The War Between Government Statistics and Reality

 

There’s a war going on, but it has no human casualties and gets little attention. There are no guns and no blood. Yet this war gets a lot of press.

This war is the struggle between inflation and deflation.

So far there are only a few winners… and an awful lot of losers.

Three weeks ago the Bureau of Labor Statistics (BLS) released the latest inflation numbers, showing that the Consumer Price Index had fallen by 0.1% for the month of October and had risen by only 1% for the year.

Typically you’d think this is great news. After all, low inflation means our dollars are holding their value, right?

Instead, economists and Fed members are worried that we’re at risk of falling into deflation. They worry that if prices start to drop, spenders will hold back as they wait for further price reductions, thereby pushing the economy back into recession.

It’s called the paradox of thrift…

Saving money causes a falling economy, which hurts the very savers (through job losses and falling asset values) that started the whole thing!

To fight this possible deflation, the Fed and other central banks print money like crazy. But their actions aren’t causing widespread gains in wages or inducing higher spending, although they are causing asset prices like stocks to shoot higher. This has allowed the gains of their actions to be concentrated in a few hands while everyone else gets to plod their way through life with flat or falling earnings and zero return on their savings.

The problem is that the Fed and others want to turn the economic tide, somehow beating or changing a business cycle that has existed as long as people have worked with specialized labor and used debt.

I’ve got news for them.

We are in deflation. Consumers want less debt and are refusing to rack up more on credit cards. This is the very natural and healthy response to years of spending on credit.

We should welcome this trend… even encourage it. The faster we work our way through the deflation of credit reduction the faster we can move on.

But the members of the Fed aren’t buying it. They don’t want anyone to claim they “allowed” deflation on their watch, as if they have the almighty power to make consumers do what they want.

So they hold down interest rates, punishing us with negative savings rates, and work to bolster inflation so that we pay more for goods and services… brilliant!

I have a message for members of the Fed and other central banks:

Please. Stop already.

We don’t want to spend more… and no matter what CPI tells you, even though prices have fallen for gadgets and widgets, we do have higher prices in some key areas of life. All you have to do is ask us about it.

Been to the grocery store? You’ve paid more.

Written a tuition check? Prices are higher.

Bought medicine or paid an insurance premium? Welcome to higher costs.

In daily life, we’re taking it in the shorts.

In one area – gasoline – prices dropped fairly dramatically over the last year (down 10%), but this is from already high prices. Think about it, gas is over $3 per gallon! That’s huge.

Just because some government statistic shows modest price movements doesn’t mean that things are rosy on Main Street.

The really sad part about CPI not capturing what happens in daily life is that the numbers to do so are readily available. The U.S. government already captures data on how we spend and how prices actually change… it’s just not reported in a useable way.

I don’t think there’s a conspiracy to hide such information, just a constant effort to make our economy look better than it really is. After all, who wants to take responsibility for making it more expensive to live while wages fall?

I’m sure that neither Ben Bernanke nor Janet Yellen want to be remembered as “The Killer of Our Standard of Living.”

So next time you read a government statistic about inflation, don’t take it too seriously. Instead, turn to us. We’ll give you the real numbers. And then we’ll tell you what you can do about it.

Rodney

P.S. I’d like to introduce you to a new contributor to our daily writings, Eddie Speed. We’ve mentioned him before and he was one of the speakers at our recent Irrational Economic Summit in November. He’s a 30-year real-estate veteran who has mastered the art of a real-estate strategy that allows you to make money without becoming a landlord. He’ll tell you more about this over the next couple of weeks, so be sure to check back regularly. Now, over to Eddie…

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.