Consumer Price Indexes May Lie

Bill Bonner - Fri 16 May, 2008

People are starting to question the readings of consumer price indices.

The Dow rose more than 90 points yesterday. Oil, gold, the dollar – all held steady.

But here’s some good news.

Last month, the price of gasoline went down 2%, says the Labor Department.

Wait a minute. Do you remember gasoline prices going down in April? We don’t. As we recall, oil prices were soaring…and so was the price of gasoline. We’re beginning to sniff something funny in the air…a rat.

It was largely thanks to this reported drop in prices at the pump that the Consumer Price Index registered a scant 0.2% increase for the month of April. And it was largely because of this low inflation reading that the yield on the 10-year note stayed below 4%, says Gary Dorsch.

Our view is that higher consumer price inflation is in the pipes and will soon be backing up in the bathtub drains. Dorsch says the US money supply is now increasing at a 16% rate; higher inflation can’t be far behind.

Generally, we don’t trust numbers. Who can trust a 5 after all – with a bottom like a communist sickle and its top nicked from a swastika? Who can trust an 8 – wandering back and forth and never getting anywhere? And what about the zero? What does it mean? You put it in front of a number and it means nothing. You put it behind…and all of a sudden you’ve got 10 times as many. So, let’s look a little more at those numbers – that is, at the crooked 4s, the slick 6s, and the empty 0s – put out by the feds.

Getting back to the price of gasoline, we check the records from NY gasoline futures trading and find the price actually rose 12% in April. How come the feds put it down as minus 2%? Turns out, they made a ‘seasonal adjustment.’ But turning plus 12 into minus two sounds like more than an adjustment; it sounds like either magic or major surgery…like turning a prince into a frog or a fat man into a slim woman.

Elsewhere, we find the feds working their magic on all the primary numbers. The IMF, for examples, says food prices rose 43% last year. Yet, after the feds waved their wands, US food costs were up only 5.1%. And import costs rose 15% year to year – according to the numbers when they first got off the boat. But by the time the Labor Department statisticians had finished ‘adjusting’ them, they were down to only 0.2%.

Only investors, of course, are gullible enough to believe the government numbers. Consumers believe the numbers they see at the check-out counters and the pumps. What they see is sharply rising prices. Even newspaper reporters shop…and even they see what is happening.

“Inflation may be worse than the consumer price index shows,” reports a suspicious USA Today.

“Food costs jump most in 18 years,” notices the Washington Post.

Consumers don’t figure out consumer price increases – they pay them. The combination of lower wages and higher prices squeezes them like thumbscrews. What can they do?

Californians may be among the last Americans to wake up in the morning, but they’re the first to spot a trend. And the big trend in California today is recession.

House prices have fallen more in California than anywhere – down 29%, according to the California Realtors Association. A thousand foreclosed houses are auctioned every day in the Golden State. And joblessness hit 6.2% in March.

What are Californians doing to cope? They’re doing just what you’d expect. “Californians are cutting back on spending,” says James Saft in the International Herald Tribune. “Besides causing woes for state and local government, the cutback is giving California’s economy another knock and makes further job losses, home repossessions and banking problems more likely.”

Nordstrom says a third of its sales come from California and sales overall are down 6.5% in the first quarter. Starbucks says it is just not selling as much mocha in CA as before. Jack-in-the-Box, too, says the Californians aren’t buying as much of its dreadful food.

Meanwhile, other towns – such as Modesto, Stockton and Merced – are said to have 60% of their homeowners “upside down,” with more mortgage than house. Their unemployment rates are above 10%. And Vallejo, a city in Northern California, is taking the coward’s way out. It is slashing its wrists – it says it will declare bankruptcy.

Welcome to California, dear reader. Welcome to the future.

*** “The only way to make a real change is to make a real change…otherwise, you’re just buying time. Big problems need big changes…not parametrical changes, but paradigmatic changes. You have to change the system, in other words, not just the details.”

We had dinner with a fellow who made a real change - Jose Pinera. As Chile’s Labour Minister in the ‘80s, he completely changed the system of public pension financing and provided a model for the rest of the world.

We’ll let Jose tell his story as he told it to us last night:

“I was one of the ‘Chicago Boys.’ That is, I studied under the great economists at the University of Chicago…and then I got my Ph.D. in economics at Harvard, which added a little bit of humanism to the hard-edged teaching in Chicago. So, they called me a ‘Chicago Boy’ and a ‘Harvard Man,’ which is the way I like to think of myself.

“Things fell apart in Chile during the Allende years. We had to rebuild the country afterwards. So, I went on TV and I said what I thought…about how to reform the pension system…or what you call in the US, Social Security.

