# CPI can be manipulated to leave out individual Inflation components

CPI can be manipulated to leave out individual Inflation components

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.3xx).

#CPI, #inflation, #fiat money, #taxation by stealth, #indexation, #cost of living

Figure 1: Fiat money are paid to government employees. All citizens have to pay their taxes with that fiat money.

Inflation is vicious to the citizens who have to accept fiat currency from their ruling government. It is half terrible as having to use money with some use-by dates. Only governments like inflation. Inflation is often associated with the rise in CPI but the association may not be true.

# 1. Inflation.

It is convenient to begin the discussion with my previous posting entitled Your Fiat Money, part 2 (reference [1]).

Inflation is the steady loss of exchange value of a fiat money with time. Inflation of fiat money is caused by loss of its (government dictated) demands. When the government stop demanding payments of taxes, government fees, government charges with its fiat money the fiat money loses its value in the population. Real money like gold has no inflation.

For example, a load of bread is sold for 1 unit of fiat money. Ten years later it may be sold for 2 units of that fiat money, and twenty years later it may be sold for 4 units of that fiat money.

We say that there is an inflation. The fiat money steadily loses a percentage of its value every year. In this example it loses 7% every year. This 7% is found out from

(1+x)^(10)=2, x=0.07177= 7.1%

Inflation can only be estimated when looking backward. Even then it cannot be accurately determined as the past goods and the present goods can never be truly compared. Nevertherless people try to assign a figure on inflation based on the purchase prices using fiat money as if that fiat money has been compared against a hypothetical real money (made of gold, silver, food grains…).

# 2. Measurements of past inflation

Past price rises for each type of goods are easy to obtain and tabulate but overall price rises due to the loss of purchasing power of a fiat money is not easy to estimate as relative prices of different types of goods drift over time and their various price rises spread over a wide range. Fast rises and slow rises can be attributed to a variety of causes. It is hard to pinpoint how much of each rise is due to inflation alone and how much is due to other causes.

Past inflation may be estimated by looking at the required amounts of fiat money to obtain “the same” purchasing power of “the same” basket of goods, services, living conditions after a time duration.

If the yearly figures of inflation are x1, x2, .., x10, … then the compound inflation for 10 consecutive years would be

(1+x1)× (1+x2)× (1+x3)× (1+x4)× (1+x5)× (1+x6)× (1+x7)× (1+x8)× (1+x9)× (1+x10).

Compound Inflation ís not equal to the sum of yearly inflation.

Tax payers can use compound inflation over a long period to check the accuracy and honesty of the figures of inflation published by their governments. They can compare the purchasing values of their fiat money over that long period of time.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available (https://www.bls.gov/cpi/).

Sometimes prople just look at the rise of Consumer Price Index as an indication of inflation. However the switching from one type of items to another type of replacement items (even when only due to their availability) do introduce inaccuracy. That happens when some goods evolve over a long period, so that we have to compare the price of vastly different qualities of the same goods. For example, a house built fifty years ago cannot be accurately compared against a current house in terms of safety, comforts, satisfaction of ownership; or a car built fifty years ago cannot be accurately compared against a current car in terms of safety, comforts and performance. Similarly a loaf of bread sold fifty years ago also cannot be compared against a current loaf of bread in terms of taste, packaging, sanitation standards.

# 3. Inflation and CPI may NOT track each other.

There is another type of inaccuracy caused by the switching of the selection of replacement goods in the components of CPI.

Example:
The prices of log houses were tracked for some years then the prices of timber houses were tracked and phased in to replace the former type of log houses, then the prices of brick houses were tracked and phased in to replace the type of timber houses.

Suppose that the prices of each of those types of house all stay stationary then the CPI figures involving each period are gradually phased in, joined together to produce the figure for the whole period. The CPI stay the same for the whole period.

As the price of log houses has been phased out, its increase may become undiscoverable even if it had gone ballistic. Then log houses can come back AS A NEW TYPE OF PRODUCTS REPLACING THE OLD ONES at a steady price of say ten times the last price they were tracked for CPI. Now suppose that people start using log houses again, the new price (at ten times the old price) of log houses get phased back in and the CPI still can stay constant.

