Friday, October 5, 2007

A Tip on TIPS

"Imagine that a cardiologist told you aside from the irregular heartbeat, the stratospheric cholesterol count, and a little blockage in your aorta, your core heart functions are just fine. ... Signs on inflation are evident throughout the economy. ... In still-poor China, food expenditures account for 37 percent of the CPI, compared with 14 percent in the United States. ... China's government is trying to deal with its inflation [by instructing local bureaus] not to use the word 'inflation' to describe what is happening. ... But by focusing on core inflation, the [Fed] ... is practising its own subtle form of denial", Daniel Gross in Newsweek, 8 October.

Gross is too kind. What's subtle about it? Uncle Sam knows what he's doing. In 1997 he revised his CPI based on the Boskin Commission's (BC) report. I thought BC was a fraud. The BC concluded the CPI overstated inflation by about 1.3 percent per year. We need a new BC! "Round up the usual economists". That said, in reducing reported inflation Uncle Sam reduces Social Security payments and increases income tax collections. Moral of the story, do not buy TIPS, Uncle Sam will manipulate their returns to his advantage and your disadvantage.

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