The Numbers Lie

by Lear Capital EditorialFebruary 16, 2015
Cloud of inflation, just for you

Mark Twain famously said there are three kinds of lies – lies, damned lies and statistics.

Do you ever feel like you have your own little personal cloud of inflation that follows you around where ever you go, ballooning the price of everything just for you, and then dropping prices again when you’re safely out of sight? Your bills keep going up and up and up. Money is tighter and tighter, and yet the government keeps denying any of this is happening. The latest official inflation rate is an astonishing 0.8%. Supposedly everything is fine and getting better. It must be just you, right? The numbers don’t lie.

Except that they do.

Every now and then the Bureau of Labor and Statistics (BLS) comes out and reports inflation numbers, confirming that the Federal Reserve is doing a bang up job keeping inflation right around its target 2%, spurring analysts to exclaim that in fact, deflation is more of a danger than inflation. So why do prices seem to be skyrocketing all around you?

First of all, it is important to understand that the BLS is not really quite as politically independent as it should be. Take jobs numbers: Before the 2012 elections there was a bit of a firestorm about the Obama administration trying to circumvent the Senate confirmation process in order to install a crony at the top spot in the BLS. Great jobs numbers came out right before the election. Re-election was achieved. Evidence of fraud came out later. Hearings were held. The world moved on. But this is nothing new. John Williams of Shadow Government Statistics discusses here how all the way back to Lyndon Johnson, administrations have been monkeying with official data behind the scenes for their own job security interests.

Why do they want official numbers to show that inflation is low? One big reason is that a huge part of the federal budget goes to entitlement payments, like social security. These liabilities are already unsustainable for the long term. The last thing the government can afford or tolerate is for those obligations to go up not down. Yet by law they have to give out adjustments for inflation every year. The Cost of Living Adjustment (COLA) must compensate social security recipients for price inflation.

Truth is expensive

Therein lays the rub. If the government admits there is inflation, they must pay for it. If they pay for all the inflation they have caused through bad monetary policy, there will soon be very little or no budget left for other expenditures. So they can’t admit there is any serious inflation.

The last COLA was a mere 1.7% increase. Can you imagine if it was based on 1980s methodology, as economist John Williams keeps track of here, and was closer to 8%? What if it went up 8% every year? It would be fairer to seniors, but Social Security payments would quickly absorb the federal budget entirely.

Where does that leave you? In desperate need of alternate plans for retirement, that’s where. It is very important to understand and accept this dynamic when planning ahead. To expect the government to act in any way contrary to these realities would be devastatingly naïve.

On the other hand, gold has enjoyed an average 12% return over the last 14 years, beating not only official inflation numbers (not hard) but old school methodology of inflation as well!

It is rough out there in the investment world, with bubbles popping and sectors crashing all the time. If your portfolio is in the wrong sector at the wrong time, it may never recover in time for your retirement. That is why many experts recommend keeping some portion (5-15%) of your portfolio in physical gold – to insure yourself not just against inflation, but also against government lies about inflation.

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