So why is there all this pressure for economists to lie? Because if the public knew what the government has been doing to your currency, well...they wouldn't be happy.
"If the people were to ever find out what we have done, we would be chased down the streets and lynched."
-George H. W. Bush, cited in the June, 1992 Sarah McClendon Newsletter
So what is it that they've been up to? One of the best web sites I know for this is the Grandfather Economic Report. It's a right-wing site, but it captures some important numbers.
Fiddle me another tune, Nero
The most important thing to understand is what inflation actually is: "In economics, inflation is a fall in the market value or purchasing power of money."
To put it another way, inflation isn't caused by greedy oil companies, greedy labor unions, or in fact, any supply side developments. What causes inflation in the world today is the fall in the value of the dollars in your pocket, not the rise in value of what you buy.
So what causes that? Supply and demand causes that. In other words, too many dollars chasing the same number of goods. So take a look at this chart and tell me if America is experiencing inflation.
You can't have an empire without fighting wars, and wars are expensive. A government needs a lot of currency to fight their wars of empire. But printing a lot of currency means inflation, and the public doesn't like inflation. So what is a government to do? Save lives and money by not fight wars of empire?
Yea, right. And monkeys will fly out of my butt. No, governments will do what they have always done: lie to the public. In this case they will try to "manage inflation expectations". They do this by rigging the economic numbers.
"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
-Henry Ford
About a year ago the federal reserve stopped publishing the M3. However, some people have computed the numbers themselves, and they tell an interesting story.
Of course, just not telling people the information isn't always effective. People tend to wonder what the truth is. Therefore, recalculating the information so it tells a different story is the preferred method. People think they are informed, when they actually aren't. And the Number #1 way to misinform the public today is to lie about inflation.
Inflation Blues
Now you take that paper dollar
It's only that in name
The way that buck has shrunk
It's a lowdown dirty shame
That's why i got the blues
Got those inflation blues
- B.B. King
The rigging of the Consumer Price Index started long ago, but it never stopped reflecting reality until Reagan's deficits.
Before 1983, CPI measured housing inflation by looking at what it actually cost to own a home: house prices, mortgage rates, property taxes, even maintenance. After 1983, BLS changed the housing component, using the concept of "owner's equivalent rent." It's a measure of what homeowners could get for their homes if they rented them. It accounts for 23% of the overall CPI and about 30% of core prices, according to BLS.
Since the housing market began soaring, rental properties have languished. Vacancy rates rose, and rents came down in price. This had the surreal effect of pushing CPI measures down. At exactly the time housing became extremely expensive, the BLS measure of this component made inflation appear to be going lower.
On top of that, the BLS removes the value of any landlord-provided utilities in its calculation of owner's equivalent rent.
But the inflation numbers fun doesn't stop there. Under the Clinton Administration the BLS stopped measuring a basket of goods and started substituting. For instance, when the price of steak rose they would substitute hamburger. Cost of living was replaced with cost of survival. It was called hedonics. I assume that when the price of hamburger rises they will substitute dog food.
They then decided to change a straight arithmetic weighting of the CPI components to a geometric one. In other words, the price of goods that are rising will be given less weight in the CPI than the price of goods that are falling.
Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by a total of 30%.
A good web site to learn more about the rigging of statistics is done by John Williams. His entire business is finding out the real numbers and then selling the information to professional investors so they can make educated decisions.
He has a few charts that are very revealing.
Of course by understating inflation you are inherently overstating growth (as measured by GDP), because price inflation is a deflator of growth.
Empires and Ruin
So, historically speaking, why is it so important for governments to lie to their people about the economy? To answer that, I give you the example of France.
American political rhetoric makes most people unable to get past France's surrender in WWII. But the fact is that France had not only one of the best armies in Europe from the 8th Century until the 19th Century, but in the early 18th Century France had an empire nearly the size of Britain's.
Yet by 1789 their empire had collapsed in revolution. What's more, about a decade later their First Republic had become a military dictatorship. What could have caused such upheaval?
Two men (other than the French kings) were largely responsible for this catastrophe: John Law and Robert Clive.
Both Law and Clive are men of economics. Clive was a mercenary from the East India Company. He was inflicted upon the French. Law was an economist, and France inflicted him upon themselves. Both men lived extremely colorful lives that I can't hope to do justice here, but a brief synopsis will help my story along.
"Reckless, and unbalanced, but most fascinating"
John Law was the son of a Scottish banker. He went to school in London and became an economist, but not before losing most of his the inheritance from his father's death in gambling. It was to be a reoccurring theme of his life.
In the summer of 1694 he fought a duel over the affections of a young lady and killed the man. He was tried and convicted for murder and sentenced to death. But on appeal he managed to flee to Amsterdam.
[by coincidence, England was going through a currency crisis at the same time that ended with the creation of the Bank of England, the first central bank in the world]
Law's financial speculations eventually led him to Paris in 1714. France at the time was financially exhausted and nearly bankrupt from Louis XIV's wars of empire. So much gold and silver had spent on his wars that there was a shortage of currency that was crushing the economy. The atmosphere was ripe for a con-man with new economic theories.
Law had become friends with the Duke of Orleans, and the Duke became Regent when the King died in 1715.
In 1716 Law convinced the French government to let him open a bank, the Bank Generale, that could issue paper money, or bank notes. The paper notes would be supported by the bank's assets of gold and silver and would circulate as a medium of exchange. Paper money was a new concept for the French; money to them was silver and gold. Law believed that paper notes would increase the money in circulation, which, in turn, would increase commerce. These conditions would help revitalize and rehabilitate the finances of the French government.
