Recovery Built on Retirees' Backs

The BLS has been using methods like this for years to measure inflation in the cost of things like cars and computers.

The BLS performs other interesting mathematical feats when it calculates inflation as well. For instance, the bureau measures inflation in the cost of housing not by how much the price of a home goes up, but by how much the cost of renting a similar house has increased or decreased.

That worked until rents and housing prices began to diverge in the 1990s. Grant's Interest Rate Observer has calculated the current inflation measured by the consumer price index at 2.2% using rental rates would now be 3.6% if home prices were substituted in the inflation calculation.

A Huge Incentive for Lower Inflation Estimates

Alan Greenspan doesn't have anything to do with this kind of statistical legerdemain. But you don't need to be a conspiracy theorist to imagine that a government that's running huge deficits requiring constant financing would favor measures that show inflation is low.

And here's how this inflation number affects the other side of the equation. With government-measured inflation low, interest rates can stay low, and that means investors looking to increase their cash flow are facing yields of 4% on 10-year Treasuries and 0.95% on 3-month Treasury bills for a long time to come.

Which Assets Are Squeezed the Hardest?

The retirement problems Greenspan's squeeze causes will extend to investors who aren't counting on Social Security to provide anything for their retirement. I'd argue that the squeeze has an effect on asset classes from bonds to equities.

For example, would you buy TIPS from this government? Treasury inflation protected securities pay an interest rate that goes up with inflation as measured by the consumer price index. The principal value of a TIPS is also adjusted to compensate for inflation, again measured by the CPI. The U.S. Treasury will issue $40 billion to $60 billion of TIPS in 2004, up from $25 billion in 2003.