Let's take the official inflation rate, tracked using the consumer price index, or CPI. The idea behind the CPI is to have a fixed basket of goods and track how the prices of these things change from year to year. It only gained prominence after World War II, as a way to adjust autoworkers' labor contracts, a practice that soon spread.
Over time, its importance grew and more people looked to it as a gauge of general price inflation - and, hence, to get a feel for the health of the economy.
The thing is, the way the CPI is calculated changed dramatically over the years. Politicians have figured out that these statistics are useful in winning elections. Ergo, nearly every administration has altered the calculation. And always, the changes made the CPI lower. Every effort to change the CPI, by design, aims to make the economy look "better" than it looked before the changes.
The accumulation of these changes creates a huge difference over time. It's like making a series of small changes to a ship's course in the midst of a long voyage. Soon, you wind up way off course, miles and miles from where you think you are. The chart below on William's Web page shows the extent of the difference, which is just massive. The rate of inflation using only the pre-Clinton era CPI is closer to 7%!
The "Experimental C-CPI-U" is another innovation, introduced by the Bush administration to lower the CPI yet again, once again to paint a kinder portrait of the old hag known as the U.S. economy.
But it's about more than just making the economy look better. For example, since increases in Social Security payments link to the CPI, a lower CPI also saves the government money. According to Williams, if you used the CPI when Jimmy Carter was president, you'd get Social Security checks 70% higher than today's levels. Yes, 70% higher.
The government also duped all those people who thought it was such a great idea to buy TIPS (Treasury inflation-protected securities). Changes in the CPI determine the interest paid on these bonds. The higher the CPI, the more interest paid to bondholders. Some people loved the idea, figuring here was a bond that would keep pace with inflation. Given the government manipulates the CPI, you can be sure the interest rate paid will not keep pace with inflation - nor has it ever.
The manipulation of the CPI explains the great disconnect between what the man in the street feels when he pays his bills and what the confident, well-dressed Fed chiefs and politicians try to tell him. The cost of living is rising a lot more than they want you to believe. At a 7% annual rate of inflation, the cost of living would double in about 10 years. Looked at differently, the purchasing power of your dollar will fall in half.
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What about unemployment? The government, since the time of the Kennedy administration, has been changing the definition of "unemployed." Again, many small changes over time lead to dramatic end results. According to Williams, if you back out the changes, you get an unemployment number closer to 12%!
Let's look at the federal deficit - basically, the amount of money the government is losing every year. The official deficit for 2005 was $319 billion. However, this excludes unfunded Social Security and Medicare obligations. Throw them into the mix and calculate the deficit the way a business does in its financial statements - and you get an annual deficit around $3.5 trillion.
That's more than 10 times the so-called "official" deficit. By Williams' calculations, you could raise the tax rate to 100% - dump everyone's salaries into the U.S. Treasury - and still have a deficit.
Years of such deficits have created a mountain of obligations for the U.S. government. As Williams says, "The fiscal 2005 statement shows that total federal obligations at the end of September were $51 trillion; over four times the level of GDP." These debts are unsustainable. The bills must go unpaid. If the U.S. government were a private corporation, its bankruptcy would be beyond dispute.
There are only two ways to protect yourself from this kind of abuse. Buy gold and ride the storm or buy gold and leave the country.
