My Apologies to the BLS
In this post, I ranted against the shady tactics of the BLS in suppressing price inflation. In my sleep deprived rage (my son woke me up far too early), I wrote:
For example, both on NPR and in the CNBC story linked above, they talked about how prices for retail automobiles fell sharply, but they expect them to rise in September. The reason? Oh, cash-for-clunkers, of course! But wait a second. If the government hands out up to a $4,500 subsidy to buy a new car, shouldn’t that increase sticker prices? E.g. do we explain plummeting college and health care prices by reference to government support? Of course not–that’s how we explain skyrocketing tuition and medical expenses.
After last month’s CPI release, people on CNBC were talking about this, so I called the BLS. And the guy I talked to assured me that they were measuring the actual sticker price, before the government rebate. That makes sense economically, but it wouldn’t surprise me in the slightest if the people at the BLS decided to buy themselves an extra two months of suppressed CPI by counting the post-rebate price for new cars.
Oops, my bad. The cash-for-clunkers program was a rebate to the dealers, not to the car buyers. (That’s why the dealers are freaking out about the government being late in sending the actual checks.)
So the BLS guy wasn’t lying, and it would make sense for the CPI numbers to show a sharp drop in sticker prices for cars. Because the dealer is getting (up to) a $4,500 check for each of the qualified new cars he sells, he would be willing to sell at a much lower price, splitting the rebate with the consumer as it were. (If you and I were locked in a room with nothing but a dry erase board and marker, I would torture you for a good hour showing how the elasticities of the supply and demand curves determine how much of the rebate goes to seller and how much to the buyer.)
Gold Closes at Record Highs
CNNMoney reports:
Gold prices settled at an all-time high Wednesday as the dollar slumped and inflation concerns boosted demand for the metal as a hedge against rising prices.
Gold for December delivery jumped $13.90 to close at a record high of $1,020.20 an ounce, well above the previous high of $1,003.20 that was posted March 18, 2008.
The dollar fell to a one-year low against a basket of currencies, as upbeat economic data boosted optimism about the global economic recovery and gave investors an appetite for more risky assets, such as stocks.
Mark Hansen, director of trading at commodities research firm CPM Group, said the weak dollar is the “main driver” of Wednesday’s gold rally.
At the same time, gold prices are being supported by concerns that government efforts to stimulate the economy could result in a bout of inflation a few years from now. “That has given investors more of an appetite for tangible assets,” Hansen said.
The inflation concerns come despite a government report that showed consumer prices remained relatively tame last month.
The Labor Department’s Consumer Price Index rose 0.4% in August from the month before due to higher energy prices. Over the past 12 months, CPI has declined 1.5%.
“Because inflation is really not an issue now, investors are looking out a year or two and wondering what happens if there’s not a timely withdrawal,” of economic stimulus dollars, Hansen said.
Investors view gold as a hedge against rising prices because tangible assets tend to hold value better than equity-based assets when inflation is an issue.Looking ahead, gold prices could head even higher, Hansen said.
Market participants have become “more comfortable” with gold prices above $1,000 and that has “emboldened investors to think that market can go higher,” he said.
As long-time Free Advice readers know, the parts in bold above are quotes that I consider to be dumb. Note that I’m not saying there’s a conspiracy here. I think a few writers say, “0.4% inflation in one month is tame” and then everybody else follows suit. A guy trying to make his deadline isn’t going to pull out a calculator and say, “Wait a second, that’s 4.9% a year! We’re saying that’s tame inflation? Did I miss something? Have we always been at war with Eastasia?”
Now Is the Time to Buy Ron Paul’s End the Fed!
If you have been meaning to buy Ron Paul’s new book, End the Fed, now is the time to place your order or swing by Barnes & Noble. Today is the official release date, and for purposes of Amazon and NYT rankings, you want to concentrate sales right when a new book comes out.
I haven’t read it yet, but Robert Wenzel has given it a glowing review.
My Thoughts on the CPI Release
OK first I’ll deal with the CPI numbers as the media is handling them, and then I’ll question the numbers themselves.
