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The Trouble With Shadowstats

by John Aziz, Azizonomics:

Often, when I talk about inflation being low, people who disagree tend to cite John Williams’ Shadowstats as evidence that price inflation is not low at all.

Now, I don’t disagree with the idea that some people have experienced a higher level of price inflation than the CPI. Everyone experiences a different rate of inflation based on their purchasing habits, so by definition everyone’s individual rate will diverge from the official rate to some degree; some will be higher, and some will be lower. And I don’t disagree that rising food and fuel prices have been a problem for welfare recipients and seniors on a fixed income, etc, who spend a higher proportion of their income on food and fuel than, say, young professionals with a lot of disposable income.

What I do disagree with is bad statistical methodology. Shadowstats is built on the belief that the Bureau of Labor Statistics changed their methodology in the 1980s and 1990s, and that if we were using their original methodology the level of inflation would be much higher.

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10 comments to The Trouble With Shadowstats

  • beligerant

    This seems like a hit piece at Shadowstats. If you read the About page you’ll find the writer is 26 years old.

    While I’m sure he has some valid points, the problem with these younger writers is they can’t remember when a can of soup was $0.49 back in the 1980’s. Today that same can is $1.49 or $1.99. Correct me if I’m wrong but that’s 300% to 400% amount of inflation. A house in a nice neighborhood was $25,000 in 1976 but today is worth $350,000. That’s around a 1,400% price increase and the list goes on and on. Remember when gas was $0.69 and $0.79 / gallon. A Hershey’s chocolate bar was $0.25 to $0.49 just a few years ago. So they are looking at previous massaged data in text books versus real life experience to make predictions and create graphs. Also, they are unable to take into account Quality Products made in the U.S. versus cheap plastic junk shipped in from China that will break in 2 years. All they can see is the product is cheaper!

    People buying a house or feeding themselves are being hit hard by inflation and asset bubbles. Sure some items like a cell phone or a LCD TV has gone down but I’m not buying a new TV every month. This is what John William is trying to show.

    Yesterday I had to replace a door handle which finally failed after about 30 years. I went to the local hardware store and had to buy the Chinese garbage. When installing I noted it had several plastic parts within the mechanism. Guaranteed it will fail within the next 5 to 7 years. Please Mr. Azizonomics show me where this is figured into your economic theories about price?

  • MPB

    @ beligerant, Spot on analysis! I concur. I was just talking on this subject with my family on friday and was almost identical to what you brilliantly outline and state in your post.

    BTW: Sorry, some added bad news for you, on your door handle as I have already experienced this PRECISELY. Yes you can count on the new handle falling but not in 5-7 years, more like 2-3 years… IF IT LASTS THAT LONG! UGH! And for precisely the reasons you state. I have first experience with this subject
    Peace all, MPB

    • Frank Zak

      Shadowstats uses 1980 dollars
      to come up with a huge gold price.

      Problem is, gold and silver are still
      being mined.

      Painting and old coins are not.

  • Jim

    @beligerant, did you actually even read the post at azizonomics? If you had you would know that he’s not arguing that prices haven’t gone up, but that the way shadowstats measures their reported values of inflation is, in his opinion, flawed. He makes a fairly good case, and actually quotes Williams hiself as basically saying it’s just the official measure with a ‘best guess’ constant added to increase the values. As you bring even the author’s age into you argument, it is your comment and not his article that reads as a hit piece IMO.

    • beligerant

      @Jim: This is NOTHING but a hit piece to discredit Shadowstats. I’m guessing you are a TROLL trying to defend their hit piece.

      Actually the aruthor makes a VERY POOR CASE full of here-say and one brief statement during an interview which was arbitrary at best. The point I would concur is every CPI is flawed including Shadowstats because everyone’s spending habits are different. My CPI will be much different than yours even on common items like food depending on what is purchased. However, if you ask me whether I believe Shadowstats numbers are much more accurate than any of the govt’s out there, the decision is quite easy. This article was nothing more than a hit piece so face the music.

  • Petedivine

    It is easy to discredit the work of someone else. The author quotes John Williams from 2008. Why not do the work and arrive at a different conclusion before calling out John Williams? After all, many quotes are taken out of context to manipulate an audience or to make a point. I dont subscribe to John Williams shadow stats website, but I know he uses a lot of empirical evidence to back his claims. No doubt some of the data originates Witth the government. John Williams believes that we will see the beginning of hyperinflation in 2014. Should I Ignore Jon Williams because Azizeconomics doesn’t believe in his work? I take those warnings seriously and think there is a high probability John Williams is right. I reviewed Weimar hyperinflation as part of my due diligence. Hyperinflation does not effect all products equally. What I saw in the case of Weimar is shocking. At the start of the inflationary period people spent the majority of their income on housing while food was at the low end of the spectrum. Two years into hyperinflation and the roles reversed, almost all of their income went to food and housing was at the low end. Hyperinflation hits food harder then any other product.

