Most Americans haven’t, but I wish they had.

COLA stands for “cost-of-living adjustment.”

The cost-of-living adjustment determines the annual increase (raise) you see in your Social Security check each year.

Typically, adjustments are based on the annual increase in consumer prices, or the consumer price index (CPI).

The cost of U.S. goods (the CPI) rises over time. So the money the government promises you in future Social Security benefits, government pensions and other “pay as you go” social programs should increase proportionately.

Meaning the higher the CPI, the higher the annual benefit increase.

Makes logical sense, right?

Well, carry that strand of logic a few steps further and you’ll see what that means for us today.

The higher the CPI, the more Washington must pay. The more money spent on entitlement (Social Security), the less money spent on pork…i.e., shorter-term projects (such as, let’s say, the Iraq war), farm subsidies or bridges in Minneapolis.

Fewer projects mean fewer ribbons. Fewer ribbons mean fewer votes. You get the idea.

In other words, more money for you means less money for them. Now, what do you think they did about it?

With that logic in mind, take a look at historical cost-of-living adjustments since their inception in 1975:

Notice anything?

The COLA took a major hit in 1984. In other words, while the cost of U.S. goods rose from 1983-1984, as they inevitably do each and every year, the cost-of-living adjustment actually fell in value.

What happened?

Well, in 1983, the Bureau of Labor Statistics (BLS) dramatically changed the way we account for rising house prices, a figure that makes up 28.4% of the CPI.

The BLS no longer measures the actual price change of the tangible asset itself (in this case, the house). Instead, it measures rising house prices through a method called “owners’ equivalent rent.”

According to the BLS, “Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market.”

Now take a look at the direction of fixed-rate mortgage rates since 1984:

Meaning 23 years of extremely low interest rates have prompted most Americans to buy instead of rent. Consequently, the demand for rentals has dropped significantly. So when demand for rental properties drop, so does the price a homeowner could earn from renting.

Paradoxically, by printing more money, Washington, in a sense, holds down the CPI (inflation rate)!

Another major adjustment took place in 1995.

That was the year the United States Senate assembled the Boskin Commission. The task: Assess the possibility that inflation was, of all things, overstated.

As we said, an understated inflation rate certainly serves a politican’s best interests.

Sure enough, the Boskin Commission concluded that the inflation rate was indeed excessive. Four major adjustments to the CPI equation were quickly made.

They called this new math a hedonic adjustment. Meaning a subjective — and let me stress the word “subjective” — assessment in quality improvement of a certain good would offset a tangible rise in that good’s price.

Did you catch that? A subjective assessment… Who’s to say…and exactly how much?

We have no idea, dear reader.

But here’s how it works.

For most, when the $475 price tag on a brand-new Sony LCD TV doesn’t budge from one month to the next, the price hasn’t changed.

For most, that’s true…but not for the commodity specialists at the Bureau of Labor Statistics. They take the same TV, flip it a couple of times, shake it once for good measure and give it a long hard stare.

They determine that Sony’s latest LCD displays significant quality improvements…(i.e., a shaper picture, clearer sound and more stylish display). They literally run these “changes” through a complex government computer model and determine that the improvement in the newest model is valued at more than $125.

Factoring that in, they conclude the price of the TV has actually fallen 26%.

Wow. What can you say?

Well, for one, what a colossal hoodwinking of the U.S. public!

Subjective judgments aside… One thing’s for sure: These “adjustments” keep prices artificially low! These “adjustments” also account for 46% of CPI components.

Meanwhile, M3, the fullest measure of U.S. money supply, has increased at roughly 8% per year since 1971.

Just take a look at the spike in money supply since 1970:

Until 1983, the inflation rate kept respectable pace with the M3 growth rate. But then, alas, came the BLS adjustments.

No more inflation, they say. Official inflation rates are only 2-3%, although consumers report price hikes much greater than that.

Hmm…

Independent analysts tell us that M3 is now increasing at 12% per year. We also like to note that a 1940s dollar is worth roughly only five cents today.

Meaning the money supply increases at 12%, but the inflation rate magically stays at 2-3%.

That got us thinking… Why did the Federal Reserve cease publishing M3 statistics in March 2006?

We’re not exactly sure… Just as we entertain no illusions as to in what direction interest rates are heading. But we do know this.

As stated last week… Approximately 80 steel bridges currently spanning the American landscape currently have weaknesses much like the one that caused the I-35W bridge collapse in Minneapolis.

But it gets even scarier when you realize America’s infrastructure crisis involves roads, schools, dams, power grids and water pipes, too…

Uncle Sam now needs $1.5 trillion just to sprinkle Band-Aids across America’s degenerate body.

The Iraq and Afghan wars have cost the United States $458 billion to date.

What does this mean for you, dear reader?

We have a couple of thoughts.

First, demand that Washington recalibrate the CPI equation. Only then will your dwindling Social Security paycheck cover more than three gallons of gas, two cheeseburgers and a small fries.

Second, take a long hard look at U.S. infrastructure stocks right now. Rebuilding our roads, bridges, schools and dams will require plenty of gravel, cinderblock, steel and cement.

If only these companies demanded payment in just about any other currency except U.S. greenbacks…

Remember, every imaginable rescue mission for the overly indebted American consumer — not to mention the overly indebted American government — leads to increasing quantities of dollars and credit, which can only mean one thing:

Dollar holders beware.

Until next time,
Christopher Hancock
October 19, 2007

P.S.: I’ve stated time and time again, investing in U.S. greenbacks is futile. The inflation eats any profits. So, to back up what I’ve been saying, I started up a newsletter of my own, Free Market Investor. I tell readers of all the possibilities abroad and give them very real moneymaking plays. So far, readers are already up 43%, 44% and even 95% on three separate recommendations this year alone. To catch the next one, you’ll have to hurry up and get in now.

Cost of Living Concerns was originally featured in the Penny Sleuth.