#AI ChatGPT Grok: How much credibility should one give to official economic data?

One example on where I come from on this subject

Here another

I asked:

"With respect to economic data, e.g., inflation rate, GDP growth and unemployment rate, given by official entities e.g., a Bureau of Labor Statistics, political considerations set aside, how much credibility should one give to that those figures accurately reflect the reality?"

ChatGPT answered:

Economic data such as the inflation rate, GDP growth, and unemployment rate, when published by official entities like the Bureau of Labor Statistics (BLS) or the Bureau of Economic Analysis (BEA), generally deserve a high level of credibility—but not blind trust. Here's why:

Why they are broadly credible:

1. Transparent methodology: Agencies like the BLS and BEA publicly disclose how data is collected and processed. Methodologies are subject to academic scrutiny.

2. Professional staff: These agencies are staffed by career statisticians and economists with technical expertise, not political appointees.

3. Consistency over time: The data is collected using well-established procedures that allow for comparisons across time and countries.

4. Third-party validation: Independent researchers, journalists, and global institutions (e.g., IMF, World Bank) constantly review and critique the data.

But here are the caveats:

1. Statistical limitations: Reality is messier than averages. Unemployment figures, for example, exclude discouraged workers, and inflation may not reflect personal cost-of-living experiences.

2. Revisions: Initial GDP and job figures are often revised—sometimes substantially—based on better or fuller data.

3. Assumptions and models: Seasonal adjustments, imputations, and hedonic adjustments (in inflation) are necessary, but they can also obscure intuitive reality.

4. Political pressure: While rare in advanced economies, pressure to "frame" narratives exists. However, data tampering in the U.S. remains unlikely due to strong institutional norms and watchdogs.

Bottom line:

Treat official statistics as broadly reliable indicators of trends and magnitudes, but supplement them with independent analysis and understand the definitions and limitations behind each number. Statistics are a map, not the territory.

I said: Thanks!

It replied: You're very welcome! If you'd ever like to dig into the specific quirks of how, say, inflation or unemployment is calculated—or how alternative measures (like U-6 unemployment or shadow stats) compare—I’d be glad to help.

Grok 4 answered:

Official economic data from entities like the Bureau of Labor Statistics (BLS), Federal Reserve, or Bureau of Economic Analysis (BEA) are generally credible but not infallible. Here’s a breakdown of their reliability, focusing purely on methodological and statistical considerations:

Inflation Rate (e.g., Consumer Price Index - CPI):

Strengths: The CPI, produced by the BLS, uses a fixed basket of goods and services, updated periodically, to measure price changes. Data collection is rigorous, involving thousands of price quotes from diverse geographic areas and sectors. Methodologies are transparent, with detailed documentation available.

Limitations: The CPI may not fully capture individual experiences due to regional cost-of-living differences or personal consumption patterns. Substitution bias (consumers shifting to cheaper goods) and quality adjustments (e.g., tech improvements) can skew perceptions of "real" inflation. Hedonic adjustments for quality changes can be subjective but are based on statistical models.

GDP Growth:

Strengths: GDP, reported by the BEA, is calculated using standardized methods (e.g., expenditure or income approaches) aligned with international guidelines (SNA 2008). Data comes from surveys, tax records, and industry reports, with revisions to improve accuracy as more data arrives.

Limitations: Revisions can be significant, especially for initial estimates, as seen in past discrepancies (e.g., Q1 2023 GDP revised from 1.1% to 2.0%). Non-market activities (e.g., household work) and environmental costs are excluded, which may understate or overstate economic "reality." Seasonal adjustments can also introduce noise.

Unemployment Rate:

Strengths: The BLS’s unemployment rate (U-3) comes from the Current Population Survey, a large, randomized sample of households. Definitions follow international standards (ILO). The process is systematic, with clear criteria for who counts as unemployed.

Limitations: The U-3 measure excludes discouraged workers, underemployed individuals, and those marginally attached to the labor force, which the broader U-6 measure captures. For example, in 2023, U-3 was ~3.6%, while U-6 was ~6.7%, showing a gap in "felt" unemployment. Survey response rates have also declined, potentially affecting representativeness.

General Considerations:

Data Integrity: These agencies operate with professional independence, adhering to statistical standards. Manipulation is unlikely due to oversight, peer review, and public scrutiny. However, methodological choices (e.g., weighting, seasonal adjustments) involve judgment calls that can influence outcomes.

