re: Doubting the Fed (and the Department of Commerce)

[David Farber <dave () farber net>]

Begin forwarded message:

From: dewayne () warpspeed com (Dewayne Hendricks)
Date: February 26, 2007 1:22:51 AM JST
To: Dewayne-Net Technology List <dewayne-net () warpspeed com>
Subject: [Dewayne-Net] re: Doubting the Fed (and the Department of  
Commerce)
Reply-To: dewayne () warpspeed com

[Note:  This comment comes from reader Steve Schear.  DLH]

From: Steve Schear <s.schear () comcast net>
Date: February 24, 2007 10:18:03 AM PST
To: Tom Williams <Tom () AirNetworking com>,dewayne () warpspeed com
Subject: Re: [Dewayne-Net] re: Doubting the Fed (and the Department  
of Commerce)

> At 06:09 PM 2/23/2007, Dewayne Hendricks wrote:
> [Note:  This comment comes from reader Tom Williams.  DLH]
>
> From:
> Date: February 23, 2007 12:07:09 PM PST
> To: dewayne () warpspeed com
> Subject: Re: [Dewayne-Net] Doubting the Fed (and the Department of
> Commerce)
>
> I held my virtual tongue when I read the Multiverse posting,
> and held back (at that time) from blurting out "Why is it
> that so many find it easier to believe in a gazillion
> universes than to believe in one sovereign God?"

Because Quantum Mechanics makes predictions that can be tested in  
controlled conditions.  Can you make the same claim for a deity?


> But this one pushed me over the right-wing edge:
>
> The buying power of a dollar today is only $0.04 of what it was in
> 1913, when the Fed was created.
>
> That statement totally ignores the fact that there are so
> doggone many more of those dollars fluttering about.

Not at all.  That is precisely why the value of each has fallen.   
Which, in turn, says is that the number of dollars issued has greatly  
exceeded the goods from a fixed basket (the same basic staples one  
could buy in 1913 and that still get consumed) that the economy is  
producing.

> Anecdotally, my (late) dad was born in 1913, and his
> standard of living continually increased, with the planet-wide
> exception of the Great Depression.  In terms of purchasing
> power, my wife and I are doing better in our late 40's than
> my parents did at our age.  I'm not referring to inflated
> dollars -- I am referring to _things_ we can afford to
> purchase.  Televisions.  Cell phones.  Computers.
> And we don't _feel_ atypical.

When my father was in his prime earning years he and most of his  
friends owned homes and cars on a single income.  Why is it now a  
requirement, even if you forgo foreign family vacations, these new  
gadgets and expensive autos, to have two wager earners to own a  
decent home, put food on the table and send a few kids to school?  An  
interesting home price analysis shows why home prices are almost  
bound to fall dramatically if they are to return to the historic mean  
values, which is almost always a good bet.

<http://www.investingintelligently.com/wp-content/uploads/2006/08/ 
a_history_of_home_values.png>


> The Fed [...] is designed to slowly transfer wealth from
> the poor and middle classes [...] to a privileged few
>
> Please, show me where that "design" is documented.
>
> No one has to tell the poor and middle classes of this country that
> their wages aren't going nearly as far as they use to or should.
>
> That's not my perception.  In order to maintain power,
> Democrats must trumpet that exact message again and
> again until, while watching widescreen television
> in our house and talking on our third cell phone, we
> believe it.  Even when our kids are wearing $150
> sneakers and playing full-color handheld video games.
> Then we vote the class-warfare dems into power, they
> take money from people who earn it (e.g., me), and give
> it to people who don't (e.g., my ne'er-do-well buddy Bill
> back in WV).

[Walter J. (John) Williams is the John Williams behind a fascinating  
website, www.shadowstats.com, which promises and delivers “analysis  
behind and beyond government economic reporting.” An old hand at  
peeling away layers of spin and mathematical machinations to reveal  
kernels of economic reality, the consultant launched his website in  
late 2004. A series of essays he had penned on the government’s  
statistical shenanigans for friend Doug Gillespie’s  
GillespieResearch.com stirred so much response, John says, he  
basically had no choice but to start his electronic letter to  
efficiently distribute his scrubbed statistics and economic views. He  
shares both in excerpts from this interview ]


Back in the pre-Great Depression days, there really were almost no  
modern economic statistics. There was a crude industrial production  
number. In fact, before the Great Depression, most people looked at  
the stock market for an indication of how the economy was doing. If  
stocks were up, the economy was strong; if stocks were down, you had  
trouble. The kind of detailed modern reporting that we see the  
National Income Accounts, for example, weren't published until after  
WWII. The unemployment numbers as we see them pretty much came into  
popular use at that time. The CPI really gained its prominence as a  
way to adjust auto worker contracts, and so the cities that were  
surveyed for the CPI were where all the automobile facilities were.