First off, the headline on CNBC today says, “Inflation Still Tame Despite Jump in Gasoline Prices.” Huh, so I guess that means there was a CPI reading well within the “comfort zone,” right? Well no, the official, seasonally adjusted price increase from July to August was 0.4%. If that were to happen twelve months in a row, it would mean an annual inflation rate of 4.9%. If Bernanke suddenly announced that he expected inflation to average 4.9% per year over the next ten years, would we describe that as “tame” and blame it on low capacity? Of course not! People would flip out and say, “Whoa! That’s about double what we all thought your target was! Dude, you need to jack up interest rates pronto!”
Now don’t misunderstand, folks, I understand that you can’t robotically take a single month’s number, raise it to the twelfth power, and flip out. But my point is, if “last month’s inflation reading was tame” is to have any meaning, surely it is, “At this rate, inflation is still under control.” It can’t possibly mean, “Sure, if we kept that up, inflation would be way too high, but Bernanke still has plenty of time to cut that number in half.” Everyone see the point?
OK, let’s go back to the article and see just why nobody is worried about inflation. As we’ve seen, it has nothing to do with the actual number, since that number indicates high inflation. Here’s the real reasoning:
Still, analysts said the risk of inflation remained low as the economy crawled out of its worst recession in 70 years, in part because stubbornly high unemployment is likely to keep labor costs down.
…
“We’re in the part of the economic cycle where inflation is not an imminent concern, not to say there won’t be long-term issues with the Fed’s balance sheet,” said Steve Goldman, market strategist at Weeden & Co in Greenwich, Conn.A separate report from the Federal Reserve showed there was still a great deal of slack in the economy, which also supported the belief that inflation posed no near-term threat.
Suh-weet. So everybody from the CNBC writer to a “market strategist” to the Federal Reserve apparently believes that you can’t have stagflation. We’re all Keynesians now (again).
It’s not merely that this analysis is sometimes off; it’s backwards. What is price inflation? It’s too many dollars chasing too few goods, right? OK then, during a recession, what happens to the flow of goods–does it go up or down? So, other things equal–and that’s an important caveat, since in this recession in particular other things have not been equal, namely the demand for liquid assets–recessions should lead to higher price inflation. If you think I’m nuts, that my armchair reasoning has somehow gone off the rails, I point once again to the below chart. It’s certainly consistent with my claim that there is a tendency for price hikes to increase during recessions in real output (which is what guides the NBER in drawing the gray bars).
Another thing that really annoys me about the media spin, is that yesterday the PPI was more than double what people were officially “expecting.” And yet there was no separate story at all. Instead, they buried the news release at the bottom of an article that had headlined with the recession being over, as I explained at the time.
Now that I’ve criticized the media treatment of the official numbers handed over to them by the BLS, we turn to the numbers themselves. If you go to the official BLS press release, you learn that the non-adjusted increase (from July to August) in the CPI was a mere 0.2%. So they doubled it to 0.4% with the adjustment. OK I am glad they did that, because they systematically adjusted the true number downward for the first half of the year.
But now we ask, does it make sense that consumer prices only went up 0.2% from July to August? Well maybe, but from mid-July to mid-August, actual retail gasoline prices were up about 4.5%. I am very skeptical. Remember kids, you can do just about anything you want with economic statistics, and you won’t even be officially lying. Just change your assumptions.
For example, both on NPR and in the CNBC story linked above, they talked about how prices for retail automobiles fell sharply, but they expect them to rise in September. The reason? Oh, cash-for-clunkers, of course! But wait a second. If the government hands out up to a $4,500 subsidy to buy a new car, shouldn’t that increase sticker prices? E.g. do we explain plummeting college and health care prices by reference to government support? Of course not–that’s how we explain skyrocketing tuition and medical expenses.
After last month’s CPI release, people on CNBC were talking about this, so I called the BLS. And the guy I talked to assured me that they were measuring the actual sticker price, before the government rebate. That makes sense economically, but it wouldn’t surprise me in the slightest if the people at the BLS decided to buy themselves an extra two months of suppressed CPI by counting the post-rebate price for new cars.