Lag and Revisions: Initial releases are often based on incomplete data, leading to revisions. For instance, GDP estimates are revised multiple times over months or years. This can make real-time accuracy lower than final figures.

Scope and Interpretation: No single metric captures the full economy. CPI, GDP, and unemployment reflect specific aspects, not the lived experience of every individual. Structural changes (e.g., gig economy, automation) may not be fully reflected in traditional metrics.

Credibility Assessment: These figures are among the most reliable economic indicators available, grounded in robust, transparent methodologies. However, they are estimates, not perfect mirrors of reality. Assign them high credibility (80-90%) for broad trends, but cross-reference with alternative data (e.g., private indices like the Chapwood Index for inflation or ADP payroll data) and consider their limitations for specific contexts. Always check the latest methodologies on agency websites (e.g., bls.gov, bea.gov) for updates.

I said: Thanks!

It replied: You're welcome! Happy to help with any other questions.

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here my many questions to ChatGPT and Grok on bank regulations

#AI #ChatGPT #Grok: Could there be more money to spend than money to make and, if so, why and what happens?

I asked AI:

"Could there be more money to spend than money to make and, if so, why and what happens?" 

ChatGPT answered:

Yes, there can be more money to spend than money to make — especially in the short term — and this mismatch is often a warning sign of unsustainable economic conditions. Here's how and why this can happen, and what usually follows:

How can there be more money to spend than money to make?

1. Debt and Credit Expansion:

Households, firms, and governments can borrow and spend more than their current income (or production) allows.

This creates a temporary illusion of abundance — money circulating in excess of value being produced.

Examples:Credit cards allow consumers to buy more now.

2. Governments run budget deficits to fund spending.

Asset Bubbles / Unrealized Wealth:Rising asset prices (e.g. housing or stocks) may make people feel wealthier and lead them to spend more.

But this is not “money made” in real economic output — just a paper gain that may evaporate.

3. Monetary Expansion (Loose Central Bank Policy): 

Central banks may create money (e.g. quantitative easing) faster than the economy grows.

This adds to spending power, but not to production capacity.

4. Transfer Payments and Entitlements:

In aging or populist economies, large parts of the population may live off pensions, benefits, or subsidies — funded not by production but by taxes or borrowing.

More people spending, fewer making. What happens when this persists?

Inflation:

Too much money chasing too few goods leads to rising prices. Purchasing power erodes, especially for those on fixed incomes.

Asset Misprizing and Malinvestment:

Easy money distorts risk signals. Capital flows into unproductive or speculative areas (e.g. meme stocks, overpriced real estate).

Debt Crises or Defaults:

If future “making” can’t service today’s “spending,” debt becomes unpayable. Triggers crises (sovereign, banking, corporate).

Loss of Confidence in Currency or Institutions:

If people believe money isn’t backed by real output, they may rush to exchange it (capital flight, hoarding hard assets).

Recessions or Structural Adjustments:

Eventually, spending must realign with productive capacity. This can be painful: austerity, bankruptcies, inflation-fighting recessions.

Bottom Line

When there is more money to spend than to make, it means we’re spending claims on future output that may not materialize. It’s living beyond the economy’s means — and history shows this can’t last indefinitely without consequences.

Let me know if you'd like a historical example (e.g. Weimar Germany, 2008 crisis, or modern fiscal debates).

I said:

For the time being, thanks!

ChatGPT said:

You're very welcome — anytime!

Grok answered:

Yes, it’s possible for the desire or ability to spend money to exceed the money available to be earned or created, but this depends on the context—individual, societal, or economic system-wide. Here’s a breakdown of why this can happen, and what follows:

Why It Happens

Individual Level: Overspending vs. Income

People can spend more than they earn by borrowing (credit cards, loans), dipping into savings, or receiving transfers (gifts, welfare). This is common when desires or needs (e.g., for consumption, housing, or emergencies) outstrip income.

Example: Someone earns $50,000/year but spends $60,000 by taking on debt.

Societal/Economic Level: Aggregate Demand Exceeding Supply

In an economy, if everyone wants to spend more than the total output (goods/services produced), it can signal demand outpacing supply. 

This can happen due to:

Credit Expansion: Banks lend more, increasing purchasing power beyond current income or production.

Government Deficit Spending: Governments borrow or print money to fund spending beyond tax revenue.

