Lies, Damn Lies, and Government Statistics

Lies, Damn Lies, and Government Statistics

by Van K. Tharp, Ph.D.

When the US dollar was totally based upon gold, and before the Federal Reserve existed, inflation basically was tied to the supply of gold. When new gold was found and came into play, inflation occurred; when gold reserves were down, deflation occurred. You can find some interesting articles in older, economic magazines about gold and inflation.
However, this relationship started to change partially when the Federal Reserve System* was born in 1913 (by the way, the federal income tax was also born in 1913) and then massively when Nixon took us off the gold standard in 1971. These actions provided the ability to create inflation at will.
When the government needs money it goes to the treasury and says, “We want $10 million dollars.” This was in the old days when $10 million amounted to something. The treasury would say, “You’ve spent all the tax revenues, so we can’t give you any more.” The government would then go to another door—that of the Federal Reserve and ask for the money. The Fed would say, “Sure.” It can write a check for money that didn’t exist previously. The government would then deposit the check in a bank (probably one that owns the Federal Reserve) and the bank then had the ability to loan out $100 million to their customers. And where did that money come from? The Federal Reserve just printed it. This, of course, would be very illegal if you and I did it. However, the big banks, through the Federal Reserve, could print money out of thin air. Not only that, but they could charge interest on it. That’s right, banks could charge interest on money that didn’t exist before and was printed out of thin air by an agency that they owned. This process essentially levied a tax on everyone else. It was a silent tax called inflation.

My mom was born in 1904 and told me that when she first went to the movies, it cost 5 cents. I can remember going to the movies in the 1950s and I got to see two movies, plus a cartoon in the middle, for 50 cents. Today, the price to see one movie is about $15.
In the late 1950s, I paid 15 cents for a hamburger. When I visited the UN building, I was horrified to discover that hamburgers cost $1. Today, my 15 cent hamburger can range from $2.50 to $15, depending upon where it is purchased. Do you see a trend here? It is all thanks to the tax created by the Federal Reserve called inflation.
Now, this opened up a great business for the government. Politicians could promise people anything they wanted in order to get elected. To pay for their promises, they just had to go to the Federal Reserve, who would write a check to the government and create the money out of thin air. Then, the banks that owned the Fed could loan about ten times the money that was deposited, and charge you interest on the money that was created out of thin air.
Because money was still backed by gold for the first half century of the Fed’s existence, there seemed to be some constraint over the money creation process. Around 1970, however, countries were redeeming more and more Federal Reserve Notes for gold and the US gold supply was shrinking. Thus, Nixon ended the gold standard for the US dollar in 1971.
Then we pulled something really amazing out of the hat. We got the rest of the world to treat our paper money, which the Federal Reserve could print at will, as the world’s reserve currency. It basically meant that we could spend at will and other countries would fund that spending. However, social security also funds the spending at will because the social security administration uses your social security taxes to buy up the debt created from thin air. When the Fed writes a check for money that didn’t exist, it creates a debt and the government uses your social security money (among many sources) to buy it.
I can remember when the U.S. debt first hit a trillion dollars in the 1980’s. The curve on a graph of the debt looked asymptotic and I thought then, “It has to end.” But that’s a little like Yellowstone National Park. Yellowstone is a huge volcano. It erupts about every 600,000 years and when it does, it destroys everything in North American. When was the last time it erupted? About 640,000 years ago. That makes it 40,000 years overdue to explode and wipe us out, but who knows? It might not happen for another 50,000 years or it might happen tomorrow.

Well that’s the same story with our debt. Officially, it is now about $16.4 trillion and if you include unfunded future liabilities such as social security and Medicaid, then it is about $100 trillion (depending on whose estimates you look at). Just like Yellowstone will one day destroy North America, the US Debt will one day destroy the United States. And I can guarantee that it will happen within the next 23 years -- not the next 50,000. Right now the official debt is 105% of the US GDP, according to the US Debt clock ([You must be registered and logged in to see this link.]
Now, until all of this explodes, the US has to do several things to keep the game going because it has made promises to protect you from the inflation it has caused. For example, funding for entitlement programs such as social security (which is bankrupt and another promise with no good faith backing) are tied to inflation. The government measures inflation and then has to increase SS payments by its own measurement.

