Here’s a members-only article by Gary North. Please do not share this. This is for you Elite folks only.
For five years, I have warned against Shadowstats. To read my articles, click here. (Wait about 20 seconds.) Now Prof. Ed Dolan offers serious evidence that I was correct.
I have known Dolan for over 40 years. He was the organizer of the legendary South Royalton conference of Austrian School economists. This event marked the revival of Austrianism. I attended. He is the author of a good economics 1 textbook.
He ran some simple tests on Shadowstats. You can run the same tests. His article is here.
Dolan talks methodology for much of the article. He shows why Shadowstats’ methodology is wrong. Then he ran a simple test: the supermarket test.
No one really denies that the CPI, as presently calculated, understates the rate of inflation compared to a measure based on a fixed basket of unchanged goods. Rather, what many economists, myself included, find hard to accept is Williams’ estimate of the degree of understatement.Pick a selection of items from this ad, then go to your local supermarket and note today’s prices for the comparable items. Now, perform two sets of calculations: First, predict forward to calculate how much each item should cost as of February 2015, using both the ShadowStats estimate of the increase in the cost of living from 1982 to 2014 (10.5 times higher) and the CPI estimate (2.5 times higher). Second, starting with the 2015 prices, predict backward to calculate how much each item should have cost in 1982 according to each of the two cost-of-living indexes.
The following table shows what I got when I performed the experiment, using prices for February 9, 2015 from my own local supermarket, Tom’s in Northport, Michigan. I have adjusted all prices for changes in package size, if any.
For example, a can of tomato sauce that cost $.25 at Piggly Wiggly in 1982 cost $.79 at my local market in early 2015. Starting from the 1982 price, the CPI predicts that it should cost $.61 in 2015 while ShadowStats predicts that it should cost $2.64. Starting from the 2015 price and working backwards, the CPI predicts that it should have cost $.32 in 1982 while ShadowStats predicts that is should have cost $.08. Based on these calculations, we see that the CPI underestimates inflation, as measured by the Tomato Sauce Index: The ratio of the 2015 predicted price of $.61 to the 2015 actual price, $.79, is .77, an underestimate of 23 percent. The ratio of the ShadowStats prediction to the actual price is 3.32, an overstatement of 223 percent. For tuna, both indexes overestimate inflation, the CPI by 34 percent and ShadowStats by 478 percent, and so on.Continuing in that way, we see that the average underestimate of inflation from the CPI is 9 percent while the average overestimate from ShadowStats is 292 percent. However, we might want to take into account the fact that the 1982 prices given in the ad are sale prices, while those from 2015 are everyday prices that I took right from the shelf at the store. If we were able to use higher, everyday prices from 1982 instead of sale prices as the base for our calculations, it is likely that the CPI would not underestimate food inflation at all, while the overestimate from ShadowStats would be even greater. 
Then he uses other comparisons, such as GDP.
I suggest that you do not take Shadowstats seriously.
And here’s a Gary North article from five years ago:
I feel like the guy battling a monster with multiple heads. I cut off one, and two more appear.
Yesterday, this series of exchanges appeared on a forum.
message Posted by victor81 :I just read an article http://matterhornassetmanagement.com/2010/05/18/alea-iacta-est. The article suggests that hyperinflation is inevitable, so I’m skeptical of what he writes. What I want to ask about was the comparison he made to the 1980 price of gold. The article says that the 1980 peak would be $7200 adjusted for inflation. In the gold wars you wrote gold at those prices would mean the worlds finances were toast and the dollar would lose reserve status. My question is do the numbers still hold or do they need to be adjusted because of what has happened in the last few years?
Posted May 19,2010 1:58 PM GaryNorth:
Go to the BLS Inflation calculator. Put $850 in the 1980 box. Calculate for today.
It’s not $7,200.
message Posted By akflier:
What the article said (cut and paste) was:
“Adjusted for real inflation (as per shadowstats.com) the 1980 gold peak in today’s prices corresponds to around $7,200 today.”
