Alice: “Tsar Bernanke, I’ve been perplexed for years by the fact that almost everything I buy costs more and more, but your official Consumer Price Index kept reporting almost no inflation until this September. How can that be?”
Tsar Bernanke: “Ah, Alice, I can see you have a lot to learn about the hard facts of life in our Wonderland. But the answer to that is simple! You are not the consumer we had in mind when we made up that imaginary index! In fact, few real consumers are the people we imagined when we dreamed it up. You see, we made it up years ago and simply don’t change it to really keep up with what you are buying. For example, you’re paying lots of money, whole baskets full, for college tuition, fees, tutors, new computers, software, and lots of other things people didn’t use to buy as necessities in education. The same is true with food and everything else. You buy new things and we pretend that isn’t happening, that you’re still paying for things people used to pay for. That makes life easier for us and no one seems to mind, so why hassle us about it?”
Alice: “But what about all those claims you and other Fed-speak people make about the ‘core inflation rate’ being so benign? I see in the headlines that the CPI soared last month to about 12% a year on an annualized basis. You’re always making such a big deal about the CPI, but when it soars to near hyper-inflation rates, then you say, ‘Tut, tut, don’t pay any attention to that CPI over there. What really matters is the Core Inflation Rate!’ How can you square this contradiction?
Tsar Bernanke: “Nothing could be easier! We believe in thinking positively and that means always looking for the lowest inflation rate possible. The Core Inflation Rate is simply the increases in costs of everything excluding food and energy. Well, you don’t really need to eat or use heat or electricity or gasoline or anything like that do you? Of course not, not when it would make life unhappy for us central planners. So go on a zero-calorie diet to lose weight and freeze in the dark for a while. You can’t always go around thinking only of yourself, girl! Can’t you help us central planners once in a while?”
Alice: “Well, maybe, but I’m still perplexed by the fact that housing prices for the houses people really buy on the East Coast and West Coast are sky-rocketing 20% or more a year and houses are a huge part of what people actually pay for, but the CPI doesn’t seem to register that at all!”
Tsar Bernanke: “For heaven’s sake, Alice, nothing could be simpler! We don’t count houses in the CPI. After all, no one eats houses, do they, so they are not really ‘consuming’ houses. See what I mean? Life is much simpler when you simply exclude such nasty realities, sing a happy song and pretend they don’t exist! Sing along with your tsar, Alice!”
Alice: “Well, that is kind of funny, but what about stocks and bonds? Those prices keep going up, as my Dad’s financial analyst tells us. Dad is buying those for retirement and, if the prices keep going up, he’s paying much more today for retirement than people did earlier and that seems really important with Social Security and Medicare and his back.”
Tsar Bernanke: “Alice, I know where you’re coming from this time! You’ve been reading some scary economics articles my colleague at Princeton, Ricardo Reis, has been publishing lately showing that, if you count housing, stocks and bonds over the long run, then inflation is soaring about 250% higher than the CPI in recent years. But we don’t count stocks or bonds or houses in the CPI. That’s all there is to it, Alice. Tsars can do what they want in planning your monetary and economic life and we like it this way because a very low CPI means that old folks, savers, people on SS and Medicare get very little increases in their annual inflation cost increases, thereby leaving more money for the Boards of directors on which we will be serving the rest of our lives and making all the contributors to our Political Party much happier. See, there are important things you simply don’t learn about in Econ. 101. Don’t you think you should do anything to help us Tsars?
Alice: “Of course I want to be a nice, decent girl, and I’ll promise to let you off the hook, if you’ll just explain one thing to me that’s been eating me up inside ever since Econ. 101. You and all our Scientific Economists keep telling me that tsars and central planning do not work, that they wrecked up Russia twice in a row. You keep singing the praises of a free economy in which the consumers are sovereign and of free markets that beat central planning hands down in all ways. Well, if that’s so, how can you possibly think a tsar centrally planning the world’s currency can really work? Won’t it lead to wild swings, imbalances, bubbles and crashes that cause our vastly complex global economy to implode the way the central planners at Gosplan in the Soviet Empire caused their economy to eventually implode?
Tsar Bernanke: “Alice, you are a sweet little witch! Who in the world put you up to such nonsense? Some crazed libertinist monetary theorist? Why, everyone knows that when we do central planning of money by tsarist fiat it is not really central planning, any more than the CPI is really a measure of the prices people really pay. Our monetary central planning is what we call money management or monetary guidance. A rose may be a rose when you change the name, but when you change the name of a concept in economics the very essence of the noumena and phenomena are transformed by verbal magic into what we say they are. Well, child, you simply can’t understand such big scientific things as that, so you run on and play and let me get on with guiding our money supply for the world. And don’t worry about imploding! I will never allow that! Free markets and capitalism guided by me will never do such things!”
October 27, 2005