How the Official CPI Steals Your Retirement Nest Egg

I’m reading a book by Kevin Phillips called, ” Bad Money“. It is about how the US economy became hijacked by exotic financial instruments and financial services which robbed the public of their investment returns and destroyed the world economy.

One thing he covers is the CPI and how the US Government manipulates it to “fool” the public that it is much lower than it really is.US Government Manipulation of the CPI

It seems to me that inflation will destroy much of your nest egg in the coming years as we get ourselves out of this financial mess, unless you learn to protect yourself from its affect.

This is almost as important as Rule #1 – Avoid Large Losses in Retirement.

The US Government will continue to print money if it cannot borrow it in order to maintain its massive spending, I mean stimulus program.

You need to have an objective source of information on inflation or any plans you make will be flawed as the dollar in your nest egg drops in value.

Mr Phillips points to John Williams’ website called, “Shadow Government Statistics.  If you go there you will learn that the CPI has been changed significantly from what it was Pre-Clinton.image

Just look at the chart opposite and you will see the Pre-Clinton CPI presented along with the Official CPI-U.

If you rely on the Government CPI figure for planning your retirement you would be making a big mistake since the Pre-Clinton CPI is 2-4% higher most of the time.

The Bureau of Labor Statistics defended its Official CPI methodology in an article “Addressing misconceptions about the Consumer Price Index“. Mr Williams responded in an article entitled, “Response to BLS Article on CPI Misconceptions” on September 10th 2008. In particular he said,

  • The Traditional CPI Concept Has Been Politically Mauled. At the heart of the differences over CPI reporting is the way CPI is viewed or defined.
  • Hamburger versus Steak. From page 5 of the article: “Some critics have incorrectly claimed, for example, that the BLS assumes that consumers are no worse off when they substitute hamburgers for steak.”
  • Geometric Weighting is a Mathematical Adjustment, Not a Model of Consumer Behavior. BLS touts the use of geometric weighting in the narrow CPI categories as a way of measuring shifting consumer preferences based on changes in prices in related items.
  • Hedonic and Quality Adjustments. Quality adjustments that are directly quantifiable and adjustable in terms of price impact are a necessary part of the CPI process. For example, a package that contained 12 ounces of crackers that now has been reduced to 10 ounces needs to be adjusted proportionately in pricing, in order for period-to-period price comparisons to have proper meaning.

You need to know what the CPI really is as it affects you and your nest egg. You need to watch out for possible hyperinflation if the US Governments keeps printing money and the economy does turn around as it will eventually.

At that time too much money is likely to be chasing too few goods. That will force prices up, devaluing the dollar. The purchasing power of your nest egg will drop even faster than it has over the last few years.

There is a problem with inflation which history shows has been “used” by governments to renege on their debts. Former FED chief Paul Volcker says even a little inflation is a terrible idea.

This time around China owns about 25% of the US debt and is likely to buy more from Obama but with conditions attached.  It’s likely to be indexed to inflation, although the public won’t be told. (It may be already but I can’t find out)

The US Government is likely to make a deal with China and other major bond holders to protect their loans against inflation. This will be yet another burden on the tax-payer.

”China is worried that the US may solve its problems with the fiscal deficit and banks by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. ”If the US can make sure this won’t happen, then China will continue to invest.”

I understand the only known way to successfully fight inflation is to do what ex-FED chief Volcker did in the 70’s and that is increase interest rates dramatically. On 19th December 1980 interest rates peaked at 21.50%. It slowly put the inflation fire out. Plus the CPI calculations were changed starting in 1983.

However hiking interest rates will also adversely affect China holding $685Bn in US Treasuries. I’m not sure how they plan to get around that one.

“Although economists dismissed the possibility of a default by the United States on its obligations, they said China could face steep losses in the event of a sharp rise in U.S. interest rates or a plunge in the value of the dollar.”

However the new way to fight inflation appears to be manipulating the CPI and trying to fool the public who see the real CPI when they pay for petrol or buy food or maintain a house with real dollar.

They can talk all they want about substitution, geometric weighting and hedonic adjustments. But the stats won’t stop you losing your nest egg to the “real inflation” if it takes hold.

It is in your interest to add the Shadow Government Statistics web site to your list of places to go for the truth. Only by getting objective information can you hope to be able to protect your nest egg.

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