Ahead of tomorrow’s Non-Farm Payrolls release in the United States, here is a look at the path to monetary destruction.
Most economists agree on one thing; price controls do not work. Many go on to say they create shortages of goods, which inevitably drives black market prices even higher than they would otherwise be.
Price controls were last tried in the 1970s, and everyone swore, never again. The suggestion that they could return is laughed at today, even taken as madness. Only in Venezuela and Zimbabwe…
However, the likelihood of their reintroduction is greater than generally realized, and is increasing all the time now that there are signs of rising prices. So far, central bankers are claiming that an increase towards their inflation targets of two per cent in the CPI (already achieved in the US) is a sign that economic normality is returning. They are also confident they can manage the rate of price inflation, so it should not present a risk. But in all previous credit-driven business cycles, the rate at which prices increase has always been beyond the control of central banks. This article explains why, and highlights the central role of statistical propaganda, of which its promoters are hardly aware. It also suggests how inflation outcomes are likely to evolve. We shall start by looking at officially-recorded prices.
CPI fallacies
The first of four major fallacies behind state-sponsored price statistics is the application of averages. Not one person on earth buys the products in the consumer price index in the proportions they are included in it, nor do they pay the assumed prices. Welcome to the macroeconomists’ favorite tool, the average. Averages allow them to plan our prices for us. We have all been averaged. Secondly, the prices are always historic, and what we bought yesterday is not the same as what we buy today, and even that differs from what we will buy tomorrow. Taking static numbers that no longer apply misrepresents dynamic markets that continually evolve.
Because the technique of averaging while assuming the economy is static permits economists to escape from the reality of considering individual people, they can then indulge in flights of fancy. In the name of improvement, we welcome hedonics. Hedonics, we are told, is a logical approach to adjusting prices for product improvements, and the likelihood that if the price rises for one product, at the margin people will buy a cheaper alternative. Again, this concept is flawed, because someone employed by the state sits in judgement on how you and I as individuals value the goods and services we buy, and what makes us choose between them. And given the state wishes to emphasize its success in the management of our affairs, this flaky concept is capable of being loaded to produce a desired result.
The last major error (there are other misconceptions, but we shall stop here) is to categorize our transactions into those defined as consumption, and those defined as non-consumption. We are left consuming non-consumption products. So here again, the person or committee in control of what is included in the index influences the outcome.
It is therefore hardly surprising that the official CPI under-records price inflation, because government econometricians have the means to do so. Little by little, distortions accumulate, and over time reality is left far behind. Underlying the whole process and sold to us as the advancement of science, is propaganda. Reduce the observed rate of price inflation to optimize our consumption. Reduce the GDP deflator to convince us the economy is growing. Reduce the rate of price inflation to lower the state’s pension and social security liabilities.
Unbiased attempts to replicate an index of inflation show a far higher rate. In the US, John Williams’s Shadow Stats shows a rate closer to 10% than the 2.1% shown on the official CPI-U statistic (see chart below)…..More Here