Another point: It is extremely misleading when the deflationists say, “What are you nutjobs talking about? Year/year we still have price drops!” Look at this chart of the raw (non-adjusted) CPI for the last five years. Now do you see why I think we are in an inflationary environment, even though the 12-month change in CPI is negative? For what it’s worth, prices bottomed in Dec 08. From then until August 2009, the unadjusted CPI level has increased 2.7%, which translates to an annualized increase of just over 4%. I grant you, that’s not Jimmy Carter material, but (a) would anybody who just watched the news have ANY idea that this year, actual prices are rising at more than a 4% annualized clip, and (b) I think that is a bogus, suppressed number.
Final point: People keep talking about the bond market. Well, the Fed is intervening like never before to suppress interest rates, so maybe that has something to do with it. I admit that I am surprised ten-year yields are still so low. But how do the deflationists–the people saying, “It will take markets years to work off this debt overhang, and only then will we see rising prices”–explain the fact that gold is now trading at $1017 an ounce? Why do we assume that TIPS traders are genius forecasters, but gold traders are morons?
The Brain and Mind Are Not the Same Thing!
Fresh off Gene Callahan’s discussion of methodology and the analyst’s decision to impute intelligence to a process, we have this NPR interview on Neal Conan’s “Talk of the Nation.” (Click here to get either the transcript or to listen to the audio.) In general it’s a fascinating interview for our health care debate. Leftists will love to hear the good doctor (a neurosurgeon who worked in Ukraine) criticize the “wastefulness” of Western medicine, whereas Hannity fans will love to hear him explain the need for paying doctors under the table and how jealous doctors brought a lawsuit against their more successful rival.
But here’s the part that most interested me:
CONAN: I just have time for one last question. I guess it’s a personal one. I had somehow always imagined that once you opened up the skull and looked in, it would be pretty easy to tell the difference between regular brain matter and a tumor. I suppose I thought it was green or yellow or something.
Dr. MARSH: No. It depends on the tumor. But the particular sort of tumor you see in the film and the particular sort of tumor I specialize in operating in Britain, the tumor looks like the brain. It doesn’t quite feel like the brain when you’re working on it with your neurosurgical sucker, but visually, it’s more or less the same. And this is why they’re so difficult, because the more you remove, the more the risk is you’ll stray into the brain and cause damage.
And that is why, with operations of this sort, increasingly, and in Britain (unintelligible) where I pioneered technique, you operate with the patient awake under local anesthetic, so you can see if you’re starting to produce any significant brain damage as you operate.
CONAN: And you say something fascinating as you’re doing that. You’re looking at it and saying, it’s impossible to believe, really, but that is thought.
Dr. MARSH: Yes.
CONAN: That is consciousness I’m looking at.
Dr. MARSH: It is extraordinary. And I still, in fact, the more I think about it as I get older, the more extraordinary and incomprehensible I find it, that thought – that mind is a physical entity. It’s a hugely revolutionary idea which none of us have really quite come to terms with, I think, yet.
Oh boy. Even though this guy obviously has forgotten more about how the brain works than I will ever know, he is falling prey to the crudest of fallacies. The brain is a physical thing; the mind is an abstract thing. He is not “discovering” that the mind is really “right there at the end of my scalpel!” No, he is relying on a theory of materialism and asserting it.
We could just as well have a cosmetic surgeon talk about filling people’s lips with Botox and saying, “It’s really amazing to think that I’m staring at love. Love is a physical thing. Wow.”
If you’ll excuse me, I’m going to throw Human Action on a scale and see how much Austrian economics weighs.
A Clarification on Auditing the Fed
I believe I have already linked to Lew Rockwell’s qualified case for letting Congress run the Fed (as opposed to a cartel of private bankers with no accountability at all). Robert Wenzel disagreed with Rockwell here.