Consumer Behavior: Cultural or social pressures drive consumption beyond means (e.g., keeping up with trends).

Money creation (via central banks or fractional reserve banking) can temporarily allow spending to exceed production, but this isn’t infinite.

Monetary System: Money Creation Limits

Money isn’t just “made” by earning; it’s created by central banks or through lending. If spending demand exceeds money creation, it’s often because:

Central banks limit money supply to control inflation.

Borrowing capacity hits limits (e.g., debt ceilings, creditworthiness).

If spending outpaces money creation or real economic output, it creates pressure on prices or debt levels.

What Happens

Individual Consequences

Debt Accumulation: Borrowing to spend more than you earn leads to debt, which must be repaid with interest. If unsustainable, it can result in bankruptcy or financial distress.

Reduced Savings: Spending savings faster than earning depletes wealth, leaving less for future needs.

Example: A person maxes out credit cards, faces high interest rates, and struggles to repay, damaging their credit.

Economic Consequences

Inflation: If spending exceeds the economy’s capacity to produce goods/services, prices rise as too much money chases too few goods. Central banks may raise interest rates to cool demand.

Debt Crises: Excessive borrowing (by individuals, firms, or governments) can lead to defaults or financial crises if repayment becomes unsustainable.

Economic Imbalances: Overspending can lead to trade deficits (importing more than exporting) or asset bubbles (e.g., housing or stock markets), which may collapse.

Example: The 2008 financial crisis stemmed partly from excessive borrowing and spending on housing beyond sustainable income levels.

Systemic Limits

If spending consistently outpaces money creation or production, the system hits constraints:

Central Bank Response: Tighter monetary policy (higher rates, less money printing) to curb inflation, which can slow economic growth or trigger recessions.

Resource Constraints: Real-world limits (labor, materials) prevent infinite production, capping how much “money to make” can grow.

Currency Devaluation: If money is printed to match spending without regard for output, it can lead to hyperinflation, eroding purchasing power (e.g., Weimar Germany, Zimbabwe).

Key Takeaway

Spending can exceed earning or money creation temporarily through borrowing or money printing, but this isn’t sustainable long-term. At the individual level, it leads to debt or insolvency; at the economic level, it risks inflation, crises, or recessions. 

The balance between spending and earning is maintained by real-world limits on production and prudent monetary policy.

If you want a deeper dive into a specific aspect (e.g., historical examples, monetary theory, or personal finance implications), let me know!

I said:

For the time being, thanks!

Grok said:

You're welcome! If you want to dig deeper later, just let me know.

Note: The answers are copied exactly from those given to me by ChatGPT and Grok 

Here my many other questions to ChatGPT and Grok on bank regulations

#AI #OpenAI #ChatGPT Can a government turn into just a big business?

 I asked ChatGPT:

At what point could one reasonably argue that a government, instead of just governing, has turned into a big business financed by revenues provided by current or future taxpayers or by inflation? Never?

ChatGPT answered:

One could argue that a government begins to resemble a big business when its primary activities and motivations shift from serving the public good to generating revenue, expanding its financial base, and prioritizing economic interests over public welfare. Several indicators might suggest such a shift:

1.     Revenue-Driven Policies: If government policies are increasingly focused on generating revenue—through taxes, fees, or other means—without clear public benefits, it might suggest a business-like approach.

2.     Public Services as Profit Centers: When public services or goods are managed in a way that prioritizes profitability over accessibility and equity, it can indicate a shift toward a business mindset.

3.     Excessive Privatization: When the government outsources or privatizes essential public services, treating them as commodities rather than rights, it could be seen as prioritizing financial efficiency over public accountability.

4.     Debt-Financed Spending: A government heavily reliant on borrowing, with the expectation that future taxpayers will cover the debt, might resemble a business that prioritizes expansion at the cost of future financial stability.

5.     Inflationary Policies: When a government uses inflationary policies to finance its operations, effectively reducing the value of currency and imposing a hidden tax on citizens, it might be seen as prioritizing its financial needs over economic stability.

6.     Political Capture by Economic Interests: If the government is heavily influenced by corporate or financial interests, leading to policies that favor businesses over citizens, it might suggest that the government is operating more like a business entity.

