The latest edition of The Acamar Journal contains a revealing (perhaps frightening, even?) analysis of how, quite possibly, basic governmental statistics on growth and inflation have been deliberately over and understated to ensure the flow of foreign capital propping up the U.S. economy doesn’t dry up (according to the author, the U.S. consumes 80% of world savings).
The author’s analysis is based on, and highlights comments by Dr. Kurt Richebacher, a former Chief Economist at Dresdner Bank–Germany’s third largest bank, and Bill Gross, the Managing Director of PIMCO, the largest bond fund management company in the world.
Items that struck me as particularly interesting are the discussion of how the housing price component of the CPI is calculated (vastly understates increases in the actual cost of owner-occupied housing in today’s market) and “hedonic pricing” (the Bureau of Statistics’ method of accounting for quality improvements not reflected in price decreases).
Read on for some stunning quotes, or read the entire article at the link above.
In 1983 the Bureau of Labor Statistics abandoned the ‘asset price method’ which measured price changes in owner-occupied housing, replacing it with “owners’ equivalent rent of primary residence”. This is an arbitrary assessment of the rent an owner would pay for occupying his own home, rather than the increase in the value of the home itself! 28.4% of the CPI comes from the actual rent that tenants pay and from ‘assessed’ owner’s rent (owner occupied houses account for 82% of all properties). As national rental vacancy rates have climbed from 7.8% in 2000 to 10.2% in 2004, rental rates are low. Thus, the entire housing sector accounted for only a 2.2% contribution to CPI (even while prices for homes rose at an average of 11% in 2004). [my emphasis, –TL]
Is that a stunner, or what? But it gets better–read on to learn about how “hedonic pricing” (artificial price reductions based on perceived quality improvements) artificially inflates growth in the GDP.
Here’s an example of how this works:
Used in the 1980s for computers, when massive gains in computing power were the norm, hedonic adjustments to business spending on computers (less than 1% of nominal GDP then) translated, at times, into accounting for up to 40% of real GDP growth! [my emphasis, –TL] Since 2000, business investment in computers has risen by 9.3%, but with hedonic adjustments, its contribution to GDP growth has been an increase of 113.4%.
… and of course, taking the BLS’ methods into account, even if we’ve all “substituted” plastic lawn furniture for now price prohibitive quality hardwood furniture, and we’re reduced to eating “mystery meat steak” instead of grade “AAA” beef (yes, even a vegetarian gets the difference), we’re no worse off.
Note: The author’s home page only includes links to the first ten editions, but the last twelve, including the one quoted above, are accessible by clicking on the link above, and then substitute 21, 20, 19, etc. for the 22 in the URL displayed. They’re all well worth reading, very revealing. The author is a graduate of the London School of Economics and a Canadian Certified General Accountant. That said, in case it isn’t obvious, read him critically – a “resource equity” specialist is going to have a more conservative/skeptical perspective than most.