I am not taking sides on this one. In general, I think it’s dangerous to ever say you “are for” or “support” something that increases economic liberty in one sense, but reduces it in another. Of course Rockwell is not “for” Congress running monetary policy; he’s just saying it beats our current arrangement.
I do want to clarify one thing though. Wenzel repeats an argument that a lot of anti-Fed-audit people are saying, but I think it misses the point that someone like Rockwell is making. Here’s Wenzel commenting on Rockwell:
Most of [Rockwell’s] argument is the theoretical one that Congress is less evil than the forces of power coming out of the executive branch. On a theoretical level, this may be generally the case. But we are talking realeconomik here, not theoretical odds. We are talking Ben Bernanke versus this Congress which is run by the likes of Nancy Pelosi and Barney Frank. A Congress that gains votes by passing out dollars.
Should we really turn the printing presses over to them? Remember, we are talking realeconomik here, Ben Bernanke versus this Congress.
Yeah, maybe if many read Ron Paul’s book End the Fed, or if inflation hits 10%, the public will yell and scream, the way they are over Obamacare. But remember, many who are yelling and screaming about Obamacare are on medicare and don’t see a damn thing wrong with medicare. Can we count on such an uninformed public to put the right kind of pressure on Congress, when it comes to money printing?
As I have said before, Bernanke wants to rob us by dishing out dollars to the elite, but there are elements in Big Government (and some of these elements are in Congress) who want to print and print money, they don’t have to answer to Goldman Sachs, but they have to answer to the parts of the masses that think government is one big piggy bank. Goldman probably cashed in chips worth just under $20 billion, are we anywhere confident that Congress would stop anywhere near this number, if it was in charge of money printing?
Yeah, sure, if the stars are aligned properly, in the world of realeconomik the boobsie might awake to pressure Congress to stop printing money. But it is a crap shoot with about 10,000 sided dice, with only a few possible positive outcomes out of all the combinations.
Based on hardcore realeconomik evaluation, Berrnanke’s actions to date (He hasn’t printed any money since March), appear to be a better option than this Congress running the show. [emphasis in original]
Now Wenzel is actually far more accurate in his response than I’ve seen a lot of people, who say, “For all his faults, Bernanke’s better than Pelosi and Reid.” Wenzel doesn’t actually say that; he makes the proper comparison of the entire Congress versus Bernanke.
And that distinction is crucial. It’s not the case that Pelosi and Harry Reid would personally run monetary policy, the way Bernanke (at least officially) can almost singlehandledly determine the Fed’s course.
Obviously we will never know what would have happened, but I don’t think Congress would have placed us in such a precarious position if they had been running the Fed last year. I can’t yet prove my case (since it hasn’t come true yet), but I really think we are going to see massive price inflation as a result of Bernanke bailing out Wall Street cronies. In contrast, if the ghost of William Jennings Bryan had been in charge, then the Fed may have run the printing presses, yes, but that money would have flowed out into new bank loans. So the public would have gotten its cheap money fix, prices would have started rising fairly rapidly, and Congress would have told the Fed to back away from the abyss.
Instead of that, we now have the worst of both worlds, with a dollar ready to crash (I claim) and with all of the new reserves being pumped into a narrow group of connected bankers. (See my favorite chart if you want to see the sharp contrast between Bernanke’s handouts to the banks versus credit available to the general business community.)
One last point: Look at how hard it was for Congress to push through TARP. We really almost stopped it; they needed to take a Mulligan.
In contrast, Bernanke handed out much more than that with no resistance at all. I grant you, some of the difference there was probably because the general public “gets” what it means for Barney Frank to issue more Treasurys to then give $700 billion to bankers, whereas it doesn’t seem real if Bernanke writes checks on the Fed. But it’s still an interesting difference in the resistance to each move, the Treasury bailouts versus the Fed bailouts.
Some of us purists like to pooh-pooh the Constitution, but let’s give credit where it’s due: The Founders realized that the way you slow the growth of the State is by dividing power among different branches. They purposely ensured that one-third of the Senate was up for re-election every two years, etc. When it comes to preventing the outright destruction of the dollar, you want “gridlock,” not a strong man whom you hope is very smart and has your best interests at heart.
