Haute Con Job by PMI Gross(Bush Inflation report is too low, GDP too high)

[papau]

Haute Con Job by Bill Gross of PMI


http://www.pimcofunds.com/commentary/mgr_billGross10012004.jsp

Haute Con Job Bill Gross 10/01/2004
<snip>
My quarrel though is not just with those who are fixated on the core CPI or the core PCE, but with those who support what we know as hedonic adjustments. Talk about a con job! The government says that if the quality of a product got better over the last 12 months that it didn’t really go up in price and in fact it may have actually gone down! Why, we could be back to Bernanke deflation real soon if the government would quality adjust enough products. For instance, prices of desktop and notebook computers declined by 8% a year during the past decade, The Wall Street Journal reports but because the machines’ computer power and memory have improved, their hedonically adjusted prices have dropped by 25% a year since 1997. No wonder the core is less than 2% with computers dropping by that much every year. But did your new model computer come with a 25% discount from last year’s price? Probably not. What is likely is that you paid about the same price for hedonically adjusted memory improvements you’ll never use. Similarly, government statisticians manipulate the price increases for cars and just about any durable good that comes off an assembly line but find it difficult to extend that theory to underwear or a pair of shoes. Perhaps that’s next. Talk about Uncle Sam getting into your shorts!

Actually, to make the case for a government con job, it’s important to point out that the bulk of these hedonic adjustments have come only in the past few years, when it became necessary to buttress Greenspan’s concept of our New Age Economy. Back in the 1990s the Clinton Administration blessed a start to quality adjust inflation statistics. But then in 1998, the methodology was adopted for computers—surely the biggest step backward in realistic inflation calculations. Since then, the BLS has expanded the concept to include audio equipment, video equipment, washers/dryers, DVDs, refrigerators, and of all things, college textbooks! Today no less than 46% of the weight of the U.S. CPI comes from products subject to hedonic adjustments. PIMCO calculates that without them, and similarly disinflating substitution biases, Greenspan’s favorite inflation measure, the PCE, would be between 0.5% and 1.1% higher each year since 1987. This implies as well that since inflation was higher than actually reported, that conversely, real growth must have been lower by the same amount.

This first chart shows the hedonically adjusted numbers vs. what would be reported if this hedonic stretch didn’t exist.


Peter Bernstein in a recent Economics and Portfolio Strategy piece makes the hedonic point, as have Jim Grant, Stephen Roach, Marshall Auerback, Caroline Baum, and a host of other voices in the inflationary wilderness. Bernstein points out that since 1990, total CPI inflation was 2.7% a year, yet hedonically adjusted durable goods suspiciously managed to increase by only 0.1% annually. Over the past 12 months the BLS reports that non-durable were up at a 4.61% rate while those quality-adjusted computers, cars, and refrigerators, by golly, managed to actually go down by 1.25%. “Holy Greenspan, Batman!” If we just could focus on those durable goods we could lower interest rates to 0% like the Japanese and drive up the markets one more time!

EDITED BY ADMIN: COPYRIGHT

[papau]

1. Bloomberg's Berry: PIM's Gross article on fake high GDP and Fake low

inflation is wrong - because he virtually accused Fed Chairman Alan Greenspan of being part of a conspiracy by government officials to understate inflation and thereby boost estimates of real economic growth for political reasons while screwing Social Security beneficiaries on their annual cost-of-living - and that can't be true - can it? And the 50's practice of putting the current years cost increase into the new value of the now no longer optional because it is standard accessory is not a hedonically changed price - because the BLS says it isn't! Berry says "few if any economists question the need to adjust for quality changes" - and ignores the practice of EU economists, but then Berry must be correct! A Bush/GOP assertion is always correct!

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=a7yZyxZ7nrPU

Bill Gross's `Con Job' Was Inaccurate and Flawed: John M. Berry
Oct. 6 (Bloomberg) -- <snip>In fact, by weight, or importance in the index, just 33 percent of the CPI is subject to hedonic adjustment, not 46 percent, according to BLS officials. Three items, rents, owner's equivalent rent and a portion of the apparel category, account for almost 32 percent of that weighting.

