Shadow Stats debunked, part II

The Shadow Stats cultists who believe the U.S. Bureau of Labor Statistics is manipulating the inflation numbers have more evidence against them. MIT's Billion Prices Project collects prices completely independently of the BLS, yet it comes up with essentially the same U.S. inflation rate. This graph shows less than a percentage difference after almost three years:

And let's not forget that back in October, Google chief economist Hal Varian reported that Google's inflation measure, the Google Price Index, measured deflation during 2010:

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas. ...

Mr Varian emphasized that the GPI is not a direct replacement for the CPI because the mix of goods that are sold on the web is different to the mix in the wider economy. Housing accounts for about 40 percent of the US CPI, for example, but only 18 percent of the GPI.

The GPI shows a “pretty good correlation” with the CPI for goods such as cameras and watches that are often sold on the web, but less so for others, such as car parts, that are infrequently traded online.

So, the Billion Prices Project is largely in agreement with the CPI—varying by only a fraction of a percent per year—while Google reports even lower inflation numbers than the BLS.

Now ask yourself, which is more likely?

1. Three very different institutions—the BLS, MIT, and Google—are all conspiring to mislead the public
2. One guy—John Williams—is making a living by taking advantage of suckers

I'll give you a hint. Many Shadow Stats followers think the CPI doesn't count food and energy, even though it does. (It's a different measure, core CPI, that ignores food and energy.) Ignorant people are easily scammed.

For further evidence that Shadow Stats is a fraud, read Shadow Stats debunked, part I.

Shadow Stats debunked, part I

As a follow-up to last week's post on the subject, here are U.S. housing prices discounted by the "untrustworthy" U.S. government measure of inflation (the CPI-U-Research Series, to be specific). Note the fairly obvious housing bubble that begins to form in 1998.

I have reproduced Shadow Stats' proprietary annual inflation numbers. Here's what historical housing prices look like when discounted by the Shadow Stats SGS Alternate (1980) measure of inflation:

When housing prices outpace inflation, real (i.e. inflation-adjusted) home prices rise. When inflation outpaces housing prices, real home prices fall. Shadow Stats claims some pretty high inflation numbers, so it's hard for housing prices to keep up—even in good times. That's why we see the long-term decline in real housing prices shown in the second graph.

Now you can believe there was a housing bubble, or you can believe that Shadow Stats is trustworthy, but if you believe both you're delusional.

Update: For more on this topic, see Shadow Stats debunked, part II.

There never was a housing bubble!

For five years, I have been trying to publicly warn people about the housing bubble. Unfortunately, I was wrong all along. There never was a housing bubble. I apologize for the error.

You might think I'm being sarcastic, but I'm not. You see, the belief in a housing bubble rests on housing prices substantially outpacing inflation. If housing prices don't outpace inflation, there can be no bubble. I foolishly assumed that I could trust the inflation numbers published by the U.S. Bureau of Labor Statistics. I have been informed that doing so is pure ignorance.

I admit was wrong. The army of economists crunching the inflation numbers at the BLS are just tools of a corrupt and wicked government. The true inflation numbers come from a guy with no graduate degree in economics who is chief economist at the Shadow Stats website. He sells the true numbers for $175 per year. You know he's not a snake oil salesman or a con artist because he tells you what you already believe. Con artists would never do that. This guy says the government is under-reporting the real inflation numbers. The real inflation numbers are much higher, and have been for decades.

If the true inflation numbers are much higher, then inflation-adjusted housing prices must therefore be much lower. It's a simple rule: higher inflation = lower inflation-adjusted housing prices = much smaller or non-existent housing bubble.

For example, in 2001 when I first spotted what I thought was a housing bubble (silly me), nominal home prices had increased about 8.5% from the year before. But, according to Shadow Stats, inflation was 9.1%. Real home prices actually fell 0.6% that year! What a fool I was for thinking housing prices were rising too fast. They were actually falling!

If the Shadow Stats inflation numbers are right, then home prices must now be deeply undervalued. I say buy, buy, buy!

The fear over inflation is stupid

Right now we hear lots of worries in the financial press about high inflation. We've heard these worries throughout the financial crisis, which is stupid because inflation barely even exists. This graph shows that inflation is below the Fed's target rate of 2.0-2.5%.

The red line shows core PCE inflation, the measure of inflation tracked by the Fed due to its relatively low volatility. The blue line shows the GDP Deflator, the best measure of inflation affected by monetary policy. Is inflation currently something to worry about? Not by a long shot!

