Wednesday, April 20, 2011

Playing With Numbers

Numbers tell us a lot about our world.  Statistics, the study of finding meaning behind the numbers, can give us information about a variety of topics.  Like many things that are both manipulable and trusted, statistics can be used to manipulate how we view our world.  About 10 years ago, a joke email went about trying to explain how statistics can be used to lead you to draw a wrong conclusion.  First it pointed out that 90% + of violent crimes were committed within 48 hours of the perpetrator eating bread.  Without pointing out that 90% + of the general population consumes bread at least once every 48 hours it drew the conclusion, obvious with the information presented, that eating bread is a cause of violent crime.

How has this worked recently in the real world?  Well, back in 1979 annual inflation reached 10.75%.  Then in 1980 the government changed how they measured inflation.  How did they do this?  By removing key components from the numbers.  Why did they do it?  The cynic in me says they did it to hide trouble from the nation.  It could be because they wanted to alleviate a scare in the public, that these other factors weren't critical to everyday life.  Think deeper though.  What costs to the government rise associated with inflation?  The 800 lb gorilla sitting on our government...Social Security.  A new measurement that reduces inflation also reduces the cost of living adjustments to social security recipients.  To be honest, this move probably prolonged the social security system by 20 years.  Ok, that was 30 years ago.  Aaaah, but the deception continues to this day.  Have you noticed the price of food creeping up over the last year?  You may not have.  Companies are really good at hiding inflation they same way they're good at hiding cost increases in a recession.  For instance, a few years ago you could buy a 20oz soda for 99 cents.  Well, now that 99 cents will get you a soda that looks the same, but is in fact, only 16 oz.  Don't worry, they still sell that 20 oz soda, but it costs $1.59 now.  Cereal that came in a 32 oz box now comes in 26 for the same price.  The box looks identical.  The contents are not.  Meanwhile, our government tells us that inflation is within normal range of 2.7%.  Using the same measurement that the government used in 1979, however, it's not.  It's 9.7% or higher.

What should you do?  I don't know.  I don't give investment advice.  I personally believe that investing without a hedge against inflation is foolish.  We've often, as a society, made a show of demanding transparency, but done little when that demand is either flat out rejected or when we're given numbers that have no real meaning.  So, what should you do?  When a politician tells you that he's cut $38.5 billion from the budget, asks him why that $38.5 billion cut only reduced our deficit by $350 million.  When you're told that inflation isn't a cause for concern, ask why your dollar doesn't buy as many Apple Jacks as it did 6 months ago.

Numbers don't lie.  You've probably heard that expression.  It's a paradox.  While it's true, it will cause you to believe a falsehood.  Number's don't lie, but they can be made to deceive you.  Look behind the numbers.  The real truth is likely in the small print.

Working on a new post already, pondering the question between the difference in two verbs:  govern and rule.  Which did we consent to?  Which are we receiving?

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