John Williams of Shadow Stats does not believe that the Government CPI reflects TRUE inflation, but is biased low to keep entitlements and other payments that are indexed for inflation cheaper to pay.
There are those who do not believe their Government, though they are probably very few. Americans implicitly trust their Government, for the most part, anyway, as it appears as does Dr. North, since he uses Gov’t CPI charts.
I have posted my critiques of Williams before. Please, never assume that I am ignorant of these matters. Use the search engine. I ran a search for “John Williams.” Here is what came up.
Look at the money supply data first, not the CPI or any other data.
http://www.garynorth.com/members/1225.cfm He offers no public evidence for his claims. Nothing is verifiable. This is a marketing ploy. “Trust me; trust my unverifiable conclusions.” Why should we?http://www.garynorth.com/members/2834.cfm He has warned of price inflation of gigantic proportions — a billion to one — which has only took place once in an industrial nation: Germany, 1921-23. That took a military defeat.http://www.garynorth.com/members/3435.cfm His chart shows price trend stability, which is the crucial factor. The rate of increase is not increasing, which it must do to get hyperinflation.http://www.garynorth.com/members/3521.cfm
If you had searched for “John Williams” on the forums, you would have come up with my comment. There, I referred to a critique by John Mauldin, a true quant. I know. He used to be my manager. He blew Williams out of the water. You can read his June 2008 article here:
A quick sidebar. I am often asked what I think about the inflation numbers produced by John Williams of Shadow Government Statistics. His number, using the methodology to figure inflation that existed in the late 70s and early 80s suggest that inflation in the US is over 11%. That certainly corresponds to what many of us feel like as we see food and energy prices rise. If you are bearish, a high inflation number makes your case easier.But let me make a few of you mad. I think what Williams’ numbers actually do is show that the government did not know how to calculate inflation back then. If inflation were actually 11.8%, then that would mean that GDP was a negative 6% today, and that the US would have been in a recession for several years. That is obviously not the case. You can simply look at corporate profits and tax receipts to see the economy has been growing the past five years.
The recovery after 2003 was in fact robust, and corporate earnings were solid, and tax collections went through the roof after the Bush tax cuts. That is not something that would happen in a high inflation environment.
Nothing more needs to be said. But I will say more.
In academia, if you can catch anyone famous and widely trusted in a conceptual error, you can establish your reputation. If you can identify a major statistical error, you can establish your reputation. So, there are thousands of highly skilled economists who could make their names in the profession if they found any major error in the government’s statistics. Or a whistle-blower inside the Bureau of Labor Statistics could quit and expose the scam. He would become a celebrity among economists. This is why the BLS provides as accurate statistics as the modern economics profession thinks can be done with today’s sampling techniques.
Anyone who dismisses BLS data had better have unassailable proof of deception. You can’t beat something with nothing. You can’t beat the BLS with its own data that, with your secret formula, prove that a half-decade boom period with high profits was in fact a period of severe recession.
Yesterday, the new CPI figure came out. It was down by 0.1% in April. I have long preferred the Median CPI. It is less volatile than the CPI. It was unchanged at 0%.
I will say this for John Williams. He has guts. Anyone who keeps a prediction this wrong on his site is gutsy.
April 8, 2008
__________
Inflationary Recession Is in Place
Banking Solvency Crisis Has Opened First Phase of Monetary Inflation
Hyperinflationary Depression Remains Likely As Early As 2010
You can’t beat something with nothing. You can’t beat government statistics with data collected by the government and a formula that no one else is allowed to verify.
The government does not change its formula often, and when it does, it makes the formula available to the public. So, year by year, month by month, you can see the trend. The trend is what counts. The trend is flat: zero increase in the rate of increase. Unless the rate of increase itself increases, there cannot be hyperinflation. Williams’ statistics show no increase in the rate of increase, 2001 to the present.
When someone tells you he has secret information that no one else can see, it’s a pitch by a weaver of invisible clothing. Don’t be an emperor. Don’t buy the wardrobe. Don’t wear it. Don’t parade in it.