# 4. What kinds of spending should be included in the Consumer Price Index

The inclusion should allows the index to mirror the spending of an “average” person.

However, new questions arise: What does that average person own?
What does that average person earn a year? What job does that average person do? Where does that average person live? What does that average person eat? What does that average person wear?

So the Consuner Price Index may be biased in one way or the other.

It is noted that the rise in Consuner Price Index may not follow inflation if the population increases its standard of living over time.

# 5. Why a government always want to have a low, false inflation figure (that is low rise in CPI).

A fiat money that is rapidly losing value through inflation will not be kept, hoarded by any user for longer than the duration of necessary transaction. That money will be forced spent at any earliest opportunity.

This makes the fiat money unacceptable for foreign trading outside the country.

Inside a country its high inflation or hyperinflation may make its economy SEIZE or self adapt to be ALMOST FREE from the fiat money (using bartering or using “real money” or privately issued credit notes). The government is then forced to control economic productions by decrees with tyranical policing (decreeing the prices of essential goods and publicly executing “economic criminals”).

So for its good public relations, a government always try to keep the inflation figure of its fiat money at some low figure acceptable to its citizens.

CPI can be obtained from governments’ websites. For examples:

Consumer Price Index, USA,
https://www.bls.gov/cpi/tables/home.htm

Consumer Price Index, Australia, https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia

Some web site such as
https://inflationdata.com/Inflation/Consumer_Price_Index/CurrentCPI.asp
gives easy comparison of CPI over long periods of time.

# 6. Method to keep CPI constant while prices go up.

## The method is to withdraw a line of products, use another line of substitution products, then reintroduce the products as A NEW LINE OF PRODUCTS SUBSTITUTING the previous substitutions.

For example to remove the effect of price increase in milk, a government may ask milk producers to withdraw full cream milk for a while, transfering the component of milk price to skim milk which are left at constant price. After a while, full cream milk is then reintroduced as a new line of products at ten times its previous price. The component of milk is then gradually transfered back to full cream milk. Now skim milk is then withdrawn from the market and later on reintroduced into the market.

In this way CPI can stay constant even when full cream milk and skim milk takes turn to increase their prices by ten times each.

So the claims that Inflation is reflected in CPI’s supplied by governments should be read with skepticism. Unfortunately, the statement has been told often enough and for long enough so that a number of tax payers have started to believe in it without questioning. (A lie told once remains a lie but a lie told a thousand times becomes the truth, by J. Goebbels [9].)

Significant components for Australia are listed below and it is easy for Australian government to intentionally overlook or over-emphasize some particular components to bias the inflation figures:

Fresh Foods (exempted from GST),
Ready Foods (with applicable GST),
Clothing (including GST),
Consumable (including GST),
Residential rents (exempted from GST),
Housing loan interests,
Medical expenses and Health Insurances,
Schooling fees,
Cars and Transportation costs (including GST).
Communication, phones, computers, network costs (including GST).
Short term loan interests,
Fees on Financial Service (banking fees, superannuation custodian fees, superannuation compliance fees, superannuation consultant fees)
Brokers, Investment consultant fees,
Capital Gain Taxes on selling investments or major items.
Other government taxes, fees and fines.

Suspicion should be raised if large, significant components are omitted for any particular consumer spending pattern. Indeed in around 1986, Australian CPI included the non-inflationary computer prices (of 286, XT models of PC). This kept the CPI low for that year but the age-pensions paid to old people was pegged to that CPI and pensioners suffered.

# 7. Calculating your own inflation index

As government supplied CPI’s are unreliable and designed to be biased, tax payers need to check government supplied CPI’s against their own indices. This is done by following the price of the same items of major spending over years such as housing costs, food prices and gold price (stored values for later use).

Inflation indices will roughly follow the price increase of housing, food and gold.

Figure: Vietnamese standardized gold slabs for trading.

