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Proposal to Move Bank Regulation Goalposts Signals Underlying Problems in Financial System

If a formula spits out a number you don’t like, just change the formula so you get a better number!

That’s exactly what the Bureau of Labor Statistics did to the Consumer Price Index formula in the 1990s. Because the CPI kept indicating price inflation was too high, the BLS tweaked the formula to spit out a lower inflation number.

Now the International Swaps and Derivatives Association (ISDA) is trying to talk the Federal Reserve into changing the formula for the supplementary leverage ratio (SLR) to make bank balance sheets look better.

This proposal sends some alarming messages about the stability of the banking system and confidence in U.S. government debt.

What Is the SLR and Why Do They Want to Change It?

The SLR is calculated by dividing the bank’s tier 1 capital (capital held in a bank’s reserves and used to fund business activities for the bank’s clients) by all assets on the bank’s balance sheet, including U.S. Treasuries and deposits at Federal Reserve Banks.

Banks use the SLR to calculate the amount of equity capital they must hold relative to their total leverage exposure. Regulations imposed after the 2008 financial crisis require category I, II, and III banks to maintain an SLR of 3 percent. “Globally Systemically Important Banks” are required to keep an extra 2 percent SLR buffer.

During the pandemic, the Fed temporarily altered SLR requirements, allowing banks to exclude Treasuries and reserves from the formula’s denominator. This made it easier to maintain the required SLR ratio.

As a Federal Reserve note explained, the banking system “exhibited considerable strains” during the reign of COVID-19. As the pandemic unfolded and governments began shutting down economies, banks quickly liquidated risky assets and increased their cash holdings. This resulted in a “sharp increase in bank deposits.”

…click on the above link to read the rest of the article…

Today’s Contemplation: Collapse Cometh XXII–‘Net Zero’ Policies: Propaganda to Support Continued Economic Growth

Today’s Contemplation: Collapse Cometh XXII
June 22, 2021
Knossos, Greece (1993) Photo by author

‘Net Zero’ Policies: Propaganda to Support Continued Economic Growth

A personal view of the ‘Net-Zero’ policy being implemented by governments around the world, particularly those of the ‘West’.


As happens so often (always?), the ruling elite are manipulating what is possibly one of our more (most?) existential dilemmas so as to have their cake and eat it too. The chicanery that takes place within statistical calculations is widespread and occurs in virtually everything they touch but of course gives the impression of ‘objectivity’ and ‘transparency’ because figures can’t lie (although liars can figure, simply take a look at the statistical manipulations that take place in determining a nation’s consumer price index). The trickery goes far beyond numbers, however, for the use of statistics is just one of many narrative control mechanisms used to support the stories they want citizens to believe.

They have leveraged carbon emissions as THE most pressing environmental/ecological issue (even though it is only one of many predicaments resulting from humanity overshooting its natural carrying capacity on a finite planet) and have presented a variety of ‘solutions’ from carbon taxes to widespread ‘electrification’ of society to ‘net-zero’ policies. I would argue all of these ‘solutions’ derive from their primary motivation: the control/expansion of the wealth-generating systems that provide their revenue streams. From ever-increasing taxation to capital reallocation towards ‘green/clean’ technology to increasing curtailment of once-expected liberties and mass surveillance, the ruling elite are enhancing and consolidating their grip on wealth and power but marketing it as a necessary societal shift to ‘save’ humanity from itself.

There is certainly a grain of truth in all of the efforts to shift society away from fossil fuels. Apart from the fact that fossil fuel exploitation has encountered significant diminishing returns on its investments, I am increasingly convinced humanity has blown past several very important biophysical limits that exist on a finite planet and if it wishes to make it out of the other side of the very narrow bottleneck we have created for ourselves some very difficult choices need to be made. The ruling elite, however — as they always do — are taking advantage of various crises for their own self-serving ends. They are selling a ‘Build Back Better’ narrative to the masses — as snake oil salesmen do — as beneficial for everyone while accruing the benefits to themselves that may come from this shift in what remains of our dwindling resources, especially energy, for our use.

There is massive evidence that we have reached significant diminishing returns in our exploitation of fossil fuels and there exist no comparable replacements. This has gargantuan implications for our exceedingly complex and global industrial world. The energy decline it portends CANNOT, with current technology, be offset. Yes, there are ‘potential’ alternative energy sources but none are currently available at scale or cost, or offer the energy-return-on-energy-invested that fossil fuels have — in fact, many are just concepts on paper or test projects and critical views of them show they offer little if any surplus energy; to say little about the hard fact that they all depend upon the fossil fuel platform from the mining and processing of raw materials to the construction and maintenance to the after-life care and disposal of waste products (resulting in further environmental/ecological distress).

And even if by some miraculous turn of events we were to discover a truly ‘green/clean’ new energy subsidy to replace the relatively inexpensive and easy-to-access/readily-transportable fossil fuels that have allowed almost all of our expansion and ‘progress’ the past couple of centuries (but especially the past 100–150 years), this would do little to address the variety of other negative consequences of humanity’s spread and impact across the globe (e.g., biodiversity loss, soil fertility issues, etc.). Powering all of our technology and complexities does NOT address the underlying cause of our dilemmas: ecological overshoot.

Rather than acknowledging our plight, our elite are actually doing the exact opposite of what very likely needs to be done to address overshoot. They continue to pursue the perpetual growth chalice taking humanity even further down a path that is becoming both narrower and far more dangerous for most if not all.

The elite are well aware of the human tendency to defer to ‘experts’ and ‘authority’ (think Stanley Milgram’s shock experiments) and think in ‘herds’ so as to go along with the ‘mainstream’ narrative even if it goes against our own experiences and observations, so they dispatch their narrative managers/propagandists. These people have been working overtime crafting comforting and cognitive dissonance-reducing tales to overwhelm the contrarian evidence that shows the emperor has no clothes. To say little about Big Tech increasingly censoring alternative narratives.

The ‘net-zero’ propaganda is a perfect example. It continues to push expansion (the very cause of our dilemmas), particularly of certain ‘solutions’, while marketing itself as the road to sustainability because, you know, it all evens out in the end. Sit back, relax, fire up the Netflix, watch another sports event, your ‘leaders’ have everything under control. Pay no attention whatsoever to the kerfuffle behind the curtain over there. We can have our cake and eat it too!

Gold Establishment Supports Central Bank Secrecy instead of Exposing it

Gold Establishment Supports Central Bank Secrecy instead of Exposing it

This week, the World Gold Council (WGC), which is a gold market development organization representing 32 of the world’s gold mining companies, published the latest quarterly edition of it’s well-known “Gold Demand Trends” research publication.

In the latest edition, which is titled “Gold Demand Trends Q3 2022”, the World Gold Council claims that during Q3 2022, “central banks continued to accumulate gold, with purchases estimated at a quarterly record of nearly 400 tonnes.

And for my Next Trick

According to the WGC:

“Global central bank purchases leapt to almost 400 tonnes in Q3 (+115% q-o-q). This is the largest single quarter of demand from this sector in our records back to 2000 and almost double the previous record of 241t in Q3 2018.

It also marks the eighth consecutive quarter of net purchases and lifts the y-t-d total to 673 tonnes, higher than any other full year total since 1967.

Specifically, the World Gold Council claims that Q3 2022 central bank gold demand was 399.3 tonnes, which is a massive 340% higher than Q3 2021.

The infamous 399.3 tonnes of gold in question – Source WGC GDT Q3 2022

Sounding impressive enough, the world’s financial media not surprisingly ran with the soundbite, publishing articles with headlines such as “Record central bank buying lifts global gold demand, WGC says” and “Central bank gold purchases set an all-time high” and “Central banks are buying gold at the fastest pace in 55 years”.

Until that is, you read a bit further and see that the World Gold Council added a caveat for Q 3 2022 central bank gold demand, saying that for “Q3 net demand includes a substantial estimate for unreported purchases”.

Rabbit out of a Hat – Central bank gold demand data?

Wait, what was that? The Q3 gold buying from central banks includes “a substantial estimate for unreported purchases”?…

…click on the above link to read the rest…

World population is growing faster than we thought

World population is growing faster than we thought

We’ve all heard the aphorism ‘Lies, damned lies and statistics.’ Statistics are an invaluable tool for understanding and responding appropriately to the world, but when the numbers say one thing and the headlines say another, it’s a cause for concern. TOP takes a dive into World Population Prospects 2022.

The world’s population has grown more than anticipated in the past three years.

That should have been the headline when the United Nations released its latest revision of world population data (World Population Prospects 2022) on 11 July. Instead, the headline was that global population would peak in 2086 at 10.4 billion, about 15 years earlier and half a billion fewer than projected in 2019.

Is this fake news? Why should greater-than-anticipated growth yield lower future growth projections? Let’s look at the data they have given us. Apologies if this article is a bit nerdy, but the UN projections play an important role in government planning throughout the world. Any criticism of them needs to be thoroughly justified.

Figure 1 shows the world population as it was estimated in each revision of World Population Prospects (WPP) from 2010 to 2022. The pink line connects each revision’s estimate of the current population, i.e. the mid-2010 population as estimated by WPP2010 connected to the mid-2012 population as estimated by WPP2012 etc. Using this rolling-current estimate avoids any bias in the UN’s model that might be influencing the slope of the projected line.

In blue dashed lines are the projected growth anticipated in each of those revisions. With the exception of 2019, where recent past estimates closely matched what was expected in 2017, each new revision has concluded that growth since the last update was greater than they anticipated.

The world population estimates for each successive revision of World Population Prospects from 2010 to 2022 have been higher than the previous years'

…click on the above link to read the rest of the article…

The CPI Revisited And Its Failure To Reflect True Inflation

The CPI Revisited And Its Failure To Reflect True Inflation

The cost of living numbers prepared by the Bureau of Labor Statistics are highly misleading. Currently, the government understates inflation by using a formula based on the concept of a “constant level of satisfaction” that evolved during the first half of the 20th century in academia. This extended into the BLS re-weightings sales outlets such as discount or mass merchandisers with Main Street shops. Those promoting this change claimed it was simply another way to measure inflation and it still reflected the true cost of living.  

 
The fact is, politicians and those behind this system created it as a way to reduce the cost of living adjustments for government payments to Social Security recipients, etc. By moving to a substitution-based index and weakening other constant-standard-of-living ties those reporting inflation have muddied the water as to just how much we are being impacted by inflation. The general argument used to promote this change was that changing relative costs of goods results in consumers substituting less-expensive goods for more expensive goods.
Allowing for a substitution of goods within the formerly “fixed-basket” supposedly allows the consumer flexibility in obtaining a “constant level of satisfaction.” This adjustment to the inflation measure was touted as more appropriate for the GDP concept in measuring shifting demand and weighting actual consumption. Other tricks were also used to give the illusion of less inflation. In cases where the quality of the product are deemed by the government to be “improved” prices in the CPI, calculations are now adjusted lower to offset the higher quality. Extending this idea the Baskin Commission Report, December 4, 1996, actually used steak and chicken for its substitution example.

…click on the above link to read the rest of the article…

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

With actual house price inflation based on market data, overall CPI would have jumped by 3.7%. Lifting the cover on the deception to keep CPI low.

For most Americans, housing costs are the largest item in their budget, ranging from 30% to 60% of their total monthly spending. In its Consumer Price Index (CPI) for February, released yesterday, the Bureau of Labor Statistics reported that the costs of homeownership (which the BLS calls “Owner’s equivalent rent of residence”) have increased by just 2.0% from a year ago, and that rents (“rent of primary residence”) have increased by 2.0%. They’re the biggest items among the 211 items in the CPI basket and together account for about one-third of overall CPI. They play a huge role in CPI. So…

Rent inflation of 2.0% year-over-year on average across the US might be roughly on target, from what I can see in other rental data. But homeowner’s inflation of just 2.0%, given the skyrocketing home prices? Ludicrous. In its latest release, the Case-Shiller National Home Price index jumped by 10.4%.

This discrepancy between home price increases and the CPI for homeowners – which has for years contributed to understating the overall CPI – is depicted in the chart of the Case-Shiller National Home Price Index (red line) and the CPI for “owner’s equivalent rent of residence” (black line). I set the homeowners CPI at 100 for January 2000 to match the Case-Shiller index, which is set by default at 100 for January 2000. This allows you to see the progression of both indices on the same axis.

The thus corrected CPI increases by 3.7%.

The “owner’s equivalent rent of residence” accounts for 24.2% of CPI. If it had increased by 10.4%, in line with the Case-Shiller index, instead of 2.0%, the overall CPI would have increased by 2.03 percentage points more

…click on the above link to read the rest of the article…

wolfstreet, wolf richter, cpi, consumer price inflation, house prices, inflation, statistical manipulation, statistics,

How the Unemployment Fiasco in Europe Is Kept out of Official Unemployment Rates

How the Unemployment Fiasco in Europe Is Kept out of Official Unemployment Rates

The massive and once-again extended Pandemic-era furlough programs serve their purpose, but…

In Europe, people who are furloughed are paid under government programs via their employers. Many of these programs have been created during the Pandemic. In theory, these people still have jobs. In practice, they’re not working, or are working heavily reduced hours. But they do not count as “unemployed” and are not reflected in the “unemployment” numbers. So throughout the Pandemic, the official unemployment rates barely ticked up, compared to the last crisis, and remain low for the EU era, despite tens of millions of people who’d stopped working due to the lockdowns (chart via Eurostat):

Under these furlough programs, the government pays companies, who in turn pay employees between 60% and 84% of their monthly wage. In some cases, the workers work fewer hours for less pay; in others, they don’t work at all. The workers take a hit to their income but their jobs remain intact, at least for the duration of the program.

The UK adopted a sweeping furlough program at the beginning of its last lockdown. Businesses can claim 80% of a staff member’s regular monthly salary, up to a maximum of £2,500. The money must be passed on to the employee and can also be topped up by the employer.

But the unemployment rate has begun to rise as people come off furlough, and those whose jobs disappeared entered official unemployment. The unemployment rate ticked up to 4.8% in the three months to September, from 4.5% in Q2 and from 3.9% a year earlier, according to the Office for National Statistics (ONS). In London, the unemployment rate surged by 1.2 percentage points from the previous quarter, to 6%, the largest quarterly increase in unemployment since the ONS started tracking the data in 1992.

…click on the above link to read the rest of the article…

False Bizarre Economy Renders GDP Useless (Part 1)

False Bizarre Economy Renders GDP Useless (Part 1)

GDP Growth Is Akin To “Magic Illusion 101”

We may be getting to the place where more people are beginning to realize the illusion created from printing and pouring trillions of dollar haphazardly into the economy can’t last. Today, consumer confidence hinges on what Washington decides to do with the next stimulus package. At this point it is likely they will pour enough money into the economy to keep things artificially inflated. Still, anyone looking at the coming gross domestic product (GDP) figures as an indication of how the economy is faring is barking up the wrong tree.

The usefulness and validity of the GDP numbers in determining how rapidly the economy is growing has been disputed over the years. Let us face the fact the illusion the economy continues to work its way forward is completely based on “government deficit spending” coupled with the Fed’s very easy monetary policy.  At the same time, we should concede much of the perceived growth is because all the money being printed has to go somewhere. Sadly, economic growth does not guarantee a healthy economy. 

The original formula for measuring economic growth was full of flaws but over the years we have allowed numbers that mean “nothing” to seep into how the GDP is calculated all in an effort to create the illusion of growth. In years past America far outproduced the rest of the world and manufactured goods that it exported across the seas. Today much of our economy is dominated by the service sector, this means if you wash my windows, then I will mow your yard. Another huge problem is that the GDP counts government spending, and politicians spend (other people’s) money on stuff simply to get reelected. If this isn’t the clearest cut case that the calculation of GDP is meant to obscure, rather than to inform, I can’t imagine what would be.

…click on the above link to read the rest of the article…

Never Before Have I Seen So Much Fake Unemployment & Jobs Data by the Bureau of Labor Statistics. Labor Department Nails It

Never Before Have I Seen So Much Fake Unemployment & Jobs Data by the Bureau of Labor Statistics. Labor Department Nails It

Labor Department today: People on state & federal unemployment insurance jumped to 31.5 million, worst ever.

Bureau of Labor Statistics today: 4.8 million jobs created, unemployment dropped by 3.2 million.

BLS under-reported unemployment by 13.7 million, based on data from the Labor Department. What’s happening is infuriating. Read and cringe.

Normally, the jobs report by the Bureau of Labor Statistics is released on the first Friday of the month. And the unemployment claims report is released Thursday every week. But this month, the monthly jobs report was also released today because of the 4th of July weekend. And now we have this delicious situation of both reports on the same day, with the Labor Department’s unemployment insurance data – people who are actually receiving unemployment benefits under state and federal programs – calling the Bureau of Labor Statistics’ survey-based report a liar. And we’ll go through them.

What the Labor Department reported today:

The total number of people who continued to receive unemployment compensation in the week ended June 27 under all state and federal unemployment insurance programs, including gig workers, surged by 937,810 people in the week, to 31.49 million (not seasonally adjusted), the highest and worst and most gut-wrenching ever:

The number of people receiving state unemployment insurance (blue columns in the chart above) has essentially been flat for three weeks (it ticked up this week), as many people got their jobs back while many other people were newly laid off. But the number of people on federal unemployment programs, including gig workers (red columns), has been soaring.

What the Bureau of Labor Statistics reported today:

…click on the above link to read the rest of the article…

America’s Debt Burden Will Fuel The Next Crisis

America’s Debt Burden Will Fuel The Next Crisis

Just recently, Rex Nutting penned an opinion piece for MarketWatch entitled “Consumer Debt Is Not A Ticking Time Bomb.” His primary point is that low per-capita debt ratios and debt-to-dpi ratios show the consumer is quite healthy and won’t be the primary subject of the next crisis. To wit:

“However, most Americans are better off now than they were 10-years ago, or even a few years ago. The finances of American households are strong. 

But, that’s not what a lot of people think. More than a decade after a massive credit orgy by households brought down the U.S. and global economies, lots of people are convinced that households are still borrowing so much money that it will inevitably crash the economy.

Those critics see a consumer debt bomb growing again. But they are wrong.”

I do agree with Rex on his point that the U.S. consumer won’t be the sole cause of the next crisis. It will be a combination of household and corporate debt combined with underfunded pensions, which will collide in the next crisis.

However, there is a household debt problem which is hidden by the way governmental statistics are calculated.

Indebted To The American Dream

The idea of “maintaining a certain standard of living” has become a foundation in our society today.Americans, in general, have come to believe they are “entitled” to a certain type of house, car, and general lifestyle which includes NOT just the basic necessities of living such as food, running water, and electricity, but also the latest mobile phone, computer, and high-speed internet connection. (Really, what would be the point of living if you didn’t have access to Facebook every two minutes?)

But, like most economic data, you have to dig behind the numbers to reveal the true story.

So let’s do that, shall we?

 …click on the above link to read the rest of the article…

Earthquake Economics

“The United States of America, right now, has the strongest, most durable economy in the world,” said President Obama, in his State of the Union address, on Tuesday night.  What performance metrics he based his assertion on is unclear.  But we’ll give him the benefit of the doubt.

A collapsed building is seen in Concepcion , Chile, Thursday, March 4, 2010. An 8.8-magnitude earthquake struck central Chile early Saturday, causing widespread damage.  (AP Photo/ Natacha Pisarenko)Photo credit: Natacha Pisarenko / AP

Maybe this is so…right now.  But it isn’t eternal.  For at grade, hidden in plain sight, a braid of positive and negative surface flowers indicate an economic strike-slip fault extends below.  What’s more, the economy’s foundation dangerously straddles across it.

1-gdpnow-forecast-evolutionActually, it probably isn’t so – the Atlanta Fed’s GDP Now measure, which has proven surprisingly accurate thus far, indicates that the US economy is hanging by a thread – and the above chart does now yet include the string of horrendous economic data released since January 8.

 

Something must slip.  A massive vertical rupture is coming that will collapse everything within a wide-ranging proximity.  It is not a matter of if it will come.  But, rather, of when…regardless of what the President says.

Here at the Economic Prism we have no reservations about the U.S. – or world – economy.  We see absurdities and inconsistencies.  We see instabilities perilously pyramided up, which could rapidly cascade down.  We just don’t know when.

Comprehending and connecting the infinite nodes and relationships within an economy are beyond even the most intelligent human’s capacity.  Cause and effect chains are not always immediately observable.  Feedback loops are often circuitous and unpredictable.  What is at any given moment may not be what it appears.

Not Without Consequences

For instance, the Federal Reserve quadrupled its balance sheet following the 2008 financial crisis, yet consumer prices hardly budged.  Undeniably, the Bureau of Labor Statistics’ consumer price index is subject to gross manipulation.  We’re not endorsing the veracity of the CPI.

…click on the above link to read the rest of the article…

A Recession Within A Recession

A Recession Within A Recession

Recession - Public DomainOn Friday, the federal government announced that the U.S. economy contracted at a 0.7 percent annual rate during the first quarter of 2015.  This unexpected shrinking of the economy is being primarily blamed on “harsh” weather during the first three months of this year and on the strengthening of the U.S. dollar.  Most economists are confident that U.S. GDP will rebound back into positive territory when the numbers for the second quarter come out, but if that does not happen we will officially meet the government’s criteria for being in another “recession”.  To make sure that the numbers for Q2 will look “acceptable”, the Bureau of Economic Analysis is about to change the way that it calculates GDP again.  They are just going to keep “seasonally adjusting” the numbers until they get what they want.  At this point, the government numbers are so full of “assumptions” and “estimates” that they don’t really bear much resemblance to reality anyway.  In fact, John Williams of shadowstats.com has calculated that if the government was actually using honest numbers that they would show that we have continually been in a recession since 2005.  That is why I am referring to this as a “recession within a recession”.  Most people can look around and see that economic conditions for most Americans are not good, and now they are about to get even worse.

For quite a while I have been warning that another economic downturn was coming.  Well, now we have official confirmation from the Obama administration that it is happening.  The following is an excerpt from the statement that the Bureau of Economic Analysis released on Friday

…click on the above link to read the rest of the article…

 

 

truthinesslessness

truthinesslessness

Nothing is stable, nothing is straightforward, everything is fixed, and nothing is fixed. O nation of busboys and WalMart greeters, awake and sing!

Can an empire founder on sheer credulousness? After last Friday’s jobs report, I think so. For a culture that luxuriates in statistical analysis (and the false idea that if you measure enough things, you can control them), it is rather amazing that we absolutely don’t care whether the measurements are truthful or not. Hence, an economist (sic) such as Paul Krugman of The New York Times might ask himself how it is that Zero Interest Rate Policy only trickles down to places where hamburgers are sold. PK was at it again in his Monday column, yammering about “rapid job growth,” “partying like it was 1995.” Wise men like him are pounding this country down a rat hole faster than you can say Romulus Augustulus.

Apparently the US Bureau of Labor Statistics missed the job bloodbath in the oil industry, especially over in Frackville where the latest western phenomenon is the ghost man-camp (along with ghost pole dancing parlors). It’s a veritable hemorrhagic fever of job layoff announcements: 9,000 here, 7,000, there, thousands of thousands everywhere — Halliburton, Schlumberger, Baker Hughes — like an Ebola ward in the oil services sector. Not to mention the cliff-drop of capital expenditure, meaning even steeper job losses ahead, Casey Jones. But nobody notices, I guess because they’re out at Ruby Tuesdays eating things bigger than their heads. Are the portions getting smaller, or are their heads shrinking?

…click on the above link to read the rest of the article…

 

Republicans To Investigate NASA Over Climate Data Tampering

Republicans To Investigate NASA Over Climate Data Tampering

With record heat (and drought) in the west and record cold (wet and snow) in the east, the global warming game-playing continues every day but the climate-gate rhetoric has increased vociferously since we first noted three weeks ago, the data that has been so relied upon to ‘prove’ global warming’s trend was in fact manipulated. What The Telegraph called “the most extraordinary scandal of our times” – that of the “seasonally-adjusted” seasonal raw global temperature data – is about to be investigated by Congress. As Daily Caller reports, California Republican Rep. Dana Rohrbacher exclaimed “expect there to be congressional hearings into NASA altering weather station data to falsely indicate warming & sea rise.”

This began, as The Telegraph previously noted, with claims that the underlying data used to justify practically every study p[roving global warming has, in fact, been manipulated…

Although it has been emerging for seven years or more, one of the most extraordinary scandals of our time has never hit the headlines. Yet another little example of it lately caught my eye when, in the wake of those excited claims that 2014 was “the hottest year on record”, I saw the headline on a climate blog: “Massive tampering with temperatures in South America”. The evidence on Notalotofpeopleknowthat, uncovered by Paul Homewood, was indeed striking.

…click on the above link to read the rest of the article…

 

Estimating the Effect of Hedonic Quality Adjustments on the Consumer Price Index | The Consumer Price Illusion

Estimating the Effect of Hedonic Quality Adjustments on the Consumer Price Index | The Consumer Price Illusion.

Having an informed debate over Hedonic Quality Adjustments is difficult due to the lack of comparable consumer price indices. A few exist, however, andtoday we will look at an index compiled by PriceStats, an off-shoot of MIT’s Billion Prices Project, which scrapes the internet for prices and compiles a daily index that aims to track inflation in real-time.

The time series eschews hedonic and seasonal adjustments and relies on sampling over 5 million products to produce a very different look at inflation (CPI included for comparison):

price_series

Since starting calculation of the index in mid-2008, PriceStats inflation series has remained consistently above the CPI as reported by the BLS. Considering the differences in methodology this provides an estimate to how much Hedonic Quality Adjustments have been used to understate the head-line CPI figures. Currently, the CPI uses quality adjustments on over 32% of the items used in its calculation. 

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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