A Dollar Deluge Disguises Deceitful Economic Data

Story Stream
recent articles

Did someone slip Paul Krugman juice into The Wall Street Journal's water cooler? That's the only conclusion I can fathom after reading a pair of articles celebrating the long awaited return of prosperity.

The Happy Days Are Here Again two-step began with "Home Prices Rise in July" followed by a companion piece, "Consumers Back to Feeling Flush." If you stopped reading at the end of each lede-choking your way through the shameless Obama plug before throwing in the towel-you might believe that the economic witch-doctors in Washington have finally started to deliver on their promised magic. But if you read both pieces from start to finish and haven't forgotten how to do arithmetic, you could only end up scratching your head. Whom are they trying to fool?

Yes, the Case-Shiller 20-city index went up as it normally does in July, rising 5.9% year to date. With mortgage interest rates at an all time low and the Federal Reserve promising to hoover up $40 billion a month in mortgage debt from now until the day we have to carry our cash in shopping carts, anything less would be a colossal disaster.

Artificially inflated home prices are a welcome gift for incumbent politicians, underwater mortgage holders, and unemployed construction workers in cities that contributed more than their fair share to the housing debacle of 2008. But buried in paragraph 12 is the news that home prices nationally are only up 2.1% since last July. With headline inflation running 3.2% this means that inflation-adjusted housing prices are actually dropping.

Falling housing prices are a signal that we should be building fewer homes, at least until the glut of unsold inventory clears. False price signals always induce malinvestment, which is what caused the housing bubble in the first place. So why is the Journal celebrating false price signals as a good thing?

The second article gets even more wrong. Consumer spending is up 3.3%-yippee, we're going to spend our way up by our bootstraps! Maybe consumers really do feel more confident when they believe that housing prices are rising. But isn't headline inflation, which excludes food and energy, running at roughly the same pace? So doesn't this imply that consumers are spending more money to buy the same amount of stuff? The article calls the rising cost of goods "one factor" in increased spending. That's like saying the stake driven through the corpse's heart might be "one factor" in the cause of death.

But wait, there's more. The same article points out that average household income rose 1.9% before taxes in 2011. So after inflation, consumers' purchasing power went down by 1.3% plus whatever was gobbled up by the tax man. The author concludes that, "The report is further evidence that Americans' finances are slowly recovering." Did Jay Carney sneak in and write this?

Now here is my favorite. "The Labor Department said all major areas of spending rose last year, with the biggest jump, 8%, seen in transportation. Spending on gasoline and motor oil rose 25% in 2011, mostly because the price of gasoline climbed 26.4%." Let's see-isn't the 26% jump in gas prices that volatile bit left out when the gnomes at the Bureau of Labor Statistics calculate the headline inflation rate? And what is the other item they leave out? The happy days article provides the answer. "Americans' spending on food averaged $6,458, the highest level since at least 1984." Someone tell Jimmy Carter to call home.

What is it about fiat currency debauchery that makes it so hard to understand? Imagine the mockery Michelle Obama would get if she announced plans to cure the country's obesity epidemic by changing the number of ounces in a pound. Wow, I'm down to 175 without dieting! Yet this is exactly what is happening to the dollar, with much worse to come. Fooling the man on the street is one thing, but reporters at the venerable Wall Street Journal are supposed to know better.

I understand that inflation is the most politically palatable way to reduce real wages across an entire economy without fomenting strikes-at least until workers catch on and start demanding cost-of-living increases. It's also a time-honored technique governments use to repudiate sovereign debt. And I appreciate the pivotal role that the press and pundits play in trying to create an illusion of prosperity before an election. But I expect the newspaper that has a tradition of sound financial analysis-and of confining its editorials to the editorial page-to see through this chicanery, not contribute to it.


Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

Show commentsHide Comments

Related Articles