### References:

[1]. Your fiat money (Part 2), posted January 12, 2017.

[2]. Your fiat money, posted January 9, 2017.

[3]. Why does the Federal Reserve aim for 2 percent inflation over time?, Board of Governors of the Federal Reserve System,https://www.federalreserve.gov/faqs/economy_14400.htm, updated January 26, 2015, accessed 03 Mar 2017.
[4]. Neha Sharma and Shalu Yadav, The Indian village that has returned to bartering, BBC News Services,http://www.bbc.com/news/world-asia-india-38180075, 5 December 2016.

[5]. Patrick Bodenham, Will Spain’s coal belt survive through online barter?, BBC News Services,http://www.bbc.com/news/world-europe-38731808, 2 February 2017.

[6]. James Melik, Haggling and bartering gain appeal, BBC News Services,http://news.bbc.co.uk/2/hi/business/7883050.stm, 12 February 2009.

[7]. Mark Lowen, Greece bartering system popular in Volos, BBC News Services,http://www.bbc.com/news/world-europe-17680904, 12 April 2012.

[8]. Dallas police fire pension board ends run, bank stops 154m withdrawals. http://www.dallasnews.com/news/dallas-city-hall/2016/12/08/dallas-police-fire-pension-board-ends-run-bank-stops-154m-withdrawals
[9]. Joseph Goebbels quotes, azquotes.com, http://www.azquotes.com/author/5626-Joseph_Goebbels.
[10]. https://www.moneymetals.com/news/2017/05/04/higher-inflation-consumer-prices-001061, (added on 10 May 2017).
[11]. http://www.zerohedge.com/news/2017-05-13/arizona-passes-bill-end-income-taxation-gold-and-silver
References added after 2017 November:
[12]. http://www.gold-eagle.com/article/deepening-crisis-hyper-inflationary-venezuela-and-zimbabwe

Added after 2018 Aug 15th:

[23]. How Venezuela’s crisis developed and drove out millions of people, https://www.bbc.com/news/world-latin-america-36319877

# The “Mean Realizable Present Value” of a future income

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No. 3xx).

#inflation, #present value, #inflation discount, #probability,

Many investors have run into losses due to their blind application of inappropriate valuations. They just blindly buy a bond if it is sold at less than its “present value” and thought that they have bought such a thing at a discount only to find out later on that they have paid too much.

Here I propose that they should use a more appropriate “mean realizable present value”
instead of “present value” for stream of incomes such as bonds.

## 1. The “present value” commonly used by investors.

The “present value” of some future income is an amount of money needed at present to buy and store a wealth to match that income when it arrives.

The present value of an uncertain future income is therefore also uncertain like that income.

Common application of “present value” to a stream of future incomes has simply equated it to the “inflation discounted value” of that stream of income.

For example, when a bond issuer commits to pay the bond holder 3 yearly installments of 1000 dollars each, the “present value” of that bond is often valued by only compensating for inflation to be

1000×(1-Inf) + 1000×(1-Inf)×(1-Inf) + 1000×(1-Inf)×(1-Inf)×(1-Inf)

At a rate of inflation of 3% per year, it will be

1000×(0.97) + 1000×(0.97)×(0.97) + 1000×(0.97)×(0.97)×(0.97) = 2911 dollars.

Many investors have run into losses due to their blind adoption of such inappropriate “present value” for their bond. They just blindly buy the bond if it is sold at less than 2911 dollars and thought that they have bought a “debt at a discount”.

If and when the bond issuer goes bankrupt, they lose all uncollected payments and the reality is they receive much less than the 2911 dollars of inflation discounted value in their formula.

Therefore such definition of “(inflation-discounted) present value” is inappropriate for investors. It is proposed here that investors should use instead the “mean realizable present value” defined as in the following.

## 2. The “mean realizable present value” of a future income.

It is more appropriate for investors to use a “mean realizable present value” of a future income defined to be the “mean of all possible present values” from that income.

Figure 1: The question is “Would you exchange 1 bird in your hand for 3 birds in the bush?”.

