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The Collapsing US Economy And The End of The World

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Changes in the way inflation is measured have destroyed the Consumer Price Index (CPI) as a measure of the cost of living. The new methodology is substitution based. If the price of an item in the index rises, a lower priced alternative takes its place. In addition, some price rises are labeled quality improvements whether they are or not and thus do not show up in the CPI. People still have to pay the higher price, but it is not counted as inflation.

Currently, the substitution-based rate of inflation is about 2%. However, when inflation is measured as the actual cost of living, the rate of inflation is 5%.

The Misery Index is the sum of the inflation and unemployment rates. The level of the current Misery Index depends on whether the new rigged measures are used, which understate the misery, or the former methodology that accurately measures it.

Prior to the November 1980 election, the Misery Index hit 22%, which was one reason for Reagan's victory over President Carter. Today if we use previous methodology, the Misery Index stands at 27%. But if we use the new rigged methodology, the Misery Index is 10%.

The understatement of inflation serves to boost Gross Domestic Product (GDP). GDP is calculated in current dollars. To be able to determine whether GDP rose because of price rises or because of increases in real output, GDP is deflated by the CPI. The higher the inflation rate, the less the growth in real output and vice versa. When the substitution based methodology is used to measure inflation, the US economy experienced real growth in the 21st century except for the sharp dip during 2008-2010. However, if the cost-of-living based methodology is used, except for a short period during 2004, the US economy has experienced no real growth since 2000.

In the chart above,the lower measure (blue) of real GDP is deflated with the inflation methodology that measured cost-of-living. The higher GDP measure (red) deflates GDP with the new substitution based methodology.

The lack of employment and real GDP growth go together with the decline in real household median income. The growth in consumer debt substituted for the lack of income growth and kept the economy going until consumers exhausted their ability to take on more debt. With the consumer dead in the water, the outlook for economic recovery is poor.

Politicians and the Federal Reserve are making the outlook even worse. At a time of high unemployment and debt-stressed households, politicians at local, state, and federal levels are cutting back on government provision of health care, pensions, food stamps, housing subsidies and every other element of the social safety net. These cutbacks, of course, further reduce aggregate demand and the ability of income-stressed Americans to survive.

The Federal Reserve has interest rates so low that retirees and others living on their savings can earn nothing on their money. The interest rates paid on bank CDs and government and corporate bonds are lower than the rate of inflation. To live on interest income, a person has to purchase Greek, Spanish, or Italian bonds and run the risk of capital loss. The Federal Reserve's policy of negative interest rates forces retirees to spend down their capital in order to live. In other words, the Fed's policy is destroying personal savings as people are forced to spend their capital in order to cover living expenses.

In June the Federal Reserve announced that it was going to continue its policy of driving nominal interest rates even lower, this time focusing on long-term Treasury bonds. The Fed said it would be purchasing $400 billion of the Treasury's 30-year bonds.

Driving interest rates down means driving bond prices up. With 5-year Treasury bonds paying only seven-tenths of one percent and 10-year Treasuries paying only 1.6%, below even the official rate of inflation, Americans desperate for yield move into 30-year bonds currently paying 2.7%. However, the the high bond prices mean that the risk of capital loss is very high.

The Fed's debt monetization, or a drop in the exchange value of the dollar as other countries move away from its use to settle their balance of payments, could set off inflation that would take interest rates out of the Fed's control. As interest rates rise, bond prices fall.

In other words, bonds are now the bubble that real estate, stocks, and derivatives were. When this bubble pops, Americans will take another big hit to their remaining wealth.

It makes no sense to invest in long-term bonds at negative interest rates when the federal government is piling up debt that the Federal Reserve is monetizing and when other countries are moving away from the flood of dollars. The potential for a rising rate of inflation is high from debt monetization and from a drop in the dollar's exchange value. Yet, bond fund portfolio managers have to follow the herd into longer term maturities or see their performance relative to their peers drop to the bottom of the rankings.

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Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

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Kedep up the great work.Thank you.... by bogi666 on Sunday, Jul 8, 2012 at 12:35:22 PM
As always........This article was in today's paper... by 911TRUTH on Sunday, Jul 8, 2012 at 1:07:31 PM
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the link under 'Article'... by 911TRUTH on Sunday, Jul 8, 2012 at 2:51:48 PM
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Very possibly no one. However, I cannot for t... by Daniel Geery on Monday, Jul 9, 2012 at 1:53:43 PM
I'll certainly vote for his ass, he's the only one... by Tommy Wright on Monday, Jul 9, 2012 at 3:37:51 PM
Thanks for the great articles. I read everything y... by Janet Gaudiello on Sunday, Jul 8, 2012 at 3:29:53 PM
Great article.  Everyone I talk to agrees wit... by Ernie Messerschmidt on Sunday, Jul 8, 2012 at 4:02:21 PM
As a a Socialist I find it very disconcerting tha... by Jack Heart on Sunday, Jul 8, 2012 at 4:33:08 PM
Could someone please point me to specific articles... by Roland Michel Tremblay on Sunday, Jul 8, 2012 at 4:42:12 PM
Well Roland we can start by putting the criminals... by Jack Heart on Sunday, Jul 8, 2012 at 4:51:56 PM
First we citizens of the United States need to fac... by Patricia Gray on Sunday, Jul 8, 2012 at 9:41:36 PM
And anybody on here who supports Mr.Roberts needs... by Jack Heart on Sunday, Jul 8, 2012 at 4:47:35 PM
Obama has been aggressively pushing for even more ... by Lance Ciepiela on Sunday, Jul 8, 2012 at 6:46:33 PM
I cannot doubt even though it is terribly difficul... by Walter J Smith on Sunday, Jul 8, 2012 at 7:28:32 PM
The article above represents a studied overview of... by Ray Tapajna on Sunday, Jul 8, 2012 at 7:36:17 PM
I used to think that Rick Perry, Governor of Texas... by Deborah Dills on Sunday, Jul 8, 2012 at 9:22:24 PM
The only flaw is that Mr. Roberts like most people... by Paul Repstock on Sunday, Jul 8, 2012 at 9:30:04 PM
Uhh wasn't the takeover of Afghanistan so that the... by Tommy Wright on Monday, Jul 9, 2012 at 9:47:59 AM
The following are 70 facts that Barack Obama does... by Lance Ciepiela on Monday, Jul 9, 2012 at 8:21:46 AM
As has happened so often in the past, in so many d... by Norman Harman on Tuesday, Jul 10, 2012 at 4:23:03 PM