housing makes up ~33% of the average Americans’ expenses. Because of this, housing is weighted and makes up 33% of CPI.
If the BLS could manipulate this one part of CPI, it would make a huge difference in the final numbers.
To measure the cost of housing, the BLS uses a made up metric called “Owners Equivalent Rent”. Instead of using actual house prices, they do a poll and ask homeowners how much they think they could rent their house out for. In January 2022, the BLS reported the cost of ‘shelter’ up 4.4%.
Rather than this subjective measure, why not use actual house prices?
Zillow: Jan 2021-Jan 2022 house prices rose 16.6%
Redfin: house prices rose 15.1%
Even the St. Louis Federal Reserve has house prices up 15.5%
The S&P CoreLogic Case-Shiller 20-city home price index, which measures house prices in 20 US cities, is up 18.3%
4.4% compared to ~16% is a HUGE difference, especially when housing makes up 33% of CPI.
If CPI included the cost of purchasing a home, it would be well above 10%
3. CPI doesn’t include assets
Every financially literate person will tell you that you must own assets. Because the Federal Reserve artificially inflates asset prices while devaluing the dollar, you’re becoming poorer every year if you don’t hold assets.
Most of the money created by the Federal Reserve makes its way into assets like stocks, real estate, gold, or Bitcoin. None of these assets are included in CPI. Because of inflation, owning assets is necessary if you want to maintain your wealth and standard of living and should therefore be included in CPI.
The S&P 500 has increased ~10% each year for the last 10 years. This means that every year, buying the S&P becomes 10% more expensive -regardless of the underlying companies performance.
Inflation is a policy choice. In many ways, inflation is taxation without consent.
The US government chooses to devalue our money rather than allowing the free market to work properly. Because of this policy choice, every one of us who uses US dollars is being silently robbed by inflation.
Even using the government reported CPI statistics, you’re losing ~4% of your purchasing power every year. In the short term, 4% loss doesn’t seem so bad — but if you look out further you lose 50% of your wealth in 18 years.
In reality, inflation is ~10%. This means that you lose 50% of your wealth in just 7.2 years.
At 15% inflation, you lose 50% in 5 years.
The government devalues our money, spends more than they have, and then LIES to us about it.
Bitcoin fixes this.
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