Unfortunately for Gross's argument, hedonic adjustments for those items boost the index. That's because for the rent components, adjustments relate to the aging of the housing stock (Computers weight = 0.23 percent).<snip>

The Pimco fund manager also derides what he calls the ``substitution bias'' in both the CPI and the personal consumption price index, which is part of the gross domestic product accounts. <snip>

The introduction of this substitution effect beginning in 1999 has lowered the increase in the CPI by only 0.2 percentage points a year, Jackman said. <snip>

The real surprise about Gross's column -- something that might have added credibility to the notion of Greenspan and a conspiracy to have a low inflation rate -- is that he fails to mention the Fed chairman's frequent assertion that the CPI overstates -- yes, overstates -- inflation by perhaps as much as a percentage point a year. <snip>

[Moderator]

2. Per DU copyright rules

Please limit quotes to four paragraphs and a link to the original source. Thank you.

[On the Road]

3. Thanks, Papau

I've heard about the quality bias issue but have never seen it quantified, much less in a graph.

The substitution issue is new to me, and it's amazing that it's done in only one direction. For example, the recent surge in demand for red meat because of the Atkins diet has been accompanied by much higher beef prices. But the article applies that the adjustment is only done if consumers start to prefer cheaper alternatives? Can that be right?

The bottom line is pretty striking -- cumulatively, inflation is 46% higher (3.5% vs 2.4%) without those adjustments. And that really amounts to cooking the numbers.

The other distortion is, from what I understand, eliminating certain categories completely that have seen large increases, such as education and medicine. It didn't start with Bush, but it also leads to distorted numbers and bad policy.

[papau]

4. True - it has effect that living standard decrease is not noted!

If you "prefer" less costly because that is all you can afford - and less costly also means lower living standard - inflation is down!

Seems the product improvement concept only works one way!

[On the Road]

6. Oh, I Hadn't Thought of That

It's a vicious cycle. All these economic analysts are comfortably middle class, and being forced to save doesn't occur to them. Not to mention the economic theorists who interpret all changes as preference.

[papau]

5. To the Moderator - Re: Gross PR Blurb and DU copyright rules

In general PR Blurbs do not carry a copyright. However this was in a "newsletter" asking if I wanted to invest.

In anycase, I could not find a copyright symbol anywhere on the doc - but that is not a 100% guarantee.

So I did clip about half the doc.

In any case, There seems to be an "education exemption" on the Doc "These publications are distributed for educational purposes only and are not recommendations or offers for the purchase or sale of any particular security, strategy or investment product. For more information, please contact your financial advisor. Some materials, products and services may not be available at certain broker/dealer firms."


Bloomberg's refering to and quoting the Doc means permission to do so must have been given by PMI - or is not needed.

I think we're within fair use here - however, I did not see a reason to not cut it back to barebones if that is what you wanted - but when I tried I found I am outside the edit period.

Please cut back to the first 4 paragraphs plus the two charts, if that is adequate.

Thanks

[Demeter]

7. Can't Eat Computers or DVDs

and the food supply is getting compromised, not to mention people being scared out of their wits by the warnings about this and that and the other. Energy sufficiency is hanging by a thread, and the economy is like a punctured tire. This is the best of all possible worlds? I don't think so.

[KoKo]

8. And 1987 by my memory is when the flood of cheap imported Chinese goods

started flooding into the US and the "Made in America" label began to disappear. By allowing cheap imports (which drove our manufacturing here out of business) they allowed consumers to purchase more for less for over a decade as real inflation ran high and salaries couldn't keep up. That policy by Mr. "Greenspeak" hid many sins, and hurt our manufacturing base, savings rate and allowed us all to play while our Economic health went down the tubes. I remember shopping with my Mom during that time and I wanted to buy everything at a discount, imported, and she said: "I'll only buy "Made in America" and pay full price if I have to so that jobs stay here." Lou Dobbs fans would have loved her. Sadly she died but at least she didn't have to see what's going on now!

Thanks for this by Bill Gross. He's always a fun read and some of us think he's speaking the truth, here. So much is covered up that the day of reckoning can't be far off. :-(

From the article:

Greenspan’s favorite inflation measure, the PCE, would be between 0.5% and 1.1% higher each year since 1987. This implies as well that since inflation was higher than actually reported, that conversely, real growth must have been lower by the same amount.