How the government manufactures low inflation

[Robbien]

In a recent report, Milunovich noted that the Bureau of Economic Analysis (BEA), whose job it is to compute the Gross Domestic Product each quarter, has "stopped reporting the real computer hardware shipment figure used to calculate real GDP growth, though it is still used in GDP calculations." The BEA, which is part of the Commerce Department, made this readjustment because it is "concerned the rapid price declines for computers made the figures misleading."

Let's stop and review the bidding for a second. Remember: GDP is the measure of goods and services produced in this country. The government decided that certain of its data series involved in calculating GDP were misleading. So, what did it do? Simply stop breaking them out. Makes sense to me; how about you?

This would be a humorous window into the lunacy of government calculations, were it not so important to many statistics. Regular readers of my daily column know that the magic of "hedonics" and all its attendant distortions is something that I have railed about for a long time.

Hedonics: 'miracle' tonic for an ailing economy
For those of you who don't know, hedonics is the way the government transforms price declines into quality improvements. To wit, you buy a PC with twice as much power, so the government concludes that you really paid only half as much money for it. Hedonics is also the government's way of taking quality improvements and converting them into price declines when calculating the CPI. Sure, that brand-new Chevy you just bought cost 40% more than it used to, but it's a 40%-better car for a variety of reasons. So, the government says, the price didn't really go up. (I have oversimplified these examples, but you get the point.)

http://moneycentral.msn.com/content/P72746.asp

[Bullshot]

1. It's kind of like how they calculate farm income.

I remember hearing some ag economists beam about how farm income is up, even though this "income" at the time, anyway, included the potential market value of a farm operator's home. It also included all of the government payments farmers received. All those stats did was cover up how low farm prices received by farmers are in relation to the prices they pay for their seed, fuel, equipment, buildings, land and all of the other things needed to produce a crop or raise livestock.

On the GDP, I remember when the government went to the GDP in favor of the Gross National Product during the administration of Bush I. The Wall Street Journal reported that the GDP showed growth in the U.S. economy, but admitted that the economy would have shown a decline had the GNP been used as the measuring stick of this nation's economic growth.

[junker]

2. No independent measure of dollar inflation...

remember, inflation is an increase in the supply of money, not the prices of things. Yes prices reflect inflation, but if money supply shrinks then prices will fall (less money to pay for things). So one never has rising prices during deflation as the total amount of currency is shrinking.

Further, there is no longer (since Nixon when off the partial gold standard in the 70s and started the oil shocks when the Arabs refused to give out good oil for bad paper).....an objective measure of the dollars' worth.

It used to be gold/silver that were used to measure dollar worth and therefore inflation, but since R. Rubin did the dirty deed in 1997 in cahoots with Sir AL greedspan and started suppressing the price of gold under the table by secretly selling the gold out of Ft. Knox and West Point....there has been no objective measure of dollar value.

One of the reasons that the dollar now falls in 'value' and thus we find inflation in every thing we need like food and energy and housing but not in those things that are imported (basically we are importing deflation slowly, but the Fed is fighting it)....is that the PPT (plunge protection team otherwise known as the Presidential Working Group on Markets) has run out of physical gold/silver with which to control the market.

Why, do you suppose, that Bill Gates, and Warren Buffet, two otherwise saavy fellows, would invest vast quantities of dollars in gold and silver.. think they know something you don't? Probably so, eh?

Anyway, the 'stong dollar policy' is not implemented by merely have pRes or SecofTres go out and jawbone about it. They kept the dollar strong by suppressing, as long as they could, the relative value of precious metals and other commodities.

It is all falling apart now. Inflation is actually going at better than 50% in real purchasing terms and is rising. This spells hyperinflation like in 1923+ in Germany. So get ready....gonna be a very messy year financially. Especially with Butthead in the WH.

[54anickel]

3. Interesting how Greenspan also doesn't want SEC involved with

hedge funds.

http://www.forbes.com/markets/newswire/2004/02/12/rtr1259532.html

WASHINGTON, Feb 12 (Reuters) - Hedge funds have played a major role in recent mutual fund scandals, a federal official said on Thursday in response to Fed Chairman Alan Greenspan questioning the need to register the fast-growing investment pools.

"Hedge funds were willing participants in more than half of the recent mutual fund cases the SEC has brought," said Laura Cox, a senior adviser to Securities and Exchange Commission Chairman William Donaldson.

Donaldson is "very concerned" about hedge fund involvement in many of the improper market timing and illegal late trading scandals that recently hit the mutual fund business, Cox said.

In September, the SEC staff recommended that hedge fund managers be required to register with the SEC. Hedge funds -- the fast-growing investment pools favored by the rich and large investment institutions -- are only loosely regulated now.


PPT article
http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm