The Fed Misrepresenting Inflation to Justify Inept Policy

EconMatters's picture

By EconMatters




Government Data is useless


The final GDP calculation came out on Wednesday, and we have several takeaways from this latest revision. First of all government reporting data is all over the place, and not in a good way. I have no confidence that any of these numbers are actually right, and second with an ever changing economy, most of these data gathering tools are obsolete at best. The GDP number has now become a complete farce, the components used to calculate growth are so useless that we literally could have a plus 7% GDP quarter, and it mean absolutely nothing regarding the real health of the US economy! 


PCE & CPI both Under-Report Real Inflation


But now we know why the Fed likes the PCE calculation for quoting the level of inflation in the economy because it is skewed to a lower number even with the joke that is government numbers these days regarding inflation levels and pressures in the economy. It is bad enough that the government keeps tweaking the CPI Data points to change what they measure in terms of inflation, and now that this number starts rising to 0.4% for a month, well above their targeted level, they search for some lower inflation reading metric in the PCE measure. While the PCE number is skewed to healthcare and the CPI to housing, both of these measures severely underreport real inflation because most Americans cannot afford healthcare or housing.



Many Americans just avoid healthcare spending altogether and only show up to emergency rooms when they can no longer ignore a health issue and they aren`t paying anything here that shows up in terms of the inflation numbers that line up with actual health care cost increases of the last decade! Another interesting relation is that Healthcare Debt for consumers is one of the most prominent reasons for declaring personal bankruptcy so consumers aren`t actually paying for this healthcare further downplaying the actual real inflation that consumers who do pay for healthcare are experiencing in the economy. 


It seems with every inflation gauge they are cookie cutter archaic and massively antiquated, i.e., created in a different era that fails to capture the proper nuances of how consumers have adapted to higher inflation pressures. All the inflation metrics skew towards underreporting inflation in real terms! Take housing for example, with the state of Boomerang Kids living much longer at home and group living arrangements out of necessity; both of these inflation measures from a historical context severally underestimate real inflation in the US economy! 


The reason these living arrangements and the necessity for two parent income producing households is due to much higher inflation levels in the economy that require Americans to adapt, i.e., they cannot afford the alternatives in practical terms relative to historical norms and an apples to apples comparison of living standards. This is the hidden inflation that Fed induced policy is directly responsible for, and is underreported in the real inflation numbers based upon out of date reporting measures interpreted by outdated economists who haven`t published anything relevant in economic theory for 20 years! 


Real Inflation has been all around us for Decades, and the last 5 years of a weak economy, has exhibited much higher inflation in Real Terms that fail to be captured in old-fashioned inflation gauges. Furthermore, when Inflation actually does start showing up in these “Useless Inflation Measures” you better start paying attention because that means Real Inflation is getting dangerously out of hand! 


Real Inflation is Reducing Disposable Income for Consumption in Discretionary Retail Spending


You want to know why retail sales numbers are so tepid, it is due to much higher inflation levels taking a huge hit on disposable income, average consumers are robbing Peter to pay Paul in terms of much higher food, gas, entertainment, cable, internet, and insurance costs (our home owner`s policy just went up 25% with no claims). Throw in higher taxes in all forms and there is Real Inflation out in the US economy that is much higher than these ridiculously low government numbers. 


The Fed is starting to lose credibility on many fronts, and downplaying inflation just to continue on with this process of monetizing debt with excessive money printing is one area where market watchers are starting to discuss privately. The Fed is sacrificing real growth by incentivizing non-productive uses of capital by banks and corporations chasing Yield Arbitrage investments instead of positive GDP and Job Creating policies of project and lending investments. The Fed is maintaining this illusion through abnormally low interest rate policies that have their own cost in terms of hurting savers, and flattening out the yield curve further disincentivising banks to lend to business for real economic growth opportunities. And at the same time hamstringing consumers with higher costs in terms of Real Inflation and less overall disposable income in their pockets! 


