PolitiFact.com, a political fact checker operated by St. Petersburg Times, has shown its economic ignorance repeatedly. It gave a biased ruling on libertarian Republican congressman Ron Paul’s assessment of the U.S. money supply. It has repeatedly said Social Security is not a Ponzi scheme. Its latest crime against economics occurred about a letter by the Virginia Tea Party Patriot Federation to Virginia’s Congressional delegation criticizing the Federal Reserve and advocating its audit.
The letter defines inflation as “a man-made phenomenon. It is a direct result of increasing the money supply.” Actually, inflation is money supply expansion which pressures prices upwards. A growing money supply’s upward price pressure can be counterbalanced by increasing production’s downward price pressure as occurred during the 1920s.
PolitiFact analyzed the letter’s claim that the U.S. dollar has devalued by 98% compared to gold since the Fed was created in 1913.
PolitiFact cited economist C. Barry Pfitzner who dismissed the gold-dollar comparison:
“The current market gold price is nothing more than the equivalent of any other speculative commodity. Not unlike, say, silver, diamonds, platinum – or for that matter, hog futures. So one could argue that the dollar has lost 98 percent of its power to purchase gold. So what? Irrelevant. And the Fed is not to blame. It does not control the price of gold.”
Gold, despite being the most commonly used money prior to government money monopolization, is a useful measurement of investor confidence. Gold’s value cannot be devalued by gold supply expansion via printing press or by adding zeros to an electronic banking account.
PolitiFact cited economist Dean Croushore who said, “Economists generally think of purchasing power as the amount of goods that a person can buy with a dollar, not the amount of gold that a person can buy with a dollar,” he said. “Measuring the amount of goods that one can buy with a dollar is best done using a price index, such as the consumer price index.”
The Consumer Price Index (CPI) is defined by the U.S. Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI is questionable. Austrian economist William L. Anderson said, "the CPI can perpetuate the myth of “cost-push” inflation, in which the cause of rising prices is, well, rising prices. Indeed, many evening news broadcasts on the new CPI figures will begin with something like, “Increases in gasoline prices have helped ignite a new round of inflation, the Labor Department reported today.”
Furthermore, the portrayal of the “official” version of inflation as an average causes other mischief as well, the most noticeable being the classification of the prices of some goods and services as “rising faster than the rate of inflation.” The implication of such a statement is that if the price of something increases at a faster rate than the increase in the CPI, then something illegitimate must be occurring. Soon afterward, politicians begin to call for price controls, and then the real damage to the economy begins.
As economists and others of the Austrian School understand, inflation occurs when the value of money declines relative to the goods and services it can purchase. In other words, inflation is a monetary phenomenon, not a price phenomenon. Prices go up because inflation is happening, not the other way around.
During a period of inflation, prices of some things increase more rapidly than prices of others. For example, during the last decade, money prices of gasoline and food have increased, while personal computer prices have fallen. That does not mean computers are impervious to inflation, but rather that inflation affects different items in different ways. Furthermore, without inflation, computer prices would have fallen even further.
What, then, is the real rate of inflation if the CPI is inaccurate? The truth is that there is no good way to gain a true measure of inflation, especially in this era when the Federal Reserve System is flooding the economy with new dollars. All we can say for certain is that inflation, with all its evils and distortions, has become what seems to be a permanent part of our economy."
Although the CPI is a poor measurement for inflation, even it shows massive devaluation. $1 in 1913 has the same buying power as $22.09 in 2010, according to the Bureau of Labor Statistics’ CPI inflation calculator. In other words, the U.S. dollar has devalued by 95% since the Fed was created in 1913.
Economist Pfitzner said, “If we blame the Fed for inflation (and the taming of inflation in recent decades), seems they should also get some credit for growth in real incomes.”
The Fed causes inflation. Declaring it does not requires an explanation that is absent in the PolitiFact article. Real income growth is due to better productivity despite the taxation, regulation, inflation, and business cycle causation of the government.
PolitiFact concludes, “If the Fed’s historic handling of inflation is to be blamed for the drop in the dollar, it must be credited for the rise in wages. We rate the [letter’s] claim Half True.”
Suddenly, a falsehood is presented as the truth by the politically mainstream PolitiFact. In reality, the central planners at the Fed are not much better than the ones in the former Soviet Union or other past government organizations. They have gradually lowered the living standards of the U.S. worker from what they would have been in their absence.
The best way I know of educating the public about this ongoing, massive theft is for WikiLeaks to publish a simple explanation of it. I bet it would cause much more controversy than the boring United States diplomatic cables leak.