However, it's important to note that governments inherently have economic functions—they collect taxes, spend on public goods, manage debt, and influence the economy through fiscal and monetary policies. The key difference lies in the government's primary purpose: to serve the public good. When this purpose is overshadowed by revenue generation and economic growth at the expense of social welfare, the argument that the government is functioning like a big business becomes more tenable.

In conclusion, the argument could be reasonably made when these patterns become prominent, though the specific threshold would depend on the context and the balance between public service and economic activity.

Thanks!

"You're welcome! If you have any more questions or need further clarification on anything, feel free to ask."

Note: The answers are copied exactly from those given to me by OpenAI - ChatGPT.

ChatGPT - OpenAI: Getting to know you!

#AI OpenAI ChatGPT: Dialoging about the validity and transparency of reported inflation numbers #CPI

I asked ChatGPT:

The Consumer Price Index, CPI, is calculated based on actual consumptions. Should it not consider the goods and services consumers no longer afford to buy as their prices have gone up too much for diminished budgets?

ChatGPT answered:

"The Consumer Price Index (CPI) is a measure that examines the average change in prices paid by consumers for goods and services over time. While it reflects the cost of a basket of goods and services typically consumed by households, it does have limitations, and your concern about affordability is valid.

The CPI is designed to capture the average price changes for a fixed basket of goods and services, which is meant to represent the consumption pattern of a typical urban consumer. The items in this basket are assigned weights based on their relative importance in the average consumer's spending. The index is calculated based on the prices of these items, and it is used to gauge inflation or deflation.

However, the CPI has its critics, and one common criticism is that it may not fully account for changes in consumer behavior when faced with rising prices. If certain goods or services become too expensive for consumers and they shift their purchasing habits, the CPI may not immediately reflect this.

Inflation can impact consumers' purchasing power, and if prices rise significantly for essential goods and services, people may adjust their spending habits by either cutting back on those items, finding substitutes, or simply forgoing them. This behavioral change isn't always fully captured by the traditional CPI.

Some economists argue that an alternative measure, such as a "cost-of-living index," could provide a more accurate reflection of changes in consumers' well-being, accounting for adjustments in spending patterns in response to price changes. This index might consider not just the prices of items in the fixed basket but also changes in the basket itself as consumers adapt to economic conditions.

In practice, policymakers often use a variety of inflation measures and economic indicators to make informed decisions about monetary and fiscal policies. The CPI, while imperfect, remains a widely used and important tool for assessing inflation trends and making economic policy decisions."

I asked ChatGPT:

If you had access to real time data provided by a great number of outlets and other sources, would you be able to provide reasonable inflation figures estimates without us having to incur in current time lags?

ChatGPT answered:

"While I don't have the ability to access real-time data, hypothetically, if someone had access to a vast amount of real-time data from various sources, it could potentially allow for more accurate and timely estimates of inflation. Traditional measures of inflation, such as the Consumer Price Index (CPI), often have time lags because they rely on data collection and processing.

Having real-time data from a wide range of outlets and sources could help capture changes in prices and consumption patterns more quickly. However, there are challenges associated with using real-time data for inflation estimates:

1. Data Quality: The accuracy and reliability of real-time data may vary across different sources. Ensuring the quality of the data and addressing potential biases would be crucial.

2. Consistency: Different sources may use different methodologies and definitions in their data collection, making it challenging to create a consistent and standardized measure of inflation.

3. Data Processing and Integration: Handling and integrating a vast amount of real-time data from diverse sources would require sophisticated data processing and analytics tools to derive meaningful insights.

4. Representativeness: Ensuring that the data reflects a representative sample of the population and covers a broad spectrum of goods and services would be essential for an accurate inflation estimate.

5. Privacy and Security: Accessing and aggregating real-time data from various sources raises privacy and security concerns. Protecting individuals' sensitive information while extracting relevant economic insights is crucial.

It's worth noting that central banks and statistical agencies continuously explore ways to improve the timeliness and accuracy of inflation measures. Some efforts involve incorporating new data sources and advanced analytics techniques. However, transitioning away from established measures like the CPI would require careful consideration and validation to maintain the reliability and comparability of the inflation data over time." 

I asked ChatGPT:

You mention the importance of maintaining the comparability of the inflation data over time. Over e.g., the last fifty years, how comparable is the inflation data reported?

ChatGPT answered:

"Over the last fifty years, the comparability of inflation data has generally been maintained, but there have been changes and adjustments to the methodologies used in calculating inflation measures. Understanding these changes is crucial for accurately interpreting long-term trends in inflation.

