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Faust100F
Advisor

Why we have zero inflation in Amerika

Here is why we have zero inflation in Amerika, even though gas is going up, food is going up, and taxes are 

going up!  What a crock!!!!!!!!

 

This is an excerpt from Zero Hedge Article.

 

 

Zero Hedge excerpt:

 

However, a bit of history is needed for context.  The government produces a measure of inflation called the consumer price index (CPI) which is generally broken down into two reports:  Headline and Core.  The only difference between the two measures is that the core reading strips out the volatile food and energy components. 

 

It is this core reading that economists, and the Fed, focus on much to the aggravation of average consumers

who quickly point to the fact the food and energy are big part of their daily lives.

 

The sole purpose in measuring inflation is to help businesses, individuals and government adjust their financial planning for the impact of inflation.  Inflation erodes future purchasing power, and decreases economic prosperity, if not accurately accounted for.  The accuracy of measuring inflation, and accounting for it properly, is essential to long term economic prosperity.

  

The original calculation of CPI, which measured the change in the cost of an identical fixed basket of goods priced at prevailing market costs each period, worked reasonably well for the intended purpose into the early-1980’s.  However, as the pressure of increasing deficits weighed on political parties, the need to find solutions to reducing spending, without actually cutting spending, led to several substantial changes in the calculation of inflation.

 

Shortly after Clinton entered the White House the Bureau of Labor Statistics (BLS) altered the calculation of inflation by changing the weighting of goods in the CPI fixed basket.  Then, over subsequent years, the method of weighting the underlying components was changed from a straight arithmetic weighting method to geometric.  The primary result of the switch to a geometric weighting was a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price which led to lower reported inflation.  

According to John Williams

 
 

“…the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.”

But the manipulation of the data did not stop there.  Aside from the weighting changes the BLS instituted a system of “hedonic” adjustments.  Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them.

 
 

“That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.

 

When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air. The same principle applies to federally mandated safety features in automobiles. I have not attempted to quantify the effects of questionable quality adjustments to the CPI, but they are substantial.”

Lastly, there is "intervention analysis" in the seasonal adjustment process.  Intervention analysis is critical to the highly volatile areas of food and energy.  When a commodity, like gasoline, goes through periods of violent price swings the BLS steps in and uses “intervention analysis” to smooth out the volatility.  As a result, sharply rising gasoline prices are never fully reflected in the reported headline inflation number.  However, declining prices, which are never adjusted, do show an impact to reducing inflation.

The obvious problem with these manipulations is it changed the measure of inflation from a cost-of-living adjustment to a reduction-of-living adjustment.  

15 Replies
ollie2655
Senior Contributor

Re: 0 inflation is a obalmo lie

he has a hard time seeing economic policy comes with all those years in the projects

bruce MN
Advisor

Re: Why we have zero inflation in Amerika

Interesting that you bring that up now, just as Darwin, Pete Peterson, Milton Freidman and Chinese Central Bankers are about to set us off on a nice little run of mini-deflation.

Faust100F
Advisor

Re: Why we have zero inflation in Amerika

Bruce, you could be right, but with the FED now at QEinfinity the debasement of the our currency will continue.  I watched BA's Kyle Bass Video, and he has recommended "hard assets"  well . . . Fortunately for most farmers that is what they own, most do not speculate in the stock market and invest in thinly traded market pervaded by front running and flash trading.   Japan is history and China has serious problems because its exports are cratering, with declining exports, comes joblessness, civil unrest and War.  

 

The United States is the least worst place to put your money right now, and that place according to Bass is not in US Treasuries but the "agencies" Freddie, Fannie, and Gennie.   Mini deflation will not be lasting long, the housing crash is about over 6,000,000 units left in inventory, a healthy inventory is 3.5 million.  Those residential properties are cheap right now, in a few years those "hard assets" will be keeping pace with the inflation that is already here.

 

What did you pay for John Deere Parts this year;  did your fuel go down in price; how about the seed, chemicals, fertilizers were they cheaper?  No, because of the uncontrolled issuance of debt and the zero interest policy of the FED our currency is headed for destruction, so if your deflationary premise is correct, perhaps you should be loading up on those "hard assets" instead of those securities from governments that cannot pay off debt,but must continue to roll the debt, just like the BTO's in farming when you cannot pay the note of at the bank, you just sign a new note, and do it again and again and again.  But someday there is a day that will come those debts must be either repaid or written off. 

 

I personally do not believe Agriculture is as immune as everyone believes to the financial consequences that will be coming. Keeping the debt balloon floating will soon be getting harder and harder. When the belief that "tenancy" was the road to follow in grain farming instead of "owning land you farm" that is when the financial problems really began, chasing land and paying higher rents and farming with guarantees from the federal

government, "the great enabler" through RMA and Federal Crop Insurance on marginal ground,

 

If certain events happened; interest rates rise which will strengthen a debased currency such as the dollar, and the FED ended its policy of lending to the big banks at their discount window at a half percent to the big banks, so they could buy US Treasuries to continue the financing of our government and receive a return of  2.5% without risk instead of forcing them to put that money to work in the private sector.

 

We are all in the same boat, we have no real control over our destiny, we will awaken some morning and find that dollars have been revalued and you will absorb those losses because they will be deflated.  Your protection will be the stuff you are standing on when you walk outside every morning.  When this occurs, the asset the most out of favor may be your best hedge against the action taken by our government, you home or your other residential real estate.  Adios Amigo. John

.

hardnox604008
Advisor

Re: Why we have zero inflation in Amerika

rots-o-ruck, hope you hit a couple tail feathers on that duck.

Red Steele
Veteran Advisor

Re: Why we have zero inflation in Amerika

Good Post Faust and well reasoned. I thought the same thoughts in the early 80's and thought that the people buying land for $3000 per acre were the smart ones as I saw only more inflation coming down the pike. If I would have had any money to speak of, that is what I would have done also. Fortunately, I had to wait and save what dollars I could. A much better opportunity came along.

 

RIght now I have a hard time seeing any deflation, but it sure does look like a land bubble again where people that said $2000 per acre land was too expensive are bidding $10,000 and more and getting peeved off if they are not the winning bid. I am sitting this dance out and watching.

kraft-t
Senior Advisor

I never have bought a cheap farm

It is only after I bought them that they all proved out to be.

gough whitlam
Senior Contributor

Re: Why we have zero inflation in Amerika

I notice you GDP is now 3.1%.  Not bad for a total idiot and spendthrift who couldn't run a chook raffle.

BA Deere
Honored Advisor

Re: Why we have zero inflation in Amerika

Gough, you give me $6 Trillion and I`ll throw you a better party than we`re having now. 

http://theeconomiccollapseblog.com/archives/75-economic-numbers-from-2012-that-are-almost-too-crazy-...

gough whitlam
Senior Contributor

Re: Why we have zero inflation in Amerika

But as I have said a million times and you all deliberately ignore the truth is you have to undestand what got yo in this situation in the first place.  Of course it would be totally irresponsible for me to suggest your country's propensity to go to war at the drop of a hat.  Further to that, it was GWB who originally handed out the money for the party when he gave the tax cuts. The result was the GFC and you guys still vote for the party that gave you that. It beggars belief.

 

Now you are slinging off at Obama because he can't fix the problem overnight.  You are lucky the chinese handed you the 3 trillion to keep going and now you probably want to declare war on them because they are taking your jobs.  You can't have it both ways.

 

So at least, tell the truth of why you have such problems. The "party" as you call it was of your guys doing.