Decades ago, when I was eight years old, I used to walk to school most days.
But there was a problem. Each day, I had to walk past a house that was home to a huge German Shepard. Most of the time, the dog was chained up and could only bark at me when I strode by. Occasionally, though, the dog would be running loose in the yard. On some of those days, it would chase me as I tried to escape down the street, sometimes biting me in the process.
Eventually, I discovered a safety-in-numbers strategy. I would wait to pass that house until at least one other child joined me. This worked well unless no one came along, in which case I had to face the dog alone. I started carrying a sharpened stick that I could poke it with, but I still occasionally got bit.
Finally, I did what no eight-year-old wants to do: ask my parents to intervene. My father looked up the owner’s number in the phone book (remember those?) and called. I was listening in on an extension.
The conversation was very short. My father said something about the owner needing to restrain a “vicious dog.” The owner denied that the dog was vicious and said that it was actually very gentle. He told my father that I must be provoking the dog for it to attack me.
Still, I wasn’t the only child the dog ambushed. One afternoon, I was walking home from school and the dog had pinned a very young girl – around four years old – to the ground. It looked to me as if it was ready to rip out her throat. So I kicked the dog and it let go of the girl. The dog turned on me, but I had my stick ready and shoved it into its snout. With a shriek, the dog retreated to its yard.
I didn’t know the girl, but I walked with her to her home, just a few houses down the street. Her mother thanked me and told me that she would make sure the owner was forced to restrain the dog.
I’m not sure what happened next, but I never had a problem with the dog again. But I did have an interesting encounter with the owner a few weeks later. When I walked by, he flew out the front door to confront me in the street. And while I don’t recall his exact words, he denied that he owned a vicious dog. He blamed me for provoking it and told me, in essence, that I was a terrible person for doing so.
Now, we could forgive you for wondering what this anecdote has to do with inflation or disinformation. But the dog-owner seemed to sincerely believe that his vicious pet was actually a gentle giant. He denied the evidence of his own senses to confirm the misinformation he was feeding himself and sharing with anyone who complained about its behavior.
We’re seeing something very similar occur 60 years later in the Federal Reserve battle what it calls “inflation.” We’re placing the word inflation in quotes because the definition of this term has changed markedly since 1980. And it’s becoming increasingly clear that, just like the dog-owner, the Fed doesn’t really understand the difference.
Thus, on June 14, the Fed announced it would temporarily pause interest rate hikes after increasing them 10 times in a row since March 2022. Its decision left the federal funds rate in a target range of 5%-5.25%.
Meanwhile, under the official definition of inflation, prices are still rising rapidly. What the Fed calls “core inflation” – the change in the costs of goods and services, excluding food and energy – hasn’t come down at all since late 2022. But overall inflation is slowly declining, up just 4% in the last 12 months.
Thus, the Fed seems to think that inflation is under control, although it’s signaled that there may be more interest rate hikes later this year. As such, it seems to be unaware of its own disinformation campaign over the last 40 years to bamboozle Americans into believing that inflation is lower than it actually is.
In the real world, inflation would be tracked by measuring the cost of buying a fixed basket of goods and services, roughly approximating the cost of maintaining a constant standard of living. And indeed, from the 1700s until around 1980, that’s how inflation was measured.
But beginning in the 1980s and accelerating through the 1990s, Uncle Sam converted the Consumer Price Index (CPI) away from measuring the price changes in the fixed basket to changes in a basket where consumers could substitute lower-priced goods and services if higher-priced ones became too expensive. The theory was, in the words of former Federal Reserve Chairman Alan Greenspan, “you’ll switch to something cheaper – more hamburger will show up in your meals than steak.” Or, to make it more real, you go from living in an apartment to being homeless.
The Bureau of Labor Statistics (BLS) also introduced a concept called “hedonic adjustment.” This theory holds that as the quality of goods or services improve, their effective cost decreases, even if consumers have no opportunity to buy them at a lower price. Thus, according to the official CPI, a television that cost $1,000 in 1996 should now cost $22.
The fact that the mainstream media almost never discusses these changes in how inflation is defined might seem surprising at first glance. But it’s simply just another facet of Uncle Sam’s long-term campaign to manipulate public opinion. Whether it’s persuading Americans that they need to support the latest war or convincing them that inflation isn’t really a problem, there are certain topics that are simply not discussed in polite company.
That’s bad enough, but when policymakers start believing their own disinformation, the consequences can be catastrophic. And in the case of inflation, it’s much worse than the Fed or any other government agency says that it is.
Indeed, if inflation were measured the same way that it was in 1980, headline CPI would be around 12% – three times higher than the official 4% level. This chart from Shadowstats shows the difference:
Now, we think we understand why the Fed might want to pause on interest rate hikes. Higher interest rates would put even more pressure on the precarious balance sheets of American banks, for reasons we explained in this article written in the aftermath of the collapse of Silicon Valley Bank last March. But not increasing rates means admitting that a real inflation rate of 12% isn’t a problem.
And as we’ve observed, inflation isn’t just unpleasant; it can literally break a civilization. This is because it makes it impossible for a person who relies on their labor to generate income to keep up with rising prices. Wages can never keep up with inflation. The rich get richer because they own productive assets whose value rises with inflation. Those who aren’t rich get screwed. This is a big reason why American wage-earners are going on strike at the highest rate in decades.
There are no easy answers to the inflation dilemma. Above all, take a lesson from the rich and buy productive assets whose value rises more or less in tandem with inflation. If you don’t have surplus assets to invest, try to live below your means so you save money and invest that surplus in productive assets. At the very least, stockpile goods you know you’ll need in the future (e.g., food) as an inflation hedge. We’re also still fans of the Permanent Portfolio strategy, devised by our colleague, the late Harry Browne, more than 50 years ago.
Finally, we’ve long suggested that you place some of your assets offshore, both for the sake of investment diversification, and to protect them if Uncle Sam decides to get grabby with your wealth.
