How the US Fed is reporting low inflation

Mar 23, 2011

Paris, France

What were we talking about yesterday? Oh yes...something about a big, nasty bird...and Japan.

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First, let's report the news from yesterday...then we'll come back to this subject. To give you a preview, Japan is using QE -- money printing -- to cover the holes in its budget. With the need to rebuild its economy and its infrastructure, our guess is that it's going to do a lot more of it.

Back in the USA, stocks went up a bit yesterday. (Or they went down a bit, we can't remember...) Gold and the dollar were about even. Nothing much worth reporting, in other words.

But investors, politicians, and economists all seem to think the economy is on the road to recovery. The only people who don't seem to believe it are the people who actually live and work in the real economy -- people who shop at the supermarket and depend on wages.

Which reminds us of a funny incident. A Fed governor recently tried to explain to an audience of ordinary citizens how the government figured the 'core' inflation rate. The lumpen didn't go for it at all. They heckled the poor man. "When was the last time you went to the supermarket," they asked.

The most recent inflation numbers tell us that prices rose 0.5% in February. For the mathematically challenged dear reader, this is an annual rate of 6%, or 550 basis points above the rate at which the Fed lends money.

But wait...the feds tell us not to pay any attention to this number. They want us to focus on the 'core' number, from which they've taken out the things that are going up -- food and energy. Having taken out the prices that are going up -- even though they are essential items -- they thus magnify the items that are left. Notably, housing. And guess what? Housing is going down. So, falling house prices make it possible for the feds to report a low 'core' rate of inflation -- which is a lie and a fraud. The average family is actually spending more and more money just to keep food on the table and gas in the tank.

And here's another counterfeit figure from the feds: it was widely reported last week that the unemployment rate was down to its lowest level in almost two years. The unemployment numbers are so cruelly twisted by the feds we feel sorry for them. The most obvious way is by means of 'seasonal adjustments.' Look what seasonal adjustments did to the latest numbers.

USA TODAY has the report:

WASHINGTON (AP) - Unemployment rose in nearly all of the 372 largest U.S. cities in January compared to the previous month, mostly because of seasonal changes such as the layoff of temporary retail employees hired for the holidays.

The Labor Department said Friday that the unemployment rate rose in 351 metro areas, fell in only 16, and was unchanged in 5. Thatís worse than December, when the rate fell in 207 areas and increased in 122.

Other seasonal trends, such as the layoff of construction workers due to winter weather, also contributed to the widespread increase.

Nationwide, the unemployment rate dropped to 9% in January from 9.4% the previous month. It ticked down to 8.9% in February. But the national data is seasonally adjusted, while the metro data isnít, which makes it more volatile. The metro data also lags the national report by one month.
See what we mean? Fewer people actually have jobs, but if you 'seasonally adjust' the numbers, unemployment is going down.

Prices are going up everywhere too, but if you take out the stuff that is going up, you see prices stable.

And here are some other little facts that come to our attention this morning: one out of every five houses in Florida is vacant. Holy sawgrass! How are the feds going to show housing prices going up?

Back to Japan...

We were just pointing out that while everyone is looking for 'black swans' it may be the white ones that bite. They might be imposters. Scratch the paint off and they're often gray...and nasty.

Take QE2, for example. The Japanese are running out of money. The government already owes 2,000% of annual tax receipts...the savings rate is falling to zero...and deficits are bigger than ever.

What's a poor Japanese central banker to do? Turn to QE! It hasn't worked yet. But it hasn't done any harm either. The inflation rate in Japan really is near zero. Japanese exporters are desperate to bring down the yen. Everyone wants a little inflation...everyone wants more money to rebuild after the recent disasters...everyone wants QE!

So, give it to them...good and hard!

Which is why we think Japanese stocks are a good bet. They've been going down for 21 years. They're cheap. If the economy bounces back -- as Warren Buffett cheerfully expects -- Japanese stocks will do well. If the economy doesn't bounce we cheerfully will be off to the races with QE. The effects won't be immediate, we predict. But they will be dramatic. One day, prices will soar. People will rush into stocks to protect themselves. Japanese stocks will be the world's top Zimbabwean stocks were at the height of that country's recent hyperinflation.

Buy Japanese stocks now. Put them away. Wait until you read about them in the paper.

*** "What should I do now," asked a friend. "I've met my financial goals. And I told my wife I'd retire [when we had enough money]."

Our friend has the sort of problem we'd all like to have. He is young. He is very successful. He has made a fortune. Now, he faces a problem; what to do with his life. We were flattered that he asked us for advice; but what do we know? We have always worked. Still, that doesn't stop us from having some thoughts about it. Here it is:

We knew another man who retired early. He was, like your editor, a publisher. He sold his business and retired early. But he couldn't suddenly turn off the juices that drove him, day after day, to compete. He had to find other activities. He tried promoting his favorite causes...he tried helping his friends...he tried moving to Europe and starting a new life. It was all very disappointing. Without the guiding light of the profit motive, he lost his way. He didn't know whether he was doing his friends good or harm. He donated generously to 'causes' only to find his fellow sojourners resented his money and the power it gave him. He became caught up in the bad politics of do-good groups. Even his marriage suffered, as he brought his critical, hard-driving skills to household improvement.

Even worse, it must have stuck in his craw that the business he sold went on to greater and greater glory without him. Its founder was soon forgotten, his name replaced with a single letter of the alphabet.

We recall talking to another, retired man, who gave this explanation:

"I was happiest when I was working. It was like marching uphill. I was getting somewhere. Always going up. Always struggling to move ahead. I didn't have worry about who I was. Or what it all meant. I had a job to do and I was happy doing it. But when I got to the top of the hill, I was lost. There was nowhere to go but down."

A good man is like a draught animal, we conclude. He is a dumb beast of burden, happiest when he feels the traces on his chest, and occasionally, the lash on his back. Head down, he pulls his load and causes no trouble. Best to keep him at it...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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