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Dan Spillane: ''Black Hole'' Found in US Economy

"Black Hole" Found in US Economy

Hiding costs and "energy eating" cycle started in Reagan/Bush I Era
By Dan Spillane
Tuesday, January 20, 2004

(SEATTLE) - In a troubling sign that accounting problems have grown beyond corporate balance sheets, two of the main economic gauges used by Wall Street, banks, and in the calculation of Social Security payments have been found to contain serious problems. The makeup or "weightings" of the gauges have been set and modified recently so they hide real inflation. Also, a complicated "circular" cycle--much like a "black hole"--has been found within one of the gauges, which not only places the US financial system at risk, but "eats energy", resulting in dramatic and permanent increases in demand for energy, at a time when our soldiers are dying overseas because of energy-related tensions (1) (2) (3).

The problems were identified in the Consumer Price Index(CPI) and Producer Price Index(PPI), by examining contents of tables provided by the US Bureau of Labor Statistics(BLS), and comparing weightings for the most recent years against each other, and against independent statistics which account for the same costs.

According to official BLS tables, in the energy category, several changes were put in to reduce energy cost weightings in the indices recently, including one which reduces importance of “housing fuels and utilities”in the overall CPI index by a whopping ten percent(4), and another which pushes winter energy cost calculations into summer(5). Also, in the housing category, the weighting of “hotels and motels” was increased (against the backdrop of post-Sept 11th falls in hotel costs), while at the same time, “housing at school” got less weighting. In the education category, the weighting of college, elementary tuition, and childcare was recently reduced.

Going back many years, the costs of running large energy-consuming homes (like categories related to energy, gas, and utilities for the home) have been slowly and mysteriously removed from the CPI inflation index, starting in the late 1980s, under Reagan/Bush I, and now, the same trend has picked up anew under Bush II. This change is unexplainable in light of census data compilations (and thermodynamics) over the same period--which would call for the opposite from a demand model. Energy costs and demand are "hidden" as a result of the Reagan/Bush I and Bush II changes, even though we are all paying them. Of particular concern are changes made recently under Bush II to hide energy costs in the CPI index. Yet, the problem traces way back to 1983--the source of the black hole is changes made to the CPI under Reagan, which are now interacting dangerously with low interest rates(11).

Disturbingly, in the most recent table which rates relative importance of health insurance, cost is placed below other categories such as “Recreational Reading Materials”, “Pets”, and “Toys.” Health insurance accounting for the most recent table is off by a significant factor of fifteen--and is set to a level below that in 1995 (6).

Taken together, these problems shed light on why consumers and domestic businesses are under severe pressure, whereas multi-national companies--who operate largely overseas or outsource overseas--are reaping huge benefits(7). Considering corporations have recently engaged in widespread malfeasance--which has gone largely unpunished(and to the contrary, they seem to have benefited with recent tax breaks)--fundamental issues of justice are raised. Stated simply, the true picture in the US is an inflationary environment where Americans pay more and don't have jobs, but shoddy accounting for inflation makes these costs "disappear"--as far as banks, financial markets, and Social Security payments are concerned.

Moreover, the longer-term trend in some statistics shows changes that hide real costs which have increased--in contrast to reports recently from the administration claiming a healthy economy with low inflation. Retirees, for example, would have received smaller Social Security checks due to these "improved" CPI calculations, and many US banks may have made loans without properly accounting for risk related to consumer budgetary liabilities. The findings also extend those of a recent CNN article which didn't get much publicity.

Indeed, there is serious question as to how domestic companies can hire in the US under conditions of increasing cost. In fact, outsourcing abroad has exploded, according to several recent reports. In an unexpected twist, persistent low interest rates may be hindering job gains since they are so dramatically increasing inflation in the US (8) (9).

Problems with the inflation figures can be attributed to several causes. In usage, the CPI is commonly used as a basis for cost of living (for instance, indirectly, by banks in lending)--even though the CPI is not constructed as such. Next, the figures trail the economy by several years. In fact, the current weightings are based on a very questionable period (1999-2000)--a period in which the economy was fully affected by corporate accounting problems. However, none of these accounts fully for the long term trends.

A source within the US BLS explained shifts in the makeup of the inflation numbers are based on the result of paper surveys--but could provide no further details. No source of independent review for the BLS inflation statistics nor their weightings was identified. Examination of a recent report from the US Federal Reserve shows they failed to identify any impacts or dangers whatsover related to persistent low rates, such as the black hole(10).