For example, when a bond issuer commits to pay the bond holder 3 yearly installments of 1000 dollars each, the “mean realizable present value” of that bond should be valued according to the following.

1000×(1-Inf)×(Pr. of 1st payment) + 1000×(1-Inf)×(1-Inf)×(Pr. of 2nd payment) + 1000×(1-Inf)×(1-Inf)×(1-Inf)×(Pr. of 3rd payment).

At a rate of inflation of 3%, the present value of that bond will be

1000×(0.97)×(Pr. of 1st payment) + 1000×(0.97)×(0.97)×(Pr. of 2nd payment) + 1000×(0.97)×(0.97)×(0.97)×(Pr. of 3rd payment)

It is equal to 2911 dollars only if the Probability of each payment is 1, that is when there is no possibility of any default.

Generally the present value of that bond will be

1000×(0.97)×(Pr. of 1st payment) + 1000×(0.97)×(0.97)×(Pr. of 2nd payment) + 1000×(0.97)×(0.97)×(0.97)×(Pr. of 3rd payment) << 2911 dollars.

Using the past records for the survival of new small companies we can guess the probabilities of survival for any new small company in Australia as:

Prob. of surviving longer than 12 month = 66%,

Prob. of surviving longer than 24 month = 66%×90% = 59%,

Prob. of surviving longer than36 month = 66%×90%×90% = 53%.

Therefore the “mean realizable present value” of a bond issued by a new small Australian company will be

1000×(0.97)×66% + 1000×(0.97)×(0.97)×59% + 1000×(0.97)×(0.97)×(0.97)×53% = 640 + 555 + 484 = 1679 << 2911 dollars.

So the “mean realizable present value” is only 1679 dollars, a much lower value than 2911 dollars of “(inflation-discounted) present value” often advocated in uncritical financial analyses.

## 3. Dependence on the survivability of the payer.

Figure 2: A crystal ball is needed to determine accurately the probability of any given company surviving in the future.

The difficulty in working out the probability of survival of the payer is one essential problem in investment.

The disadvantage of using “mean realizable present value” is that the probabilities in use may NOT be agreed upon between transactional parties whereas the “inflation-discounted present value” has always been mutually accepted as the analysis based on the best case.

However, using this new “mean realizable present value” gives a more appropriate valuation for investors. It presents a combination of the current “present value” and the commercial “rating” of that income. This “realizable present value” reduces to zero when the payer goes bankrupt and the “inflation-discounted present value” is only the upper limit of this “mean realizable present value”. The upper limit is reached when the payer survives past the final payment.

## 4. Conclusion

This “mean realizable present value” of an income stream can be applied to the income streams of bonds or of commercial loans. If it is used instead of the “present value” in the balance sheet of any economic entity the balance sheet of that entity would give a better estimate of its net worth.

This “mean realizable present value” explains to investors why some certain company issued bond may become worthless when the chance for the company to survive to repay to its bond holders vanishes. The value does increase and decrease with market conditions and can better quantify the market values of “loans” hold by any lender (or bank). It would be easy for investors to then understand the sudden vanishment of “wealth” hold by banks or investment funds.

Using these “mean realizable present values” the balance sheets of central banks may also look vastly different after they bought all bonds on the markets to support all companies on the Stock Exchanges.

### References:

[4]. Why does the Federal Reserve aim for 2 percent inflation over time?, Board of Governors of the Federal Reserve System,https://www.federalreserve.gov/faqs/economy_14400.htm, updated January 26, 2015, accessed 03 Mar 2017.

[5]. Your fiat money, posted January 9, 2017.

[6]. Your fiat money (Part 2), posted January 12, 2017.

# Inflation is vicious to fiat money users.

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.57).

#inflation, #fiat money, #taxation by stealth, #indexation, #cost of living

Figure 1: Fiat money are paid to government employees. All citizens have to pay their taxes with that fiat money.

Inflation is vicious to the citizens who have to accept fiat currency from their ruling government. It is half terrible as having to use money with some use-by dates. Only governments like inflation.