Therefore, wouldn’t it make sense for a government that is hopelessly in debt to figure out some way to lie to you about inflation? Yes it would and yes it does. Enter the Consumer Price Index.
The Consumer Price Index (CPI) is a cost of living benchmark that the government uses. The Bureau of Labor Statistics (BLS) produces the statistic and says simply that the CPI “is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”

The government uses a cost of living benchmark called the Consumer Price Index (CPI). The Bureau of Labor Statistics (BLS) produces the statistic and says simply that the CPI “is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
Aspects of the CPI began in the mid-1880s when the Bureau of Labor was asked to estimate the impact of new tariffs on prices. In those days the government got its money from tariffs, not income taxes. The government officially started tracking inflation in 1919 and has regularly published it since 1921. However, it wasn’t used that much until after World War II.
So let’s look at what’s happened to the CPI over time. The following graph shows the CPI from 1913 through 2006. Incidentally, it started in 1919, but the Federal Reserve system started in 1913 so that’s probably why they go back that far.

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Notice how smooth and predictable it has been since 1980 which very little fluctuation in the annual amount of change. Also notice how the CPI just took off in the mid-1970s after Nixon ended the gold standard. And at the same time, he thought that the climbing CPI reflected poorly on his presidency. As a result, he turned to the Federal Reserve (interesting the role that the Fed has in all of this mess) and asked chairman Arthur Burns to find a lower measure of inflation.
And suddenly “Core Inflation” was born. Basically, the old CPI calculation was stripped of two of the biggest burdens on Americans—food and energy. But when you see your groceries and gas prices go up, you are typically not that fooled by the low core inflation rate. How long did it take for gasoline to go from $1 per gallon to $4? And that didn’t show up in the CPI at all.
During Ronald Reagan’s presidency, housing prices were going up rapidly. As a result, the BLS in 1983 decided how much rent would be on a house (if it were rented) and used that as a measure of housing prices. So when real estate prices surged in the 1980s and the 1990s, they were vastly underestimated in the CPI.
Shortly after the Clinton administration took over, the government was allowed to start using a variable basket of goods. For example, if steak got too expensive, it could substitute hamburger. In addition, straight arithmetic weighting of the CPI components was shifted to geometric weighting. And everyone thinks, “How wonderful the Clinton administration was in controlling the economy” . . . but that’s another story.
Many of you know that I frequently cite for you John Williams’ Shadowstat statistics for the CPI and his measure of GNP growth (which subtracts the CPI) to determine whether or not we are in a recession or not. Williams calculates the CPI based upon the way it was before Clinton (though not before Reagan and Nixon). And according to Williams the US has been in a recession since 2000 with the exception of one quarter in 2003—and that’s just by using pre-Clinton measures of the CPI which are higher by about 7%.
The CPI makes a big difference for a lot of people. 50 million social security recipients and many millions more of military and federal pensioners depend upon the CPI for increases to their monthly retirement checks to cover the more expensive cost of living. Numerous agreements in the private sector are all tied to the CPI changes. So the government lies about the CPI and the lies are becoming bigger and bigger.
Now, there is more to come. In the fiscal cliff negotiations, both parties were negotiating a new way to calculate CPI call the Chained CPI. The Chained CPI is a much more exaggerated form of goods substitution for when things go up too much.
Switching to the new Chained CPI would result in a savings to the government of about $150 billion by reducing costs of living estimates between 2014 and 2022. And since things like standard deductions and limits on retirement accounts that are linked to the CPI, these changes would also raise income tax revenues by about $62 billion.
I think it’s important that you are aware of the games being played. It is only a matter of time before the “Yellowstone” of government debt explodes and totally destroys the US economy. In my opinion, it’s only about $15 trillion overdue.
But remember that this crisis presents opportunity which every good trader will exploit. You cannot trade your vision of the future, you can only trade what is happening right now – and these markets don’t allow for buy and hold anymore. Isn’t it time that you become savvy enough to be able to trade these market conditions?
Perhaps a good New Year’s resolution is to prepare yourself to trade. We can help you. We suggest that you begin with The Peak Performance Home Study Course and the Peak 101 Workshop. Understand the powerful effects your personal psychology has on your trading. These effects can be magnified by a crisis, however, the proper training can transform your psychology into an important edge in the markets.
* For a very well documented history of the Federal Reserve, read The Creature from Jekyll Island by G. Edward Griffin.

About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at [You must be registered and logged in to see this link.] His new book, Trading Beyond The Matrix, is expected for publication February 2013.