The methodologies behind these indicators remained fair constant  
until the 1980s.  The some prominent economists that had been using  
government data noticed that models no longer worked.  What has  
happened over time is that the methodologies employed to create the  
widely followed series, such as what used to be called the GNP but is  
now widely followed as the GDP, the CPI, the employment numbers, all  
have had biases built into them that result in overstating economic  
growth and understating inflation  both of which are admirable  
political goals

These overstatements have become such a serious problem that there is  
a little bit of a disconnect today between what a person on Main  
Street thinks is happening and the economic numbers you see coming  
out of the federal government. If the numbers don't seem real to the  
man in the street, they probably aren't. Real unemployment right now  
figured the way that the average person thinks of unemployment,  
meaning figured the way it was estimated back during the Great  
Depression is running about 12%. Real CPI right now is running at  
about 8%. And the real GDP probably is in contraction.

The first incident seems to have occurred during the Kennedy  
Administration which was then maybe 10 years after the economic  
numbers came to be fairly widely used. What they did was redefine  
“unemployment.” They created a category of unemployed called  
“discouraged workers.” If you were unemployed and you'd given up  
looking because there was no work to be had, you were counted as a  
discouraged worker but taken out of the unemployment count. They  
still counted you, at least, until the Bill Clinton Administration,  
when they said, “Well, we really need to define discouraged workers  
so if anyone has been discouraged for more than a year, we’re just  
going to take them out of all the numbers, take them out of the work  
force completely”. In doing so, they knocked about 5 million  
unemployed out of the broader measures of unemployment. Today there  
are seven or eight unemployment measures that are published each  
month. The one they call U-3 is the popularly followed one. The  
broadest one right now is U-6, which is running up around 9%. But if  
you take out all the funny games that they've played with it,  
unemployment is really up around 12%.

In the Jimmy Carter Administration, inflation was understated. During  
the Reagan Administration, there were methodological changes made to  
the GNP and there was an actual overt manipulation of the trade data  
following the stock market crash in ’87. At the end of that year, as  
the dollar was crashing, manipulating the trade data was part of an  
effort to turn the dollar to the upside. There had been a series of  
real bad trade numbers and, they psyched out the markets by coming up  
with a really good trade report. It amounted to a massive  
intervention but they succeeded in bottoming out the dollar and  
successfully turned the market. It was a very dangerous time and I  
guess you could justify that intervention on the basis of national  
security or economic security. But then along came George Bush the  
First. They had a circumstance where they opted for overt manipulation.

There are two types of manipulation of the data. You have the  
systemic manipulations, where methodologies are changed. Again, the  
methodologies almost always have an upward bias in growth and a  
downward bias in inflation and that’s not coincidental.

Fixing the CPI
During the Clinton Administration, the Bureau of Labor Statistics, on  
its own, changed the weighting method for the CPI. It had been  
constructed using arithmetic weightings, which meant doing things the  
way most people would add and subtract and divide. The BLS changed it  
to a geometric weighting, which has the “benefit” that if something  
goes up in price, it automatically gets a lower weight, and if it  
goes down in price, it automatically gets a higher weight. That  
change was implemented over a period of several years. The rationale  
was that it was a way of approximating the substitution effect. But  
it isn't. I mean, it is just a pure mathematical game. In the second  
Bush Administration, they introduced what they call the chained, or C- 
CPI-U, as an alternate CPI measure. And this measure, the C-CPI-U, is  
a direct measure of the substitution effect. It is running a half a  
percent-to a percent below the official CPI which itself is running,  
oh, about 2.7% below where it was before the weighting changes were  
made in the Clinton Administration. All in all, if you were to peel  
back changes that were made in the CPI going back to the Carter  
years, you'd see that the CPI would now be 3.5%-4% higher. The  
difference that it makes is significant: if the same CPI were used  
today as was used when Jimmy Carter was President, Social Security  
checks would be 70% higher.