# 1. Inflation.

It is convenient to begin the discussion with my previous posting entitled Your Fiat Money, part 2 (reference [1]). It is easily seen that the government can choose to pay its employees X units of its fiat currency C1 and require the whole population to pay it all taxes amounting to X units of that currency. The fiat money C1 will find its own value in the population depending on how government employees interact with the whole population of the country.

Alternatively, the government can choose to pay its employees Y units of another fiat currency C2 and require the whole population to pay it all taxes amounting to Y units of currency C2. Again the fiat money will find its own value in the population.

As other things are equal, we must have

X*C1 = Y*C2

and the value of a fiat currency is inversely proportional to the amount issued by the government to its employees.

Consequently, if all other things are unchanged but the government increases both the payment to its employees and the tax to be collected by 3% every year then its currency is worth only 100/(100+3) its former value one year ago. This is called an inflation at a rate of 3% per year.

# 2. Inflation is a rent on fiat money.

After selling his stock, a trader has cash (which is fiat money), he will have to use his cash to buy new stock. If he holds on with the cash for one year, he can buy only (100-3)% of what he could have bought immediately. This works as if he was renting the cash from the government at a cost of 3% a year.

The long standing wisdom is not renting anything you don’t really need and people should not keep cash longer than it is absolute necessery.

Any government will love inflation. It is its best next thing to issueing money with expiry dates and un-redeemable government bonds, vouchers (Old scams but still can be practiced against illiterate, trusting populations)

# 3. High inflation may feed on itself.

Remember that the fiat money will find its own value in the population depending on how government employees interact with the whole population of the country.

When high inflation occurs people may try to increases prices in anticipation, causing even more severe inflation.

People may then even try to avoid using any fiat money at all and they may choose their own alternative bartering medium such as food (rice grains or flour) or commodities (gold or silver) instead of the readily available but steadily depreciating fiat money.(see [4,5,6,7] for bartering techniques). Such avoidance of fiat money brings even more loss of its value and deepens the inflation.

When inflation is too high, the ruling government may lose its grips on the economy and chaos may follow (as in Germany prior to 1933).

# 4. High inflation reduces actual interests on government debentures/treasury bonds.

Inflation is to be subtracted from the interest rate given by any government debenture/treasury bond.

The inflation rate is hard to obtain but it must be taken into account when buying government debentures.

Unless the after tax return from a government debenture/treasury bond is higher than inflation, the bond holders may actually LOSE money on their bonds.

The interest rate given on Government Debenture/Treasury Bond is determined at the time of sale while actual inflation is made after that time. A government can easily wipe out its debts to bond holders by producing very high inflation. (see [10]).

# 5. Inflation rips off members of pension plans.

The loss caused by inflation on cash based holdings (rents on cash) also applies to long term storage of values such as saving for retirements.

Unless inflation has been taken into account, most perceived benefits of pension plans can be only just mirages given to uninformed plan members. To have any real benefit after tax and INFLATION, plan members usually need cash contributions/injections by the government and if they don’t obtain them there will arise the problem of unfunded liabilities.

In most cases, the contributed funds of any pension plan cannot earn any net income AFTER tax and INFLATION. If there is no cash contribution/injection by government, plan members would be MUCH better off using their contributions to buy gold and save the gold for their own retirements.

Figure: Vietnamese standardized gold slabs for trading.

The imminent run (insolvency) of pension plans are only the tip of the iceberg.(see reference [8]).

# 6. Inflation produces a stealthy wealth tax.

Inflation actually produces stealthy, disguised taxes on your properties.

When you change your house, as you have to move to a new location for new jobs, the value of that succession of similar houses keep on increasing due to inflation. Governments can classify the increases as “incomes” and impose taxes on them. Some governments have already done that. This type of FALSE incomes may also be extended to include your other possessions such as cars, jewelleries, housegold goods and gold holding.

These taxes on FALSE incomes are actually taxes on your possessions such as your houses and the tax rate depends on inflation. Your legislative representatives will not bother to make yearly oversight of it and the governments easily get away with it.

