Don’t Like the Answer? Change the Formula

February 22, 2008 at 9:45 am (Inflation)

If you were one of the last gasping members of Generation X, you might recall the time in the mid-90s when the SAT scoring system was redone, making it much easier to get a higher score.  In fact, when colleges looked at your score, they made a note of which year you took the test in order to account for this difference, which amounted to over a hundred points on average.

The reason they did this was because, historically, the average SAT score (Math and English combined) was 1000.  Over time, as students in this country became less engaged, less intelligent, less whatever you want to blame it on, the average dropped to below 900.  It didn’t look good, so the SAT administrators simply changed the scoring formula.  Presto!  Students once again averaged 1000.

Our government likes to use the same recalculation solution.  Take, for example, the CPI, the Consumer Price Index.  Back in 1980, when inflation was rampant, unemployment was rising, gold and oil were exhorbitant, the Middle East was unstable — in short, when things were like they are now — the government calculated the CPI one way.  It intended to show how fast the price of consumer goods were rising, to give an indication of how the average person buying potatoes, socks, and gasoline was being affected.

 Back then, the CPI was rising rather quickly, and it didn’t look good.  So, the government simply changed the formula and dropped things left and right.  Wheat?  That’s a commodity.  No need to note the doubling of the price in wheat.  Heating oil?  C’mon, that’s not really a consumer good.  Let’s count the price of TVs — everyone needs one of those.  And they’re so cheap nowadays!

The result is a measurement of inflation that is completely at odds with the experience of the average consumer.  Anyone compare grocery receipts from 2007 prices lately?  Strange that they’re almost 15% more when Bernanke assured us last year the inflation rate was being monitored and was only 2%.  Using the current CPI rate, we are told consumer goods are only rising at about 4% according to the government’s official statistics.  However, using the formula we dropped in 1980, the number is about 12%.  Which sounds closer to reality to you?

The Federal Reserve increased the number of dollars in circulation by about 15% last year.  They printed it up and loaned (essentially gave) the money directly to the banks so the banks could back up their worthless mortgages with some hard assets and keep loaning out more money — at ten to thirty times the amount they received, of course.  Bottom line is cash is a good just like shoes or soap and its inherent value is based upon supply and demand.  The more supply, the less the demand, and therefore value.  When the Federal Reserve increases the dollars in circulation by 15%, the value of each dollar you hold is therefore necessarily decreased in value by the same amount.  No matter what slick story the government has, they cannot fight basic arithmetic.  I have yet to find a bank that will offer a 15% interest rate on their savings accounts, so even saving money is losing money right now.  Is it any surprise the price of goods is heading towards 15% as time catches up with the Fed’s printing decision?

Today’s article of doom: your friendly backyard detention camps


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