  • Vanessa

    Here is something I started doing over 4 years ago: Go to amazon dot com and, since they sell just about everything under the sun, pick out random things and put them in your cart. I have chosen books, CDs, DVDs but also shampoo, toothpaste, coffee, cat food, and various other everyday items. Then, take them out of your cart by clicking on “save for later.” Now, every week or so, go back to amazon and click on your cart. Everything that has changed price will pop up with the last price (not the original price from 4 years ago, just the last price) and show you the new price. Sometimes prices will have gone down but it is mostly for the books and things of that nature. As for everything else, they have all gone up over the last years (some substantially), especially coffee! Try it! You’ll be amazed and you’ll never believe the govt. numbers again!

  • Glitter 1

    The whole point of the argument revolves around Inflation,the rate of Inflation,which people/sheeple just accept as a fact of life.The fact of the matter is that Inflation is a tool of the Federal Reserve(Central Bank)& Political Class.Inflating the money supply is a Fraud and is theft of one’s labor.John Maynard Keynes,who is credited with the current monetary theory,said when asked about inflation,eventually we are all dead.Vladimir Lenin had this to say about Monetary Inflation/Debasement:”Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose.”
    We don’t have to except the fraud of inflation.If the country was using honest money,gold and silver as in pre-1913 Fed Reserve,there wouldn’t be any inflation to speak of.The 100 year period prior to 1913 saw total inflation at ~5%.Since the establishment of the Fed in 1913,the 1913 Dollar is worth $.02 or has lost 98% of it’s value.Maybe you can accept the fraud of inflation,I don’t.Think of your children and grandchildren,think of them as Slaves because that is what their future holds,Debt Slaves,Hampters running on the wheel their entire lives.We must not be so dismissive of the Fraud of Fiat Money cause we are being played for saps.

  • Dutch

    Inflation by the original definition of the word is an increase in the money supply. Whenever the money supply is increased the total percentage of the buying power of the original money that was in existence is decreased. This is the law of supply and demand.

    With all of the major gains in efficiency and productivity within the last 100 years the prices of many items should have gone down substantially. Increased efficiency, increased productivity, increased technology, and increased population should have all made the original money that existed say 100 years ago many times more valuable today (probably hundred or thousands of times more valuable). Instead the one thing that truly makes money less valuable for any length of time an increase in the money supply has overcome this by such a large factor as to have destroyed 98% of the purchasing power of USD since 1913.

    This amounts to THEFT.

    So what happened? First we have to look at who injects money into the system. The banks and gov inject newly created money via the Federal Reserve. The banks/gov decide who gets this new money and this new money directly steals from everyone else.

    Every time the money supply is increased new money is going somewhere. What’s inflating now is the bank accounts of the rich, our trade deficit of 700 B a year is inflating the foreign holdings of USD, health care costs are inflating, home prices are inflating again, the stock market is inflating, and mainstream price inflation AKA CPI is positive (I would say it’s higher than 2% of the BLS but lower than Shadow Stats but that is hard to truly measure).

    The real problem is that the money supply where money is injected through debt makes the entire system expand in a parabolic fashion. This is what I call inflation – the increase in the size of the monetary system.

    NO ONE CAN DISPUTE HOW THE MONEY SUPPLY IS GROWING (and in a parabolic if not hyperbolic fashion)

    Since the US has a 700 B trade deficit in order to keep enough liquidity in the system the lender and borrower have to inject at LEAST 700 B into the system every year to prevent the whole thing from falling into a liquidity trap (this is fiscal alone and the Fed has to use QE to prop up asset prices, to support fiscal policy, and keep IR low). If there is a large hole in a balloon someone’s trying to keep inflated they have to add more air. This is what the gov/fed attempted to do in 2009 by injecting money into the system. There is no realistic exist strategy I know of from this life support of the economy.

    Beyond this the exponentially increasing debt requires a money supply to expand fast enough to keep the US mainstream liquid. The entire debt based FIAT system is unstable (on average in history FIAT money systems last 57 years).

    Another point the US National Debt has expanded to its current size because the USD liquidity required to keep the system running is either in the hands of the very rich or over seas. Should the US ever lose World Reserve Currency Status the 15 Trillion plus USD that exists as currency or bonds will be sold off. This would cause a hyperinflationary event or supply shock inflation. The US did not solve its problems in 2008 it only switched credit cards.

    Right now massive deflation or inflation is possible (mild price inflation followed by maybe some price deflation then followed by large price inflation would be my prediction).

    To solve this problem the US has to recreate enough of a productive industrial base to neutralize the trade deficit with the rest of the world BEFORE the gov can balance the budget or the US risks a liquidity trap. But again FIAT currencies around the world are STILL expanding at an uncontrollable rate. Again this monetary expansion is my definition (and the original definition) of inflation.

    I don’t expect the US to retain World Reserve Currency Status much longer. The reasons we had this status was the absolute economic and military dominance of the US after WWII that made USD valuable as the world trade currency. Now the US has military dominance but I don’t know how long countries will want to pile up USD and give us real goods.

    • Dutch

      “Since the US has a 700 B trade deficit in order to keep enough liquidity in the system the lender and borrower have to inject at LEAST 700 B”

      the lender and borrower
      This should be the lender and spender of last resort (the Fed and the Federal Gov)

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