The federal authority may have encroached on the rights of member states if it makes property taxes! So the federal authority has to do it under the guise of income tax on false incomes produced by inflation.

Note added on 15 May 2017:

Only recently, the US State of Arizona admitted that gain/loss made from gold holding is not subjected to Income Tax of that State.[11]

# 7. Inflation causes non-synchronized price increases.

Inflation causes uneven, non-synchronized price increases due to different flow on times for different types of goods. This allows the government to put unfair short term weighting factors on individual types of consumer goods. The weighting factors let the government artificially select them to manipulate the yearly statistics on the Cost of living to lessen its obligation to pay pensioners their entitled upkeep.

# 8. Inflation forces people to borrow.

Inflation forces people to borrow with any purchase plan stretching over many years. A buyer would lose to inflation on his cash accumulation/saving if he wants to remain debt free and save up the whole amount for the purchase. House purchases are typical examples where buyers are forced to borrow.

# 9. Inflation gives government unfair advantages in charging taxes on citizens.

When you made a huge loss and claimed a carried forward loss to offset against possible future gain in calculating income tax, the loss is NOT indexed by inflation! So a loss of \$1000 by a future trader in 2010 can only offset against a gain of \$1000 in 2017! (Although \$1000 in 2017 is worth much less than in 2010)

# 10. All governments love inflation.

A government loves inflation for the following reasons:

1. Inflation is a rent on its fiat money.

2. It can define False incomes and tax its citizens on the false incomes.

3. It can muddle statistics on Cost of living and the government can fool the world with its manipulated figures on the growths in GDP, GNI.

4. It allows government to gain unfair advantages over its tax payers when calculating their taxable incomes.

So the claims that Inflation is preferred to deflation by governments should be read with skepticism. Unfortunately, the statement has been told often enough and for long enough so that a number of tax payers have started to believe in it without questioning. (A lie told once remains a lie but a lie told a thousand times becomes the truth, by J. Goebbels [9].)

### References:

[1]. Your fiat money (Part 2), posted January 12, 2017.

[2]. Your fiat money, posted January 9, 2017.

[3]. Why does the Federal Reserve aim for 2 percent inflation over time?, Board of Governors of the Federal Reserve System,https://www.federalreserve.gov/faqs/economy_14400.htm, updated January 26, 2015, accessed 03 Mar 2017.
[4]. Neha Sharma and Shalu Yadav, The Indian village that has returned to bartering, BBC News Services,http://www.bbc.com/news/world-asia-india-38180075, 5 December 2016.

[5]. Patrick Bodenham, Will Spain’s coal belt survive through online barter?, BBC News Services,http://www.bbc.com/news/world-europe-38731808, 2 February 2017.

[6]. James Melik, Haggling and bartering gain appeal, BBC News Services,http://news.bbc.co.uk/2/hi/business/7883050.stm, 12 February 2009.

[7]. Mark Lowen, Greece bartering system popular in Volos, BBC News Services,http://www.bbc.com/news/world-europe-17680904, 12 April 2012.

[8]. Dallas police fire pension board ends run, bank stops 154m withdrawals. http://www.dallasnews.com/news/dallas-city-hall/2016/12/08/dallas-police-fire-pension-board-ends-run-bank-stops-154m-withdrawals
[9]. Joseph Goebbels quotes, azquotes.com, http://www.azquotes.com/author/5626-Joseph_Goebbels.
[10]. https://www.moneymetals.com/news/2017/05/04/higher-inflation-consumer-prices-001061, (added on 10 May 2017).
[11]. http://www.zerohedge.com/news/2017-05-13/arizona-passes-bill-end-income-taxation-gold-and-silver
References added after 2017 November:
[12]. http://www.gold-eagle.com/article/deepening-crisis-hyper-inflationary-venezuela-and-zimbabwe

Added after 2018 Aug 15th:

[23]. How Venezuela’s crisis developed and drove out millions of people, https://www.bbc.com/news/world-latin-america-36319877