The US govt issues large numbers of TIPS, whose value is adjusted by changes in the CPI. The CPI has some truly absurd "adjustments" which keep it artificially low. A great example was mentioned by praetorian2 on another thread, showing that the government is saying crude oil is DOWN 2% on the year, when in fact it has doubled. To me, given the large sums involved, this looks like criminal fraud on a grand scale. Bondholders are being fleeced out of billions by completely wrongheaded accounting. Given the severity with which Martha Stewart, Frank Quattrone, and Sam Waksal were punished, shouldn't we be indicting public officials and looking at serious jail terms here? At the very least, the inflation calculation for TIPS ought to be done by an independent non-governmental economic consultancy or accountancy firm, or perhaps better still an average should be taken of several different firms CPI estimates. For the government to be in charge of setting the CPI, which is then used to calculate how much money the government has to pay - well, to say that it is a conflict of interest is an understatement. If any private firm tried to get away with this, they would be crucified by the regulators, and the directors probably locked up for fraud.
I believe Greenspan himself acknowledged the various problems with the CPI. Until a better solution is created, this is what we're stuck with. Creating a weighted average index of prices for different regions, markets, and not to mention products is no minor undertaking.
Not sure if it's criminal fraud as much as a bureaucratic system that was created by 50 year old thinking combined with huge dis-incentives for change. (bad design and inertia) You can say the same of much of the US government including the tax system. Corruption has become rampant, but it's not by design... just opportunity, human nature, and the capitalist way. The government needs a revolutionary overhaul and I truly believe it's coming pretty soon. The constitution is well designed and can support such a revolution. Tear down the infrastructure but leave the country and principles intact. It's just 536 people and their support system that need replacing.
I read in Barron that the housing contribution to cpi in 2003 decreased 8 % from 2002. in contrast to the huge appreciation of house prices last year. No wonder cpi underestimates the inflation.
Does anyone read this guys column in the NY Post biz Section on tuesdays and thursdays ..... He points out that the Bureau of Labor Statistics has now gone to a 12 season calender ,.......if that alone doesnt warrent an investigation I dont know what does ..... His column is excellent and highly recomend it .....
I thought one of the not so well hidden reasons for a system that understates inflation is that SS payouts get increased based on CPI and if it was accurate that system would go bust sooner than forecast. DS
Great post. Washington is surely on the path to implosion, and it's going to be fun watching them turn from predator to prey.
So basically the answer is yes? Not just bondholders, but every single pensioner in the USA is getting stiffed by these jokers' financial shenanigans?
I agree there is huge incentive to reduce their expenses and manipulating the CPI is one way to do that. You can call it fraud (and it essentially is), but they are simply working within the confines of the existing system and maximizing for their own gain. You can't prosecute the people who run the game. It's much more than CPI. Run some #'s on how much a 20K/year earner would save if he were saving 12.4% of his income and investing it at 5% rather than paying that into SS. By age 65, he'd be self-sufficient for the rest of his life (and would still pass that money to his children). That's a single person earning 20K/year for his entire life. If you earn 75K+, don't run the #'s. It will make you sick how much money they are stealing.