“A little background. You see, almost all the world’s pension systems came from the same source – Otto von Bismarck. He set up the first one in Prussia and it was later taken up in almost all the developed countries. We set it up in Chile in 1925. It wasn’t set up in America until ten years later.

“ Bismarck was very clever. He offered people a pension on what is called here in France a “repartition basis.” That is, all the money goes into a pot…and you get from the pot whatever the politicians decide you can have. Bismarck offered people who retired at 65 a nice pension, for the time. Bismarck knew that the average life expectancy in Prussia at the time – this was the middle of the 19 th century – was only 45 years old. So he knew he couldn’t have to pay out many pension claims. But the average person didn’t know how long he would live, so he could imagine himself living to a ripe old age and taking advantage of the public pension system.

“ Bismarck also knew why he was doing it. He said he aimed to make the population “docile” so they would “serve the state,” more easily.

“Well, now, everyone is living much longer…and the politicians aren’t as smart as Bismarck. They’ve promised greater and greater benefits, and even lowered the age when you can get them…so the pension systems are going broke. They’re all going broke – you can count on it.

“Now, I’m going all over the world explaining this to governments and urging them to put my system in place…to make a radical change in the way public pensions are financed. Recently, I was in China, for example. You want to see a pension problem…look there. That policy of one family, one child is a catastrophe from a pension financing point of view. They’re going to have hundreds of millions of old people, and very few young people to support them.

“Anyway, back in the ‘80s, I went on TV in Chile, with ideas about how to reform the pension system. I was just a young economist…only 29 years old. But the president of the country saw me on television and he said he wanted to talk to me. He called me in. I said I would be happy to explain to his people how to reform the pension system. But he said that if you were really going to reform it, you had to start at the top. So, he appointed me Minister of Labour.

“Then, I had to explain to the people what was wrong…and had to explain to them how to fix it. So, the first thing I needed to do was to win their confidence.

“I went on TV again. This time I took my mother’s egg timer and I held it up and I said “I’m only going to talk for three minutes. Give me three minutes and I’ll explain what’s wrong with the pension system and what we’re going to do with it. And I told the cameraman to just cut me off after three minutes.

“This worked beautifully, because it made me look humble…I wasn’t going to waste the people’s time with a long, windy speech like Castro…I was just going to tell them something simple, fast.

“Of course, I couldn’t explain everything in three minutes. But I told them that I had good news and bad news. The bad news was that the public pension system was broke. We had no money. But the good news was that I had an even better system.

“They called me the Minister of the Egg Timer…but they began to trust me. And then, I went back on TV…over and over…each time for only three minutes…and each time with my egg timer to keep me honest…and I laid out everything…why the system went broke…and what I was proposing to put in its place - a different system in which, instead of dumping all the money into a big pot that the government could do with as it pleased, each worker had his own personal pension account. It took some explaining. But I kept going…each time explaining more and more. I had to explain, for example, that the idea of the ‘employer contribution’ is a myth. The employer just looks at it as part of his labour cost. But once you call it an ‘employer contribution,’ the employee gets the idea that it’s not really his money that finances the system and he feels he has no control over what he gets out of it anyway.

“My system is very simple. The worker makes exactly the same contribution as he did before. But it’s his own money and he knows it. And he has some control over how it’s invested. And if he dies, it goes to his family. He’s an owner of it, not just a recipient of government handouts.

“So, when I had finished laying all of this out, over a nine-month period, I then admitted that ‘I could be wrong.’ ‘Maybe this won’t work as well as I think it will,’ I said. And I said I didn’t want to force anyone to go with my system. So, we decided that anyone who wanted to stick with the old system – which is the system you still have in France…and America - could do so. Or, they had the option of getting into the new system with individual retirement accounts than they could manage themselves. Now, guess how many people went with the new system? We thought 51% would be a victory. Instead, 95% signed up for private retirement accounts.

“And here’s something interesting. About a third of the population of Chile are leftists…socialists, communists, or Hillary Clinton liberals. Even these people – when it came to their own money – preferred to have it in their own retirement accounts, invested in stocks and bonds, rather than in some black hole in the government accounts.

“And the best thing about this is that it turns the whole country into capitalists. Even the leftists think twice before they vote for higher business taxes or more regulations. They worry how their retirement account will be affected. And that’s why Chile is now the richest country in Latin America.”

A companion noticed the problem right away:

“That must be why the left fights so hard to resist this kind of reform,” he said.

“Yes…but it will come. You just have to wait until your current system goes bankrupt. And it will, sooner or later.”

Chile is now the richest country in Latin America. What a shock it will be to the gringos when it is the richest country in all the Americas!