Shadow Stats

From Paul Krugman, Nobel-laureate in economics:

An interesting exchange between John Quiggin and Jonathan Chait on right-wing agnotology — that is, culturally-induced ignorance or doubt. ...

I mean, I see it all the time on economic statistics: point out that inflation remains fairly low, that the Fed isn’t really printing money, whatever, and you get accusations that the data are being falsified, that you yourself are cherry-picking by using the same measures you’ve always used, whatever. There really is epistemic closure: if the facts don’t support certain prejudices, that’s because They are hiding the truth, which we true believers know.

Here Paul Krugman is talking about the right wing in general, especially Tea Party types, but the paragraph on economic statistics could easily be applied to the Shadow Stats website and its cult members followers.

House hunters afraid to buy

From CNNMoney:

Despite some of the best home-buying conditions in years— affordable prices, low interest rates and lots of choices — fear of buying has infected the market.

It has paralyzed house hunters, making them unable to pull the trigger even on attractive deals. Some are worried about making the payments, while others are convinced they'll save even more if they wait.

It's perfectly natural that they should feel that way in the wake of the housing bust, said Lawrence Yun, the chief economist for the National Association of Realtors. "It's like when the stock market is crashing," he said. "People are waiting to see if deals will get better."

In fact, home sales are down by about 25% from last year, which means a lot of people are sitting on the sidelines. And real estate agents are having to get used to the fear of buying trend.

Despite what the real estate cheerleading in the article would leave you to believe, there's still a housing bubble. In much of the U.S., homes are still overvalued. There's good reason not to buy.

One reason mortgage interest rates are so low is because inflation is abnormally low, so real mortgage rates aren't as low as they appear. In fact, we currently have the lowest level of core inflation on record. Here's a graph:

Is deflation a threat to the economy?

Video: Morningstar analysts discuss the possibility of deflation and whether it is a threat to the U.S. economy.

U.S. Government: Screw the Savers!

BusinessWeek says "American savers have drawn the short straw":

American savers, take a bow. This is your moment of vindication. Your hour of glory. And you earned it (in a manner of speaking).

You resisted the siren call of plastic teaser APRs, dutifully living within your means to store money for a rainy day. You never took out an interest-only mortgage. Never had to pawn the copper pipes from your exurban McMansion to pay the reset on your liar loan. Your credit score would have gotten you into Harvard at age 12.

Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity.

Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.

Since August of last year, the Federal Reserve has slashed interest rates from 5.25% to 2.00%—wielding a blunt instrument that was swung enough to bend the yield curve in favor of suffering banks. You know, the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits that they can loan out at several points higher. ...

Wholesale inflation has soared 9.8% in the past 12 months, the highest clip since 1981. The more widely cited consumer price index jumped to 5.6%. In other words, while your saved buck was adding 2 cents or so on one end (and even less after taxes), three times as much was getting singed off the other end of that dollar bill. "Inflation is just deadly to savings," says David Gitlitz, chief economist at TrendMacrolytics, an investment adviser. ... "It steals your purchasing power and sets less and less of an incentive to keep money in the bank." ...

Commodity inflation has also been exacerbated by concurrent weakness in the dollar, which is stuck between a Europe that is loath to cut interest rates and a Washington that is too scared to hike them. Even with its recent rally, the greenback is only worth two-thirds of a euro. You practically have to wheelbarrow dollars to places like Madrid and Berlin.

All of which might be tolerable to the lonely and beleaguered saver if he weren't taunted daily by lopsidedly pro-spending, pro-creditor news stories. Forget about moral hazard. Forget about rewarding profligacy. Washington is hell bent on putting a floor beneath the housing market. ...

Maybe savers' ultimate vindication will arrive when and if every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else. Assuming, of course, they didn't stash all their money in one of the many banks that is about to go under; the feds are closely watching 117 of them—and counting. The phone lines have never been so jammed with nervous clients.

Oh, the joys of saving.

Federal Reserve president Lacker says inflation is unacceptably high

As reported by CNBC:

Recent inflation figures are "unacceptably high" and the Federal Reserve should focus on combating that rather than on stimulating the economy, Richmond Federal Reserve President Jeffrey Lacker said Tuesday.

The risks of a sharp economic slowdown have "diminished substantially," which enables the Fed to consider other challenges, such as rising prices, Lacker said. The central bank can help ease inflation by raising a benchmark short-term interest rate. ...

While the economy "is growing at only a tepid pace overall," Lacker said that economic data released in the last few months has "not yet shown the sharp, widespread reversals that define a recession."