Would the Economy actually be more Productive without Fed Intervention?


It is looking more and more that the US economy would actually be doing much better by having the Federal Reserve just get out of all market interventions period. There are plenty of areas of strength that are doing just fine all by their own like energy, technology and entertainment, and actually would probably be doing much better if banks were allocating more money to these growth opportunities, and less to paper money investing schemes. Shoot with a negative 3% GDP quarter inflation should have been negative, which should scare the heck out of the Fed in terms of what is really going on with inflation right now! 


The central banks need to downplay inflation, underreport it, and find metrics that support their case of low levels of inflation in the economy. They are talking their proverbial book, justifying their policies of the last five years, and even their existence as a necessary function in the economic wheel. As it is starting to really manifest itself, the idea that the economy would in fact be doing much better all on its own with no Fed involvement whatsoever, let alone that their policies have any beneficial impact on spurring economic recovery and growth! 


The Inflation Lie & the Fed`s Ultimate Power and Credibility Demise


And the more they speak about economics, the economy, policy tools and their impact on society it becomes apparent that this discipline ‘economics’ has lost its way, and I am afraid that the inflation lie is what is going to be their undoing. As that is the nasty part about inflation, if you disrespect it, downplay it, fail to keep it in check, once it breaks out for all to see, and in undeniable fashion, by the time the Fed realizes it is a problem, because it is so enormously apparent in the numbers, it is far too late to do anything about it! We are basically right at the cusp of this inflation stage right now, and the Fed is asleep at the wheel, trying to justify their whole existence and tenure of failed policies of the last two decades, needing to hold onto the low inflation meme to continue the status quo! 


Better Results Just Sending Monthly Checks to Average Citizens


The Federal Reserve is such an inept body at this point, literally spending 4 Trillion with these subpar anti-growth monetary initiatives that have really elevated inflation for five years well beyond an economy growing at 2% annually, which has inevitably hurt consumers in terms of real disposable income, and at the same time incentivizing paper investments over project investments.


It could seriously be argued that the Fed would have had much better results in stimulating economic growth by actually giving the 317 million citizens an annual check, or a monthly check instead of buying bonds, downplaying inflation and keeping interest rates in fantasyland compared to historical norms.


The Law of Unintended Consequences


 Unhealthy interest rates are going to foster unhealthy investments, and ultimately are going to lead to unhealthy economic outcomes, when will they ever learn the Law of Unintended Consequences? Moreover, when calling outright Inflation “Noise” to continue on the path of exacerbating these “Unintended Consequences” it is time for a house cleaning at the Federal Reserve – get rid of the economists and start putting some entrepreneurs and small business owners on the Board. The career “Academic Has-Beens” from the economics field have been an abysmal failure for the last 20 years, it is time for a rethinking of what and who constitutes the Federal Reserve Board!


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WSP's picture

Sudzee wrote "False inflation numbers are a saving grace for public and private pension payouts. No inflation, no COL payment increases. Misstating true inflation is a massive fraud."

Precisely---those commentators that continually accuse the private, off-shore banks that have seized control of this country via their printed out of thin air fiat currency of incompetence may be well intentioned in their commentary, but they are dead wrong.  These criminal bankers are not incompetent---they know exactly what they are doing and their objectives are many to include decapitating the political power of their opposition by bankrupting them, impoverishing the population so that they can never get out of debt, promoting their new world order so that all countries have to be in debt to them, etc., etc.., etc.  They elect the presidents and key congressional seats, they appoint the leaders of all of the major fascist corporations---THEY ARE IN CONTROL and promoting the idea of incompetence does not help anyone except for them.  In fact, sometimes I wonder if they (the criminal bankers) are not behind the "incompetence" meme to keep people distracted from what they are accomplishing day after day while people argue amongst themselves over inconsequential memes!

Make no mistake---THE CRIMINAL OFF-SHORE BANKERS are NOT INCOMPETENT---they have a plan and they have been executing on it quite well and when they are finished it is over for humanity at large (actually it already is)!  The bankers hate humanity, they hate us, they want to control everything and they will because too many smart people think these criminals are incompetent and too many dumb people---well, they are incompetent and that is one of the biggest reasons the bankers dominate us. 

JRobby's picture

And? This has been clear for 6 years +

Coupled with allowing the TBTF's to continue without write downs. I do believe that is a large part of it.

sudzee's picture

False inflation numbers are a saving grace for public and private pension payouts. No inflation, no COL payment increases. Misstating true inflation is a massive fraud.

TruthTalker's picture

We have been taken over by communists and they are collapsing us on purpose

El Hosel's picture

Yes, We are having all your collapsing... Bitchez

El Hosel's picture

Wow, who knew.  

P.S.    Alcoa up 50% in 6 months, doing the blow off top this morning. 

geekz_rule's picture

umm.. no. communists? no.. monopolists. they care not for whatever flavor of "ism" as long as its authoritarian


the title of this article is silly. inept policy? really? when their profit motive is to increase debt? trivializes the problem. its a lot more nefarious than that.

lasvegaspersona's picture

If one considers that the Fed is presiding over a currency collapse rather than 'fixing' the economy it's actions make sense. The actions of the Fed are the same actions all CBs  and countries use when dealing with pre-hyperinflationary conditions. There is nothing that can be done to prevent a country from going down when it MUST borrow to stay afloat and when they have reached the end of the willingness of others to lend.

Lying? When things get serious you have to lie.  JC (Junker)

PhiBetaZappa's picture

The Fed's policy has always been 'lie & deny' and/or 'extend & pretend' - nothing's changed.

dexter_morgan's picture

This gubmit would lie to us? Aw, cmon. And yes, I know the FED is a 'private' organization....

stant's picture

There is no union. I've run up the stars and bars. Better than nothing . Which is what we got

PiratePiggy's picture

Back in 2008,  I had suggested that the Federal government suspend income taxes for that year, and refund the payments made going back to September 11, 2001 when the Fed created the housing bubble.


That is still the best of the alternative because it rewards production rather than sloth.

intric8's picture

Taxes (or the ability to pay them) are about the only tangible factor backing our intrinsically worthless, good as toilet paper fiat currency we call the usd.

The real responsible solution would be to let a free market economy give a hard lesson to corporations that were reckless, and let them fail. Deleverage this fucking economy. Citizens need to realize that they cant impoverish themselves with long term debt to purchase short term depreciating goods, nor can they afford asset class investments paid with borrowed money, especially when roi looks to be far, far down the road.

JustUsChickensHere's picture

Hmmm ... just a point.   I personally still like the USD ... the FRN not anywhere near as much. The USD (as per the constitution) in gold or silver is fine ...

AdvancingTime's picture

I have come to the conclusion that while inflation appears tame and is not showing up in a big way the seeds have been planted, and the number of them is somewhat shocking. Inflation lurks beneath the surface and is hidden away in the dark corners of our future. Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. Several things to consider when trying to understand inflation come to mind, first competition tends to keep price increases in check, and our slow growth economy is helping the consumer in many areas, but the monster when unleashed will take a very large toll! More on this subject in the article below.


Jack Sheet's picture

your blog must be fucking useless if you have to pimp it on just about every thread on ths site.

Okienomics's picture

+1, getting tired of the bruce links. Enough already.

AdvancingTime's picture

During the "boom times" when asset values are going up lots of people think they are getting rich. In inflationary times government also does well as tax revenues grow. Not only does government get to spend the money they print, the side effects of inflation on taxes are good for government, though bad for their subjects.

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. said John Maynard Keynes. As the central banks print like crazy to control interest rates on bonds they devalue the currency.

