I was joking with the pops the other day that if I could somehow fit a lump of coal underneath the Old Lady that we could get a diamond in about a week's time. Speaking of diamonds, the federal government is pulling perhaps a prank on us bigger than I (Hank) ever could. The best part of it? We don't even know it's happening.
There's a beautiful number in economics (and politics) for which the entire economy hinges: that number is the CPI (Consumer Price Index). The CPI is the basis for wage adjustments and social program cost of living increases. It is also the most important number that investment managers and economists pay attention to.
Here's a little secret: Alan Greenspan pushed for and succeeded in using a substitution method for calculating CPI. The inflation model is so convoluted and intricate that it would take an army of thieves (or a couple folks at the Fed) to figure out how much *you* are losing to inflation. (You can thank www.shadowstats.com for tipping me off to this.)
After some research over the last few weeks, I have learned that if there is a spike in the price of a good, the model automatically substitutes that good for an inferior good. Example: the Old Lady loves to talk about how diamonds used to be so cheap when she was younger. Now, she has to settle for these "purdy colored ones that are a lot cheaper." It took me a long time to finally tell her that diamonds, generally, are suppose to be white, not purple and green. The lesson to be learned here is that if diamonds are in that basket of goods that calculates CPI and now the CPI uses urine colored diamonds, the CPI has dropped. This is important to note because a yellow diamond can't be used for drill bits; it can't be used to cut glass; and most importantly, it can't be used to make the Old Lady's 84 year old hand look young again. As the CPI adjusts, and in order for those substituted goods to be comparable to the original better quality goods, you need to buy more of them - and that isn't reflected in the CPI so you are actually paying MORE for a POORER good.
So what does this all mean for you and why am I rambling on about this? This means that you are losing your shirt to inflation and you don't even know it. Even during this "Great Recession" you are facing inflation of 3-8 percent although the CPI is telling you that there was no increase in prices last year. Employers therefore do not need to give higher wages and the government can curtail it's social program spending (Amen!). What I want you to understand and be concerned about is this: By the Fed not being honest with us, we are losing our standard of living to a silent monster. Just think about this year: if there were no inflation, why have school taxes gone up? Why has the price of clothes, food, and especially energy continued to climb? Why have the basics of last year jumped in prices for this year?
For me, this is great. The Old Lady looks at things in nominal terms. She still thinks that you can get a nice dress for 1.50 down at Woolworth's. She has saved a lot for her family. For anyone though who has a spouse or a kid(s), you should be really concerned. As the Fed continues to print money, and if I am right in saying real inflation is about 3-8%, you can guarantee real inflation in the future will be 10%+ but the Fed will be telling you it's 4-5%. Employers will give you half of what you need to maintain your lifestyle because they follow the CPI number not the real inflation number.
I'd like to see Alan Greenspan live as cheap as my Old Lady. If he did, he would experience the true effects of the substitution method of CPI, but more importantly, Andrea Mitchel would have some ugly yellow diamonds hanging from her neck as she globe hopped following Secretary Clinton...
Tuesday, November 10, 2009
Sunday, November 8, 2009
Butter, Guns, and the Old Lady
This morning I made the old lady some buttermilk pancakes filled with carob powder. She has a massive sweet tooth and I would never tell her it was not chocolate. As she piled on the butter, about 1/4 of a country crock's worth, I noticed something - our country cares a lot more about butter than guns as it gets older.
What do I mean?
Chapter One Economics deals with society's choice to make either Butter or Guns. At equilibrium, as the very simple model goes, a society will choose so many guns and so much butter given their resources and utility. Their choice puts them at the maximum point they can achieve on their production possibilities frontier given their endowments and desires. In this hypothetical model, only two goods are produced. (Arguably, you can say this is a metaphor for deciding between defense and social programs.) So, what's my point?
We have a society of graying citizens that care more about eating what they want rather than what they should. As the House passed a sweeping remake of the Healthcare system last night, they forgot one thing: individual responsibility. Over the last month, I have heard at least a half of a dozen of retired people say, "I don't care what I eat anymore." You know why? Because I am paying for it, they aren't. Their pitiful contribution to medicare will long be outspent by what they use post-65 - and what do they care - they aren't paying for it.
I completely disagree with maintaining the status quo in Healthcare as the Republicans suggest. People *need* to be able to buy into affordable insurance. But people shouldn't be allowed to do what they *want* when it comes to their health decisions without paying for those poor decisions.
So what about guns? I think it's pitiful that we can produce all the social programs in the world but not arm and protect our soldiers on the field. We have soldiers without bullet proof vests fighting a war. We, as a nation, are deciding to maintain our unhealthy lifestyles, addiction to social programs, and continuously are looking for ways not to pay for the services we use. We are doing this at the expense of our national security. We are choosing butter over guns.
Now, if this is the path we want to take - to fatten up our citizens, to make sure no one is paying for what they are using, and maintaining the status quo, so be it. But we should give up our place as a superpower, and more importantly, we shouldn't be dabbling in the business of other countries if we aren't willing to take responsibility for our actions.
Next time you eat that stick of butter just think about how your healthcare costs are sucking dollars away from national security. Now if that's not domestic terrorism, I don't know what is!
What do I mean?
Chapter One Economics deals with society's choice to make either Butter or Guns. At equilibrium, as the very simple model goes, a society will choose so many guns and so much butter given their resources and utility. Their choice puts them at the maximum point they can achieve on their production possibilities frontier given their endowments and desires. In this hypothetical model, only two goods are produced. (Arguably, you can say this is a metaphor for deciding between defense and social programs.) So, what's my point?
We have a society of graying citizens that care more about eating what they want rather than what they should. As the House passed a sweeping remake of the Healthcare system last night, they forgot one thing: individual responsibility. Over the last month, I have heard at least a half of a dozen of retired people say, "I don't care what I eat anymore." You know why? Because I am paying for it, they aren't. Their pitiful contribution to medicare will long be outspent by what they use post-65 - and what do they care - they aren't paying for it.
I completely disagree with maintaining the status quo in Healthcare as the Republicans suggest. People *need* to be able to buy into affordable insurance. But people shouldn't be allowed to do what they *want* when it comes to their health decisions without paying for those poor decisions.
So what about guns? I think it's pitiful that we can produce all the social programs in the world but not arm and protect our soldiers on the field. We have soldiers without bullet proof vests fighting a war. We, as a nation, are deciding to maintain our unhealthy lifestyles, addiction to social programs, and continuously are looking for ways not to pay for the services we use. We are doing this at the expense of our national security. We are choosing butter over guns.
Now, if this is the path we want to take - to fatten up our citizens, to make sure no one is paying for what they are using, and maintaining the status quo, so be it. But we should give up our place as a superpower, and more importantly, we shouldn't be dabbling in the business of other countries if we aren't willing to take responsibility for our actions.
Next time you eat that stick of butter just think about how your healthcare costs are sucking dollars away from national security. Now if that's not domestic terrorism, I don't know what is!
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