There was a very deliberate effort in the early 1990s under the  
auspices of Michael Boskin, who at the time was the head of the  
Council of Economic Advisors, in conjunction with Alan Greenspan,  
who, of course, was Fed Chairman, to “fix” the CPI. The story, very  
simply, was that CPI was supposedly overstating inflation. The pitch  
was that if people go out to shop and find that buying a steak is  
getting expensive, they buy hamburger instead. Therefore, their cost  
of living is really less than it would be if they always had to buy a  
fixed basket of goods, which is what the CPI was originally designed  
to measure. That was the whole purpose of the CPI, to measure the  
change in the cost of a fixed basket of goods over time. You'd have a  
steak, a loaf of bread, a gallon of milk, whatever. You'd price them  
out one year and then you'd price out exactly the same goods the next  
year. You'd look at the difference in the cost and that was your  
annual rate of inflation. It was a measure of how much the cost of a  
consistent and constant standard of living was going up. What Boskin  
and Greenspan argued was, “We should allow for substitution here  
because people can buy hamburger instead of steak, when steak goes  
up.” The problem is that if you allow substitutions, you aren't  
measuring a constant standard of living. You’re measuring the cost of  
survival. You can keep substituting down and have people buy dog food  
instead of hamburger. It happens. But that’s not the original concept  
behind the CPI. The reason substitution of the items in the CPI  
basket became a hot topic in Washington at the time and it was talked  
about very openly was because the CPI was (and is) being used to  
adjust Social Security payments to compensate for increases in the  
cost of living, and tamping it down would hold down Uncle Sam’s outlays.



> For independent confirmation one has only to compare the dollar's
> value to gold, the traditional
> standard for constant monetary value.
>
> Please, explain to me what makes gold a better standard
> than the made-up values assigned to paper currency.  Do
> we eat gold?  Build houses from it?  Ride it to work?
> Heck, we can at least burn a dollar bill in the fireplace. :-)

Historically, successful forms of money have had the following  
characteristics:
- a commodity in heavy demand, demand, which shoemakers and others  
will be likely to accept in exchange from the very start of the money- 
choosing process
- pick a commodity which is highly divisible, so that small chunks of  
other goods can be bought, and size of purchases can be flexible
- easily portable, then, a commodity must have high value per unit  
weight. To have high value per unit weight, however, requires a good  
which is not only in
great demand but also relatively scarce, since an intense demand  
combined with a relatively scarce supply will yield a high price, or  
high value per unit weight.
- Finally, the money commodity should be highly durable, so that it  
can serve as a store of value for a
long time. The holder of money should not only be assured of being  
able to purchase other products right now,
but also indefinitely into the future.

Clearly, paper money fails on the scarcity and durable value  
requirement.


> Gold's value is as arbitrary as that of paper.  Using
> it as the standard means the wealthy people will be
> those with gold mines.

As to why gold is historically favored worldwide as a currency I  
refer you to no lesser expert than Alan Greenspan http:// 
www.usagold.com/gildedopinion/Greenspan.html

If you have a deeper interest and wish to learn from one of the most  
preeminent economists of the 20th century, Murray Rothbard. who  
specialized in money one of his most important books books (and easy  
reading) is available or free download at: http://www.mises.org/ 
mysteryofbanking/mysteryofbanking.pdf



> By the way, I think the fed is a terrible thing.  I just
> don't buy the particular class-warfare arguments used in
> the post to drum up support for the thesis.

That's probably because you weren't alive around the turn of the 20th  
century nor studying such things.  Here is a biased, but generally  
accurate, portrayal of some of the events that led up to both the  
creation of Federal Reserve and Federal Income Tax.  http:// 
www.givemeliberty.org/features/taxes/philanderknox.htm

In a nutshell, prior to the income tax most of the government's debt  
was held by the so-called robber barons.  When they became convinced  
that excise tax receipts could no longer support more borrowing and  
government expansion they clearly told Congress either find another  
revenue source or live within your means, which of course we know  
they cannot.

The Fed was created for complementary purposes by these same people  
so that they could sit in privileged positions regarding the currency  
and have first use of all newly issued money, before its inflationary  
effects were reflected in the wider economy, and thereby have  
increased buying power than the average citizen.  For small amounts,  
like most of us deal with, this is insignificant and of no interest  
or even awareness but when you consider the amounts of money  
controlled by these barons it was significant.

Steve


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