What's certain for all of us, is the future does not bode well for homeowners nor domestic businesses, given this major "oops" by the Federal Reserve. The last time such an oversight occurred, we had a stock market crash, caused by corporate misdeeds which we are still piecing through.


Contact: Dan Spillane Citizens for Corporate Accountability


(1) "While U.S. Households Contract, Homes Expand" (AmeriStat, March 2003) The average size of new single-family homes increased from 1,500 square feet to over 2,200 square feet between 1970 and 2000. Energy consumption is related to square footage--thus, super-low interest rates, which are leading to ever-larger homes, creates increased and permanent demand for energy. But this cost is masked by the broken inflation statistics.

See Homes Expand

(2) See Fuel Economy hits 22 year low New York Times, 05/23/2003. Independently, recent GDP statistics show the recent so-called "economic recovery" consists largely of vehicle sales. The recent tax cut package allows the rich to deduct costs such as SUVs. Moreover, super-low interest rates, which push huge SUVs out on the streets, add to unprecedented and recurring demand for oil. But this cost is masked by the broken inflation statistics.

(3) See mid-article reference to "circular" problem CNN article

(4) ”Relative Importance” ”Housing Fuels and Utilities” et al, US Bureau of Labor Statistics table,, entry CPI 4.934(2001) vs. 4.469(2002)-- representing a reduction of ten percent in the weighting. Significantly, in the face of rising costs and well-documented increases in housing-related energy demand (footnote(1)).

(5) 2003 Inflation Data Hacked ---------------------------- CHRISTMAS ENERGY COSTS MOVED TO SUMMER!

Seasonal weightings changed in producer price index in 2003 vs. 2002. It also looks like there is significant hacking starting in 2001 (what politics have changed since 2000?) Category WPS055 UTILITY NATURAL GAS

2002 WPS 0555 106.4 104.1 101.4 98.9 100.0 98.0 97.9 94.6 94.6 96.4 102.4 104.5 2003 WPS 0555 105.7 103.5 100.9 98.5 100.1 98.7 97.0 96.8 96.7 97.3 101.9 102.5 -.7 -.6 -.5 +.7 -.9 +2.2 +2.1 -.5 -2.0

Net change 2002 to 2003 (Cold months)Dec-Jan-Feb-Mar -4.3 weighting (Warm months)Jun-Jul-Aug-Sept +4.1 weighting --> Christmas in JULY

See graph where prices of natural gas are higher in general recently, and more so during cold months. In addition, it was recently reported that oil prices are at multi-decade highs (oil econ. alt. to nat gas).

No similar change to move winter costs into summer was found in any tables--the first time was in 2003.

(6) Based on statistics from the American Medical Association, recent health insurance costs paid by the individual represent an amount approximately fifteen times greater than that represented in the published CPI. Employer portions have a similar rise, but are not accounted for in the CPI. See AMA Report Approx. (2K premium / 40K income, US Census) = 5 percent, but BLS CPI says far less than 1 pct (.315 pct in 2002 CPI). This means there is a big black hole in the economy, esp. considering unemployed and retired must pay ENTIRE premium, which can increase weighting another factor of ten.

(7) See Fast Growth for Profits which shows a disproportionate benefit to corporations.

(8) Widespread. See Jobs To Move/Goldman Sachs

(9) Anecdotal. See Alcoa Cuts US Jobs Due to Inflation, published since the original date of this article.

(10) US Federal Reserve December 2002, section "Economic Analysis of Refinancing." They make no reference to risks in the report. See Fed Report on Mortgages. Note disturbingly large cash-out figures listed in this report.

(11) See BLS Manual which talks about a major Reagan change--accounting for home costs--that is now leading to the circular cycle. Note that houses are indeed "consumed" when people refi cash-out against them, which is disturbingly at odds with the justification for the accounting change.

Citizens For Corporate Accountability is a 'Think Tank' non-profit, dedicated to public interest and the detection of corruption which endangers the basics of democratic society. It was founded in 2003 by Dan Spillane. The first major issue identified by Mr. Spillane, Electronic Voting Reform, has gotten significant national media attention subsequent to Mr. Spillane raising concerns to Congress and a number of activists since the summer of 2002. It was recently revealed that significant problems exist nationwide in this area--as a result, several new bills are pending for the 2004 Congress.

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