Today’s government announcement of the CPI should be given as much creditability
as an Enron earnings report. That is why the CPI should be referred to as Pro-Forma
CPI. The government manipulates the data to artificially minimize increases
in consumer prices. That is because the government has a vested interest in
maintaining the illusion that inflation is not a problem, just like Enorn had
a vested interest in maintaining the illusion that it had earnings! The U.S.
government is the world’s largest borrower, with a 6 trillion dollar plus national
debt, mostly financed with short term paper, a large percentage of which in
the hands of foreign creditors. If our creditors were to get wise to the true
inflation threat, they would demand that the United States government pay much
higher rates of interest on its debt. This would cost the government hundreds
of billions of dollars in additional annual interest payments, sending the
annual budget deficit soaring, creating a self-perpetuating spiral of bigger
deficits causing rising interest rates, causing bigger deficits, etc. Not to
mention the negative effect sharply higher interest rates would have on the
American economy so heavily dependant on spending from over-leveraged consumers
deriving their incomes from over-leverage employers and collateralizing their
borrowing with over-valued real estate! Also, by manipulating the CPI data
the government is able to reduce its cola adjustments to social security recipients
and other inflation indexed programs, while limited increases in inflation
indexed income tax exemptions, not to mention the money the government saves
on interest pays to holders of inflation protected treasury obligations (TIP’s).
Inflation, properly defined, is an increase in the supply of money and credit.
The Federal Reserve has recently pursued the most inflationary monetary policy
in its 89 year history. Initially inflation resulted in the stock market bubble.
However, as stock prices are not components of the CPI no one cared. Next,
inflation made its way into rising real estate prices. Again, no one cares.
More recently, inflation is causing commodity prices to rise. The CRB is up
22 percent this year, and is now within 1 percent of a 4 year high. That is
the biggest annual increase in the CRB since 1982. Inevitability inflation
will result in rising consumer prices, and will ultimately be reflected in
significant increases in the CPI, despite the government’s best efforts to
manipulate the data.
One of the main reasons that the CPI has not been increasing at a more rapid
rate (other than government manipulation) is the enormous merchandise trade
deficit. Today’s release of the August data show yet another all time record
high trade deficit. As dollars flow out and foreign manufactured products
flow in domestic consumer prices are held in check. But when the buddle in
the dollar finally busts consumer prices will soar as wealthier foreigners
out-bid poorer Americans for all sorts of merchandise and natural resources,
sending the CPI through the roof.
In fact, it is the trade report, not pro-forma CPI, that is the one truly
significant economic release of the day, for it shows just how unproductive,
non-competitive and mal-invested the U.S. economy really is.