Rationalizing the Fight Against Deflation

“A cynic,” Oscar Wilde famously remarked, “is one who knows the price of everything, but the value of nothing.” A Federal Reserve Chairman is not so different.

Ben Bernanke seems to know the seasonally-adjusted, hedonically refined, government-calculated price of everything, but he seems incapable of determining the real-world value of a banana…or of a dollar bill for that matter.

Chairman Bernanke says the forces of deflation are encroaching upon the US economy. The government bean-counters tell him so. They tell him that the Consumer Price Index (CPI) increased only 1.2% during the past 12 months…and that the seasonally adjusted “core” CPI barely budged at all.

This disinflation/deflation stuff is a serious threat to economic recovery, Bernanke believes, and it must be quashed. If not, the bean-counters will walk into his office one of these days and tell him that seasonally-adjusted, hedonically refined prices are falling. And that would be a really bad thing.

Why? We are not really sure. But the rationale for Bernanke’s deflation-fighting campaign seems to go something like this:

Ben Bernanke was a good student; Ben Bernanke studied the Great Depression at MIT; the good student learned that the Great Depression was really bad; therefore, things that happened in the Great Depression were also really bad; deflation happened during the Great Depression; therefore, deflation must be bad [along with jazz and temperance]; bad things should not happen; therefore, deflation should not happen…and neither should jazz or temperance.

Even though the cause-effect relationship between deflation and the Great Depression are highly debatable, Bernanke countenances no debate whatsoever. He simply proceeds doggedly under the assumption that deflation is a cause of bad stuff and that it must be vanquished so that inflation can work its therapeutic marvels.

Therefore, the Federal Reserve must continue printing dollars and funneling them into the US economy until the “threat” of deflation becomes so remote that the Bureau of Labor Statistics removes the minus signs from its computer keyboards.

Putting aside for a moment the wisdom or idiocy of printing money to combat deflation, let’s examine merely the idiocy of combating an enemy that does not exist. Deflation is missing in action; it has already fled the battlefield. This fact seems obvious to everyone except the BLS, Ben Bernanke and the thinning ranks of 30-year T-bond buyers. Inflation is the real enemy, and Bernanke is inadvertently consorting with it.

What is a $600 billion quantitative easing operation if not a “supply line” to the forces of inflation?

But the chairman doesn’t see it that way. He sees things like contracting credit, rising savings rates, sluggish economic activity and meager employment growth as sure-fire signs of a dangerous deflationary trend. He also sees the press releases from the BLS that tell him prices are, as he would put it, “failing to rise.” But the truth of the matter is that the Consumer Price Index (CPI) is one big seasonally-adjusted, hedonically refined lie.

Officially, year-over-year CPI is up 1.17%. Officially, it is also up 8.51%. That’s right; based on the official CPI-calculation methodology in use prior to 1982, the year-over-year inflation rate would be soaring north of 8%. (Deflation looks nothing like that). This fascinating insight emerges from the always-fascinating work of John Williams at Shadow Government Statistics.

If the Shadow Stats inflation data would fail to convince the Chairman that inflationary phenomena are at least as prevalent as deflationary ones, he could take a peek at commodity prices (up 11% yoy) or at health insurance costs (up 12.5% yoy). Easier still, he could examine his grocery bill.

“It’s getting harder and harder for Americans to put food on the table,” The Classic Liberal reports, “our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October…

“You don’t need a Harvard PhD in economics to understand what this means,” The Classic Liberal concludes.

Very true, but you do need a Harvard PhD in economics to not understand what this means. “You can always tell a Harvard grad,” the century-old saying goes, “you just can’t tell him much.”

Ben Bernanke did not merely graduate from Harvard, he graduated summa cum laude. The PhD came later, and not from Harvard. Be that as it may, we would never try to tell the Chairman anything about inflation or deflation. (He knows more about all of that stuff than we could ever hope to forget). We would simply tell him to look around…out in the real world where prices don’t conceal themselves inside hedonic refinements.

He wouldn’t have to look very far. Heck, he wouldn’t even have to look outside of academia. The price of a four-year college education is soaring, even though the value of that education is going nowhere. For more than a decade, college tuition has been increasing at triple the rate of CPI. As a result, 100 colleges or universities are now charging more than $50,000 per year for tuition, fees, room, and board, according to the Chronicle of Higher Education – that’s up from 58 last year and only five colleges two years ago. As recently as 2004, no college or university charged more than $50,000 per year.

The rising price of a college education is not synonymous with inflation, but it’s close. In the halls of academia, the only thing that’s deflating is the value of a college degree. According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Meanwhile, the unemployment rates for all college graduates – both recent and ancient – have doubled from 2% to 4% during the last year.

Ergo, college prices up; value down.

Number of College Presidents Receiving Over $500,000 Per Year

But don’t try telling that to a college president. The number of college presidents receiving more than half a million dollars per year has been soaring at a 27% annualized rate during the last six years. The value of these presidents may or may not have soared commensurately. Either way, the aspiring youths who attend these universities are paying ever-higher prices to pursue their aspirations…and are assuming ever-larger quantities of student debt.

Student Loan Debt vs. Credit Card Debt

Earlier this year, for the first time ever, the total value of student loans outstanding exceeded the value of credit card debt outstanding. And this trend is accelerating. According the website Critical Mass, “The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.”

Is this inflation? Maybe not, but it sure as shinola isn’t deflation.

Eric Fry
for The Daily Reckoning

The Daily Reckoning