While there are not many Bond Vigilantes there are many Currency Vigilantes. Changes in the value of a currency directly affect "buying power" and the value of assets. Inflation, deflation, what is something worth? More on this subject in the article below.


Bemused Observer's picture

They SHOULD have let it crash. It would have cleared all the dead wood away, and prepared the way for some real growth.

But that would have exposed the whole globalized economy for the charade it is. THAT would have made a whole bunch of very wealthy people suddenly much less wealthy. The need for major structural changes in how we run our economy would have been crystal clear...even the billionaires would be screaming for change.

All this fake economic data, all this 'stimulus', it was all to keep the thing afloat long enough for the business cycle to come 'round again and save them from having to do anything. But the cycle never showed, and now we are painted into a corner.
A market crash would be painful, sure. They are SUPPOSED to be, they function as the discipline in a free market system. You suffer the pain, and when it's over you try real hard not to let it happen again.
But for the average Joe, it would certainly NOT be Armageddon. The house they're sitting in will still be the same, just worth less. The jobs situation would still suck, but with the market cleared of all the garbage, real economic growth could begin, which would help fix that job thing. A hard crash would force defaults on all the debt, clearing THAT shit out of the way once and for all. 'Joe' would have some hard times, as would we all, but this time we WOULD all be in it together. The super-rich would have several zeros knocked off their digital accounts, and become millionaires instead of billionaires. Everything would stay pretty much the same, just at a lower, more realistic level.
And the implosion of all that global debt would set the globalist's agenda back by a generation at least. They wouldn't be out, but they'd be down for awhile.

disabledvet's picture

THE FEDERAL GOVERNMENT is losing credibility.

The Fed looks like a rockstar here..."seeing the the totality of lies produced weekly Wall Street and Washington."

I think they're doing things perfectly...and i do note there are no policy prescriptions in this screed...namely "winding down QE."

How anyone can surprised that the winding down of "stimulus" does not result in much slower growth certainly wasn't paying attention to last year. The sudden announcement of Taper was a signal that all was not well in "getting back to work."

Again..."we're staring another Detroit only bigger" in the face. It is not just Wall Street that has been gambling...but Washington DC as well too.

It looks like they've bankrupted all their casinos this time. "The economy is the denominator." No matter how much inflation is "created" the growth destruction simply swamps the futile effort.

"And here comes ISIS."

kchrisc's picture

"THE FEDERAL GOVERNMENT is losing credibility."


Is that like a whore losing her virginity?!

kchrisc's picture

It is not a "policy," it is theft.

Like calling a burglar’s actions a "policy of appropriation."


“My guillotine has a ‘policy’ of head 'expropriation'.“

zerocash's picture

It's all Orwellian Newspeak.

Doubleplus Ungood

The Most Interesting Frog in the World's picture

There is no crony capitalism, only crony communism.

The Most Interesting Frog in the World's picture

Should have let it all crash.  Prices would have come down on everything, interest rates would have normalized, we would be more competitive globally at this point.  But that was not the end game.  The end game was to make sure the haves remain the haves, and the have nots remain locked out.  Mission accomplished!

Buck Johnson's picture

If they allowed it to crash deflation would have happened and people who own assets worth alot would have taken a major hit and loss alot if all their money.  They wanted to protect the haves as you said and lock out the ones that didn't have anything.  But now it seems that they may have did even worse damage and it may cost us a country.

RaceToTheBottom's picture

"It could seriously be argued that the Fed would have had much better results in stimulating economic growth by actually giving the 317 million citizens an annual check, or a monthly check instead of buying bonds, downplaying inflation and keeping interest rates in fantasyland "


Don't forget paying off Banksters to make even more money.....


Lord Koos's picture

A program to repair the USA's aging infrastructer would creat a ton of good jobs. If they printed money for that at least some of it would reach the average person and we'd get new bridges and highways out of the deal. 

boogerbently's picture

That has always been my "cure".

Trickle up economics !