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Ever Feel Like You Are Getting Poorer? Surprise, Surprise… You Are.

Created: On October 19, 2007 @ 11:23 am In

By Jim Perez,
DebtHelp, Inc. Staff Writer

Super-Freak-O-Nomics hears this question quite a bit in the bars he frequents:

If the economy is doing so wonderfully, as President George Bush says, and his Fed cronies echo, why do I feel so poor?
Well, I decided to do some digging around on this topic, and guess what?

You’re right.

You are poor.

Sort of.

The housing boom we’ve been riding the past few years has created a newfound wealth for many people, primarily those who bought homes within the past 10, 15 or 20. But now that the crest is subsiding, the “artificial” wave of wealth many of us rode is crashing into the sand.

For some, this crash means losing their homes.

For others, it means working a second job to help pad the retirement nest egg that is now turning from hard- to softboiled.

According to Robert Hardaway, a professor of law at the University of Denver Sturm College of Law, this crest began quite a long time ago. It’s the result of an accounting sleight-of-hand that makes the boys from Enron look like church basement bingo bunnies.

Hardaway said that in 1983, the U.S. Bureau of Labor Statistics had to make a choice: Strip the cost of housing from the Consumer Price Index, causing an immediate drop to the inflation index, bringing it down to 2 percent, or leave it in and keep inflation at about 15 percent, making our economy look like that of a “banana republic.”

Adding insult to injury, since bond traders and investors demand a 2 percent return after inflation, this would mean that bond and money-market yields could climb as high as 17 percent.

Imagine getting a double-digit return on a bond or money-market fund.

That’s unheard of today.

And unthinkable.

Think what having to pay out that high of a return to common folk investors such as us would do to the bonus of a bank or fund manager.

Why, their salaries might actually drop below the $10 million mark.

To keep the average person in the dark, and the red, the BLS chose the smoke and mirrors route, and chose to strip out the cost of housing in the CPI.

Instead, they magically came up with a substitute they chose to call the owner equivalent rent component, which they based on what homeowners might rent their houses for.

“The reported inflation index quickly dropped to 2 percent” from the “real, and horrifying, 15 percent” inflation rate, Hardaway said.
Speculators wanted to offset the costs of holding properties “by renting out their homes while their prices skyrocketed, thereby flooding the market with rentals that pushed down the cost of renting a house or apartment,” Hardaway said.

The BLS was correct in assuming this statistical ruse would fool the average citizen into believing that inflation was only 2 percent, and therefore be willing to accept a meager 4 percent return on bank savings, Hardaway said.

“What is remarkable is that the ruse also fooled the bond traders, and apparently continues to do so, leading analyst Peter Schiff to describe these supposed savvy bond traders as the ‘hormonal teenagers of the capital markets,’” Hardaway said.

“The present subprime credit crisis can be directly traced back to the BLS decision to exclude the price of housing from the CPI. It is now clear that the ‘benign’ inflation figures reported over the last 10 years” were lies from the Fed and the U.S. government, Hardaway concluded.

Imagine that: Our government lying to us.

Not only lying, put propping the global economy on a house of cards that can be blown away by a sneeze in, say, the subprime markets.

This sneeze can be attributed as the cause for the correction in the housing market we are now seeing.

Slowing home sales. Lagging new home construction.

And this correction is causing ripple effects, such as layoffs in the financial services, construction and building supply sectors.

Even though the jobless numbers just released were better than expected, how long will this good news last? How soon before other sectors start feeling the squeeze?

Meanwhile, Washington will keep on just putting on a happy face for the hedge fund managers and bond traders.

Stay tuned to this same Bat station for more on this same Bat topic.

Article printed from DebtHelp.com Blog: http://www.debthelp.com/blog

URL to article: http://www.debthelp.com/blog/2007/10/19/ever-feel-like-you-are-getting-poorer-surprise-surpise-you-are/