Why Shadow Government Statistics is very, very, very wrong.
Update: Welcome Hogvilleians! You’re totally crazy of course. Simply read the entire article, and you’ll see why. I didn’t just choose one item and say “See inflation doesn’t exist!” Nope – I said very clearly “If we have 10% inflation, the government makes 8%+ per year just issuing debt.” Please read the entire article before making yourself look stupid.)
I see stuff like this on a supposedly intelligent website and I just despair for the future of humanity.
Jim John Williams has been running Shadow Stats for a long time now, but that doesn’t say anything about the quality of his analysis.
And for some reason, people like to believe these stats instead just remembering how much stuff cost back in the day.
Look at this chart. According to Shadow Stats, the average inflation rate since 2000 is clearly at least 9%.
I decided to do the math. Since we are fully in the year 2011, we would need to adjust the level of prices tby 1.09^10 to find out what prices were in 2000. I just went to the store and got some milk – milk is $2.99 a gallon at CVS, and the average price of a gallon of milk is $3.19 across the US, according to the BLS.
This would imply that in 2000, the cost of a gallon of milk was 3.19/1.09^10 or $1.34, or close to it. But I don’t ever remember paying $1.34 for a gallon of milk, not even in 1980. In fact, I remembrer paying about $2.79 a gallon in 2000. And that’s what the BLS numbers say too. Go back a few years more and that gallon of milk should have been nearly free, according to Shadow Stats.
From dumb to dumber: Shadow Stats says the government earns 5.6% per year by borrowing money!
But this isn’t what troubles me. It troubles me that if John Williams was correct, people have been throwing money at the U.S. federal government – literally begging them to take their money.
We know a simple identity about treasury debt. The yield on Treasury debt should equal inflation plus some real rate of interest. This isn’t controversial in the slightest.
So if we plug in the Shadow Stats numbers with the known yields that were paid in the market for Treasury debt, we can get an idea of what the real rate of interest these lenders received to lend to the U.S. Treasury.
Here is the grade school level math:
Treasury Yield = Real Yield + Inflation
Real Yield = Treasury Yield – Inflation
[Update 4/11/2011: Yes, I know that the real relationship involves multiplication, and not addition. For numbers close to 1.00, adding is a close estimate - at least according to the CFA material and Bodie/Kane/Marcus]
We know the Average yield in the 5 year over the last decade was 3.4%. A rough estimate of shadow stats inflation would be 9% per year since the year 2000.
Real Yield = 3.4% – 9.0% = -5.6%
To believe that Shadow Stats is true, we must believe investors have been paying 5.6% to lend to the treasury for an entire decade! Now, I support a bit looser government purse than most people. But by these standards, I might as well be Von Mises! These people who are giving the U.S. government nearly 6% per year are paying the U.S. government to issue debt.
These people paid 5.6% per year to lend to the U.S. government in real terms. I don’t buy it.
There is also another horrific conclusion from this exercise. If we take Shadow stats seriously, the U.S. Government earns 5.6% per year from borrowing money. Yes, according to John Williams, the government earns massive returns by borrowing!
Go through the math yourself, and borrow money for 10 years at 3% when inflation is at 100%. Use these numbers, because it will be hugely clear: Borrowing at a lower rate than the inflation rate is a path to wealth. You’ll be easily able to pay back the debt with far cheaper money in the future. A few hours of work at a Starbucks and you’ll pay off a massive debt. You’ll make a tidy sum just from borrowing.
[Update 5.13.11: Wikipedia says borrowers make money when the real rate of interest is negative. They use numbers very much like the numbers here to show this.]
There are many things I wish were true, like eternal physical life, and zero point energy. But they are not true, and I must live with them. Many people think the government is lying about inflation statistics. Maybe the government is lying. But if the government is lying, we need to reconcile this lie with other information. Data doesn’t exist in a vacuum. We must reconcile any measures of inflation with daily price and yield information from the most liquid debt market in the world.
[Update 2/2/2011 5:30am: The Wall Street Journal shows its intelligence by mentioning Shadow Stats.]
[Update 2/16/2011 3:37pm: The Daily Capitalist falls for this trick via the WSJ]
[Update 4/19/2011 Shadowstats is still wrong - but we are making progress in debunking the nonsense.]