To repeat, in closing: I am not saying I think the Fed audit will be a good idea. I agree with Wenzel that if it goes through Congress, they will pervert it and use it to enrich the regulatory power of the Fed in exchange for having to file quarterly reports or some other meaningless concession. But I just wanted to clarify the logic behind putting something devastating (like the printing press or the power to declare war) in the hands of Congress, rather than the hands of an elite group.
Liberal Democrats Should Treat Others the Way They Want to Be Treated
This is really getting ridiculous. On NPR Juan Williams explained that there was something really disturbing going on with Saturday’s march on DC. It wasn’t merely that these people opposed Obama’s policies, but–gasp!–they challenged his very legitimacy as president. (!!) And Joe Wilson actually called the president a liar to his face. (!!)
Williams explained that this was unprecedented in American politics, and was due to the fact that many Americans can’t stand the idea of having a black president.
I am not denying that plenty of Glenn Beck fans could be plausibly classified as racists, nor am I even denying that a lot of these protesters wouldn’t be so worked up if Biden were president. (If Hillary were, they would be too–but because they couldn’t stand a woman being president.)
But give me a BREAK, Juan. You’re saying you don’t remember any Democratic activists saying that George W. Bush wasn’t the legitimate president? They all conceded that he won the election fair and square, and just had a respectful disagreement with his policies?
And no Democratic official at the federal level ever called Bush a liar?
UPDATE: One more thing: The money people who are really running the show here, just love what is happening. After all the shenanigans being pulled against Obama, can you imagine how hardcore and ruthless the ACORN folks are going to be when a Republican is next in office? The two parties are going to keep one-upping each other. For those who think Republicans are the lesser of two evils, remember back when you thought Bill Clinton was the worst president conceivable? Well do you still feel that way? And for those who hold their noses and pull the lever for Democrats: Remember how bad you thought George W. Bush was? Just wait till you see the next Republican who’s elected after ten years of Obama and six years of Biden. (And no that wasn’t a typo.)
Producer Prices Up (Adjusted) 1.7% in August
Producer Prices didn’t get the memo from Mish, and rose (on a seasonally adjusted basis) 1.7% in August from the month before. Now you won’t see a headline for this anywhere at CNBC (at least not as of 2 minutes ago). If you were curious as to what the PPI report said, you would have to click on this CNBC story announcing that the recession is over (not kidding, that was one of the bullet points from the main page) and then scroll down to the last two paragraphs of the article:
Separately, U.S. producer prices rose more than twice as much as expected in August on the biggest surge in gasoline prices in more than 10 years and prices declined less than expected compared with a year ago, the Labor Department said.
Prices paid at the farm and factory gate jumped 1.7 percent last month and fell 4.3 percent from August 2008. Analysts expected producer prices to rise 0.8 percent on the month and to fall 5.3 percent on the year.
Now as longtime Free Advice readers know, I trust the BLS as far as I can throw them. So I always like to analyze the non-adjusted price indices when they come out, to see how much hanky panky is going on with the adjustment.
Well I can’t do that. I’ve gone to the BLS’ press release, and I can’t find out what the straight-up price increase was from July to August. It gives you how much the PPI went up (non-seasonally adjusted) from August 2008 to August 2009, but it doesn’t tell me (as far as I can tell) what the one-month change was.
This is a relatively new thing. Up through the July report (i.e. containing the May-June increase), the PPI press release had a great table showing everything you would want to know. (Scroll down to Table 1 of that report to see what I mean.) But they stopped doing that last month, meaning you had to read the text to find the number.
But now in this month’s report, I can’t even find the number in the text. Am I just missing it?
UPDATE: They hadn’t posted it this morning when I first blogged this, but now FRED has updated its PPI database with the August numbers [.txt]. They are showing a little less than a 1.4% jump in raw (non-seasonally adjusted) producer prices from July to August.
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