Many financial commentators have asked if or speculated that we may be headed for a repeat of our economic situation in the 1970s of stagflation. One commentator points out:
"The rare combination of surging inflation, artificially low interest rates, and a jobless recovery may be setting the stage for stagflation, an unpleasant economic malaise not seen in 40 years. "
I love the language: "may be setting the stage for stagflation...not seen in 40 years." My dear friend, we are already in Act 4! Not only has the stage been set, we have been living through stagflation at least since 2007.
Compare our recent experience (i.e., the blue line) in the chart above from 2005 to the present, to the chart below from 1970 to 1976.
a move from 6% to 18%, but mostly because no one knows, thanks to the BLS, that we are already experiencing the 1970s all over again!
If the Federal Reserve waited for real inflation to reach 14% as measured in the 1970s before it was willing to cease its counterfeit operation of printing more money, how much longer will they wait this time when our budget deficit is so much worse and they have tricked dollar-holders into thinking inflation is only at 2% when it is really near 10%! In fact, if the Federal Reserve waits until nominal inflation rates as currently measured reach the same 14% as their high point in the '70s, actual inflation as measured by the old methodology of the 1970s will likely be near 22%!
In other words, our economic situation may actually currently be far worse than a comparable year during the stagflation of 1970s, say 1976, and the only difference is this time we are oh-so-unblissfully unaware and so the counterfeit operation will go on that much longer.
Now, just for background information, as I have made the most important points already (Protect Yourself from Inflation!), let us address how the BLS justifies its mis-measurement of inflation.
As the BLS introduced changes to their inflation measuring methodology throughout the 1980s and 1990s, one new factor they introduced is "hedonics."
Hedonics allows the BLS to discount the price of an item insofar as it has improved in quality. It should be immediately apparent to anyone with a functioning brain how allowing a very subjective factor, quality, to influence a statistic that is supposed to be a grasp towards objectivity could raise problems. If the problem with this is not immediately clear to you, let me explain:
How do we define quality? Quite frankly, we cannot. Quality is in the eye of the beholder. The original methodology of the BLS, a methodology any reasonable person could accept as at least a fair attempt at some objective measure of inflation, involved measuring the change in price (something that is largely objectively observable) of an unchanged good (again, something that is largely objectively observable) from one point of time to another.
However, once we can change the objectively observed change in price by some made-up factor to account for a change of quality in one type of good to an entirely different type of good, we introduce into our process a huge window for error, even if we are making a good-faith effort to remain objective. Never-mind that the BLS has a huge conflict of interest in the matter, as it is at least partially funded (when the Federal Reserve buys Treasury Bonds) by the institution whose counterfeiting behavior it is supposed to be justifying the restriction of.
Indeed, the modern admonition that "they don't make things like they used to" is highly indicative of this hoodwinking process introduced by the BLS to "measure" inflation. Let me give two examples.
A more historical example might involve the manufacturing of a washing machine. Let us say that washing machines were originally made out of steal (I don't know this to be the case, please follow me for the logic of the analogy). A new washing machine is introduced selling for the same price. It is made of aluminum. In a Madison Avenue-esque sleight of hand, the washing machine manufacturer advertises the "new, improved!" washing machine as lighter in weight and of more pleasant design (whatever that means!).
In such an instance, the BLS can claim technological improvement and adjust the cost of the washing machine downwards. If the washing machine were the only good in the economy, we would experience deflation.
But the truth is, steal was getting too expensive. In order to not increase their prices, the manufacturer switched to aluminum. Quite frankly the new, improved, more pleasant washing machine will last half as long as the quality-made, durable steal one. If we were to measure the price of building a steal washing machine, we would experience inflation.
See the problem?
A more contemporary example might be found in food. Originally, a particular food cooked in animal fat might have been better for you, that is to say more in accordance with the nutritional needs of your body. But the price of animal fat has increased, so the food is now cooked in Crisco in order to maintain its lower price. The new product is advertised as better tasting, which it might be. So the BLS marks it down as deflation. But we might also interpret better tasting as more addicting, less satisfying or even less healthy. Not only have we actually experienced price inflation, but we have also experienced belly inflation and the spillover of the effects of inflation on our wider culture. There is so much more to address about such cultural effects, but that will have to wait for another article. One would be the rise of feminism as a reaction to the need to put female family members to work in order to maintain a certain inflation-adjusted income.