Wednesday, March 23, 2011

Journamalism (Daily Mail edition)

I was forwarded this article from the UK's Daily Mail from a friend and thought I'd comment on it as it seems another case of journamalism run amok. In this case, however that could be due to one of two possibilities: either the journamalist doesn't understand what he is writing about or he's pushing a right-wing agenda... which, given that the Daily Mail usually supports the Conservative Party, is a distinct possibility. On to the evidence...

The headline claims that the cost of living in the United States is now at an all-time high (notice they don't say the Cost of Living Index, which is the same as the CPI). That in and of itself is deceiving as the cost of living is almost always going to be at an all-time high sans a deflationary economy (but I'll get to this later). 

The first evidence provided by the Mail of an increased cost of living is the statistics from the Chained Consumer Price Index. The Chained CPI (or C-CPI-U) doesn't factor out food and energy prices, which is the main reason economists don't often use the C-CPI-U as a reliable measure of inflation. 

Food and energy prices are very volatile in the short-term so they have to be factored out. A late frost in Florida will cause a huge spike in orange juice prices, but should that spike in orange juice prices be considered when the Fed is trying to measure inflation? If so, they would be trying to tame inflation at a time when inflation isn't a problem. And as for gas and other energy and commodity prices? Well gas prices, in particular, have become unhinged from the economy as a whole (thanks to Goldman Sachs) and all commodity prices are now more subject to the swings of speculators and the total amount of money in wealth funds the world over, and the growing use of commodities in the large emerging markets. Anyway, for all those reasons, commodity prices shouldn't be used to decide whether or not inflation is present in an economy.

Now, admittedly, commodity prices do play a part in inflation but they're not nearly as large as you'd think (even if it seems like an item would have a large commodity component to it). Here's an example via Paul Krugman:
In December, says the Bureau of Labor Statistics, a one-pound loaf cost an average of $1.386. How much of that was the cost of wheat? As best I can tell, a bushel of wheat produces about 63 pounds of bread; wheat has lately been selling at around $10 a bushel; so we're talking maybe 16 cents of that loaf of bread, or less than 12 percent of the price, reflecting the cost of wheat. 
What I get from this is that wholesale food prices have a surprisingly small impact on the price of food, let alone on overall consumer prices. Again, not zero. But it's not at all peculiar to see large commodity price rises while overall inflation stays low.
Anyway, long story short, economists prefer the Core CPI (which factors out food and energy prices). And if the Core CPI is used then what we see is that inflation rates are at their lowest levels (roughly 0.5% year-over-year) since the CPI was first adopted and measured by the BLS in 1957.

Now then, let me address the other major fallacies (or deceptions) from the article. The article says that the cost of living is now at an all-time high. As mentioned before, my answer to that would be, "Well, duh!" 

The U.S. economy hasn't actually experienced across-the-board deflation in any products except in house and car prices in certain pockets of the country. Deflation is a very dangerous and almost incurable economic problem, but just because we're veering dangerously close to it and economists are warning us about it, doesn't mean we've actually experienced it. Core inflation is running at an all time low (roughly 0.5% per year) but that still means things are getting more expensive on a 0.5% year-over-year basis. So of course the cost of living is higher today than it was yesterday, higher than the day before yesterday, higher than last week, last month and last year. The disingenuous Daily Mail article fails to mention this.

As if to further prove they're being disingenuous about inflation they include a chart from the BLS that is almost completely meaningless. The chart shows the relative price level of the Chained CPI and shows that it's going up and up and up. But that chart does not show inflation "rates", it only shows what an assembled basket of goods (priced at $100 in 1978) would cost today ($220). So again, without actual deflation, this chart is only going to show rising prices.

In short, the Daily Mail's article and the journamalist who wrote it are probably no different from all the other conservative hacks out there calling on the U.S. government to rein in spending and halt all efforts to get the economy back on track.

Wednesday, March 2, 2011

Fox "News" at it again

The clip below shows a lack of snow on the ground and that Wisconsin recently imported palm trees.

From Digby (via Krugman)

Tuesday, March 1, 2011

Economic Terrorism?

I'm at a loss in trying to understand how people like Kevin Freeman have real, economic / financial jobs and appear to have no understanding of basic economics or finance.

In a report to the Pentagon, Freeman states that the Chinese are the likely culprits in a financial terrorist attack against the US (and, along with jihadists, could be the ones to blame for the 2008 financial crisis which was clearly not the result of banksters siphoning money out of the US financial system directly into their own pockets).

I have to wonder how it's possible that he doesn't understand that China's own economic self-interest is tied to America's economic success? In short, what advantage do they (or did they) gain by destroying the US economy? It's the underpants gnome theory of financial terrorism:

1.) China destroys US financial system
2.) ???
3.) Profit!

Secondly, Freeman claims that phase three of this diabolical terrorist plot will involve countries dumping US bonds to devalue the dollar which will further accelerate our decline. But, um... why would China want to do this? China owns nearly two trillion dollars worth of US government bonds (basically they hold two trillion dollars worth of US dollars). So if they start dumping their dollar holdings then the dollar holdings they currently have will further be devalued and they'll end up completely ruining their own balance sheet.

Now then, I can see how Freeman might believe a domino effect is possible because if China started dumping their dollar holdings every other government that's currently holding dollars would do the same because none of them would want to get stuck holding a ton of worthless dollars (this is the same mechanism behind panic selling in financial and stock markets). However, even that isn't a threat to the United States as a devalued dollar at this point might help US exports regain competitiveness.

But if this prophecy does come to fruition and the dollar does crash and inflation becomes a severe problem then we can deal with that. Raising interest rates and tightening the money supply are very effective tools for fighting inflation which Paul Volcker proved in the early '80s. Inflation is a much less severe problem and one much easier to fight than deflation, no matter how much conservatives and conspiracy theorist nuts with real jobs that have influence over government policy (like Kevin Freeman) insist that inflation is the greatest threat to mankind.