Law believed that money was only a means of exchange that did not constitute wealth in itself, and that national wealth depended on trade. In other words, Law had a bunch of easy answers to hard problems. Sort of like Supply-Side Economics.
At this point Law hadn't gone too far from established economic doctrine. So far his plans met with minor success (interest rates had fallen to 4.5%), and this encouraged both him and the French government. But Law had his eyes on the Louisiana colony. Not much was known about the area in 1717, but there were rumors of gold and silver mines.
In August 1717, he organized the Compagnie d'Occident (Company of the West) to which the French government gave the control of trade between France and its Louisiana and Canadian colonies. In Canada, the French would trade in beaver skins. In the Louisiana colony they would trade in precious metals.
What wasn't noticed was that just a few months earlier Law had managed to get a government decree that Law's notes could be accepted in payment of taxes. This was to be a very important step.
The following year Law purchased the tobacco monopoly in this region, as well as in Africa.
Things were going so well that the French government couldn't keep their hands off of Law's legal monopolies.
Law's Bank Generale was taken over by the French government in January 1719 and was renamed the Bank Royale. Law remained in charge, however, and the crown further guaranteed the bank's note issue. In May he obtained control of the companies trading with China and the East Indies. He renamed his entire business interest the Compagnie des Indes, but most people still called it the Mississippi Company. In effect, Law now controlled all trade with France and the rest of the world outside of Europe.
By this time, Law's reputation was truly in the ascendant. When he undertook to repay the national debt, in return for control of national revenues, and of the French mint, for a period of nine years, the share price of the Companie rose dramatically in a frenzy of speculation. People lined up in front of the Compagnie headquarters in Paris to speculate. Huge profits were being made. Europe had never seen anything like it before (except for maybe the Dutch Tulip Mania). The financial district in Paris became so agitated at times with investors that soldiers would be sent in at night to maintain order. The term "millionaire" was being used for the first time.
French investors, 1720
Law exaggerated the wealth of Louisiana. Shares rose from 500 livres in 1719 to as much as 15,000 livres in the first half of 1720. But then in January 1720 some investors began selling shares to get gold coins (aka real money). Despite Law's notes being legal tender and supposedly backed by gold, the gold simply wasn't there to back all of Law's paper. Law restricted the amount of gold he would exchange for his notes.
This attempt to turn stock shares into money resulted in a sudden doubling of the money supply in France. It is not surprising then that inflation started to take off. Inflation reached a monthly rate of 23 percent in January 1720.
Law began devaluing his stock shares, and those who bought their shares on credit, rather than with assets, had their shares confiscated. There was a scramble to sell the falling notes and exchange them for gold and silver. Law had the ownership of gold and silver outlawed in France, but this only made things worse. There was panic selling and Law's company saw a 97 per cent decline in market capitalization by 1721.
Law was dismissed by the French King late in 1720 and had to flee the country. Law died broke in Venice in 1729.
If you look at the chart above that depicts the French currency, you will see a short spike up around 1720, and then a long spike downward immediately afterwards. The story of Robert Clive is very much different, but it also holds the seeds of the destruction of the French economy.
Merchants and private armies
The East India Company was granted monopoly trading powers with the East Indies by the British government on New Year's Eve, 1600. The company's rise was slow but steady. The story is far too involved to even touch here, other than to say Robert Clive began working for them in 1743 in the position of writer in the city of Madras (now Chennai), India.
Robert Clive
At the time both France and Britain had been expanding its positions in India, as the Mughal Empire slowly collapsed.
Clive had to flee Madras in September 1746 when the French attacked. His level-headedness in the crisis was noted and Clive was given an ensign's commission in the British army. In 1751 he was sent back to India, still employed by the East Indies Company. France and England may have been at peace at the time, but France and the East Indies Company was at war.
Clive, then a captain, took sides in a war between the British-backed Mughal leader and the French-backed Mughal leader at the Battle of Arcot. Clive seized the city with about 500 men, and then withstood an 11-week seige of about 6,000 troops. Eventually Clive's forces defeated the much larger army.
Clive returned to England as a hero in 1753. In 1755 he was back in India, now a Lieutenant-Colonel in the King's army. The following year, Calcutta was captured by a new Nawab leader, Alivardi Khan. The British soldiers there were thrown in to the Black Hole of Calcutta. Clive recaptured Calcutta and forced Alivardi Khan to surrender with minimal losses.
But by this time war had broken out between France and England. The Seven Years' War was to be crippling to both the French Empire and the French economy. Clive moved against the main French settlement of Chandernagore immediately.
Nawab leader Siraj ud-Daula took up arms against the British again, and by June, 1757, Clive's army was facing off against a much larger army again at the Battle of Plassey. Clive's army was outnumbered 3,000 to 60,000.
Clive had reason to be confident - he had bribed one of the Nawab's generals, who led a large part of the army away from the battlefield. Clive won a battle that was hardly a battle. The general he bribed became a new puppet leader of Bengal, and the East Indies Company became the default ruler of India. Except for a few small trading posts, France's colony in India had ended.
Clive was to have several more adventures and live to retirement, but his story as related to France ended here.
Meanwhile, on the other side of the world, France was also losing her colony in what was to become Canada. Not only did France lose her best colonies during the Seven Years' War, she also went heavily into debt while doing it. By 1790 the percentage of tax revenue going to pay for interest on national debt had risen to a staggering 95% of total tax revenue!
Tax was paid only by the so-called Third Estate--peasants, working people and the bourgeoisie, i.e. the mass of the population-- but not by the Church or the nobility. Not surprisingly, the French Revolution started. The nobility was hanged on the lantern posts of Paris, the church lost all its property, and the king got beheaded at the guillotine.
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