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<h3><span id="lblStoryTitle"><font face="Verdana" size="1">http://www.mises.org/fullstory.aspx?Id=1600</font></span></h3>
<h3><span><font face="Verdana" size="5">Fooled by the numbers</font></span></h3>
<p class="MsoBodyText" align="center">
<h4 class="MsoBodyText" align="left"><font face="Verdana">by Antony P. Mueller</font></h4>
<p class="MsoBodyText" align="left"><font face="Verdana">[Posted September<span class="063583113-13092004">
13,</span> 2004]</font>
<p class="MsoBodyText"><font face="Verdana"><img alt src="http://www.mises.org/images3/numbers.jpg" align="right" border="0">Modern
central banks pronounce economic and monetary stability as their target. But
what they are after is not the real thing but a statistical chimera. Ludwig von
Mises </font><font face="Verdana">put
it</font><font face="Verdana"> this way:</font>
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<p class="MsoBodyText"><font face="Verdana">"The money equivalents as
used in acting and in economic calculation are money prices, i.e. exchange
ratios between money and other goods and services. The prices are not measured
in money; they consist in money."</font>
[/i]
<p class="MsoBodyText"><font face="Verdana">and</font>
<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">
<p class="MsoBodyText"><font face="Verdana">"All methods suggested for a
measurement of the changes in the monetary unit's purchasing power are more or
less unwittingly founded on the illusory image of an eternal and immutable
being who determines by the application of an immutable standard the quantity
of satisfaction which a unit of money conveys to him. It is a poor
justification of this ill-thought idea that what is wanted is merely to
measure changes in the purchasing power of money. The crux of the stability
notion lies precisely in this concept of purchasing power." (p.
221)</font>
[/i]
<p class="MsoBodyText"><font face="Verdana">"Price stability" is a
misleading and an inherently contradictory concept. When such a construct as the
price index becomes the guiding post for central banks, they will tend to
produce and reinforce the very instabilities they proclaim to fight.</font>
<p class="MsoBodyText"><font face="Verdana">What is getting published as"the
consumer price index" represents a statistical hodgepodge. It can be
concocted in almost any way, and one can do this without violating common
statistical rules. Hedonic calculation is just one example. But despite all the
statistical tricks that are being invented and applied, the core issue remains
unresolved: what actually is being measured by"purchasing power" and
what is the value of money—other than subjective and individualistic—upon
which the calculation could be based?</font>
<p class="MsoBodyText"><font face="Verdana">Along with the statistics related to
the figures about the domestic and national product, the price index is one of
the most unreliable, most deceiving and most abused statistical economic numbers.
This is even more the case as the price index provides the basis for a series of
other statistical indicators as it serves as a deflator and enters economic
growth and productivity figures. </font>
<p class="MsoBodyText"><font face="Verdana">These macroeconomic numbers suffer
from the illusion that the properties of an object—called"the economy"—could
be objectively observed and measured. Whatever finesse will be applied to their
calculation in order to make these statistics more accurate, it cannot do away
with their basic invalidity that results from the impossibility of
obtaining a fixed standard of measurement for value.</font>
<p class="MsoBodyText"><font face="Verdana">Attempts to measure the economy as
if it were an object has its origin in government planning. Treating the economy
as a whole becomes necessary for socialist central planners and under the
conditions of total war. They take place under the presumption that some center
with decision-making power has the proper knowledge about the means and ends of
economic action. The results of these plans are well known; but while
socialist-type total economic planning is off the screen even for many devout
socialists, central monetary planning through the manipulation of money, credit
and the exchange rate ranks still high on the public agenda. Indeed, central
banking may be called the last refuge for those still under the spell of the
pretense of knowledge.</font>
<p class="MsoBodyText"><font face="Verdana">Fixing their eyes on the so-called
"price stability" or following the now fashionable inflation targeting
schemes, central bankers are not just after a movable target but one that is
more symbolic than real. This way, they neglect the inflation that takes place
in the expansion of money and debt.</font>
<p class="MsoBodyText"><font face="Verdana">While central banks theoretically do
have the instruments to control at least the monetary base, they are rarely
willing to pay the price of a contraction and instead favor an illusory
permanent expansion. They act like pushers selling cheap drugs to a gullible
public with the financial sector as the intermediary. There is hardly any
central bank free from this disease, which is inherent to an unanchored
fractional reserve banking system.</font>
<p class="MsoBodyText"><font face="Verdana">Like with individual prices, the
prices of groups of goods and services rise and fall. There are always
inflationary and deflationary spots in an economy at the same time. When small
aggregate price movements occur or when opposing forces are at work, the price
index renders no valuable signal. If, however, strong tendencies in one or the
other direction of the general price level are under way, and when this finally
shows up in the price index, it is usually too late for the central banks to
catch up. </font>
<p class="MsoBodyText"><font face="Verdana">Price indexes necessarily average
out the extremes; they are unable to signal the more subtle price movements and
they leave out relevant items such as asset prices. This way, it is not only the
general public that is being deceived, the central banks themselves are
falling victim to their calculations like the joke of the statistician who
drowns while crossing the water that he had thought was easy to wade based on
the arithmetic average of its depth.</font>
<p class="MsoBodyText"><font face="Verdana">Currently, for example, the
depreciating value of the dollar is already visible in oil, real estate,
precious metals, domestic services, health care, tuition or even when calculated
against other fiat monies such as the Euro. In this perspective, there is
inflation taking place and it has been taking place for quite some time at a
remarkable pace. However, when counting in a considerable portion of computer
storage capacity and imported gadgets, the picture changes and the perspective
of a deflationary trend could be diagnosed by that yardstick.</font>
<p class="MsoBodyText"><font face="Verdana">The great cheat of the stabilizers
consists in spreading the illusion that a stable or a moderately increasing
price index would imply economic stability and would have no effect on the
capital structure. Neither do monetary policy measures publicized under the
heading of stabilization imply a constancy of purchasing power. Such measures
rather mean that old distortions are covered up while new ones are being created.</font>
<p class="MsoBodyText"><font face="Verdana">Temporary success, like is also
typical of deficit spending, makes central banking even more dangerous. Modern
central banking is a hideous endeavor. The true dimension of the devastations
caused by easy money policies become visible only in the longer run when
inflation begins running wild and as such can only be stopped by a deflationary
contraction.</font>
<p class="MsoBodyText"><font face="Verdana">Currently, central banks again fail
to recognize or remain inactive in the face of the flood of liquidity. Swamping
the globe with monetized debt drives the system inexorably on a path where the
alternative of either accelerating price inflation or deflation becomes more
pressing. When economic actors finally form a dominant expectation, a spiral of
feedback processes begins and actions will be adapted accordingly. This is the
point where the game slips out of the hands of the stabilizers and
hyperinflation and depression loom.</font>
<p class="MsoBodyText"><span class="063583113-13092004"><font face="Verdana">________________________________</font></span>
<p class="MsoBodyText"><font face="Verdana">Antony Mueller is a professor of
economics at the Universidade de Caxias do Sul (UCS) in Brazil and an adjunct
scholar of the Ludwig von Mises Institute.</font>
</font>
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