Here are some factors that can affect the comparability of inflation data over time:

1. Methodology Changes: Statistical agencies periodically review and update their methodologies for calculating inflation. These changes can include adjustments to the basket of goods and services, changes in weighting, and improvements in data collection methods. Such adjustments aim to better reflect changes in consumer behavior and market conditions.

2. Substitution and Quality Adjustments: Over time, the composition of the goods and services consumed by households can change. If certain products become obsolete or are replaced by newer alternatives, statistical agencies may adjust the basket to reflect these substitutions. Additionally, adjustments for changes in the quality of goods and services are made to ensure that inflation measures account for improvements or deteriorations in product quality.

3. Basket Updates: The goods and services included in the inflation basket are periodically updated to reflect current consumption patterns. This ensures that the basket remains representative of what households are purchasing. The frequency of these updates varies across countries.

4. Coverage Changes: Changes in the scope of the inflation measure, such as including or excluding certain items, can impact the comparability of data over time. For example, some measures may exclude volatile items like energy and food, while others include them.

5. Base Year Revisions: Inflation indices often have a base year against which all other years are compared. Periodically, statistical agencies update the base year to better reflect current consumption patterns and price levels. This can impact the reported inflation rates for past years.

Despite these challenges, statistical agencies strive to maintain the comparability of inflation data over time. Adjustments and improvements are typically made with the goal of enhancing the accuracy and relevance of the inflation measure to better capture economic realities and changes in consumer behavior. Users of inflation data should be aware of these methodological changes when analyzing long-term trends and make appropriate adjustments for meaningful comparisons."

I asked ChatGPT:

Since many, rightfully or not, suspect political and other sort of influences managing somewhat the inflation figures reported, could the inflation calculated by you gain more credibility?

ChatGPT answered:

"The credibility of inflation figures is a critical aspect in economic analysis and policy-making. While using automated systems or artificial intelligence models, such as mine, could offer certain advantages, it's important to note that credibility depends on various factors beyond the calculation method. Here are some considerations:

1. Transparency: The credibility of inflation figures relies heavily on the transparency of the data sources, methodologies, and calculations. If the process of data collection and computation is not transparent, it can lead to suspicions of manipulation or bias, regardless of the technology used.

2. Independence of Data Sources: Credibility is often associated with the independence of the institutions collecting and reporting the data. If there is perceived political or external influence on the data collection process, it could undermine confidence in the reported figures.

3. Validation and Benchmarking: An important aspect of credibility is the ability to validate and benchmark the results. Using historical data, comparing results with other reputable indices, and subjecting the methodology to scrutiny can help establish the accuracy and reliability of the inflation figures.

4. Accounting for Changes in Consumer Behavior: The credibility of inflation figures also depends on the model's ability to adapt to changes in consumer behavior. If the model can quickly and accurately incorporate shifts in consumption patterns, it may provide more relevant inflation estimates.

5. Data Quality: The credibility of inflation figures is only as good as the quality of the data used in the calculations. If the data sources are unreliable or subject to manipulation, it could affect the credibility of the results.

6. Ethical Considerations: The ethical use of data and adherence to privacy standards are important for maintaining credibility. If there are concerns about data privacy or misuse, it could erode confidence in the inflation figures.

While using advanced technologies like artificial intelligence may offer certain advantages, it doesn't inherently solve the issues related to credibility. Establishing trust in economic indicators involves a combination of rigorous methodologies, transparent processes, and the independence and integrity of the institutions responsible for collecting and reporting the data.

It's important for any inflation calculation, whether traditional or technologically advanced, to undergo scrutiny, validation, and be subject to independent reviews to ensure credibility and maintain the trust of users and stakeholders." 

Thanks!

You're welcome! If you have any more questions or if there's anything else I can help you with, feel free to ask. Happy to assist!

Note: The answers are copied exactly from those given to me by OpenAI - ChatGPT.

ChatGPT - OpenAI: Getting to know you!

My comment: I have been asking/opining on this issue for a long time.

Ideas on how to start discussions and implementation of a Universal Basic Income, or Societal Dividend

We must all be aware that the Redistribution Profiteers will be out on force trying to confuse the discussions on Universal Basic Income. 

Therefore I believe some very few principles needs to be established and firmly held on to.

First that we are always talking about a “basic” universal income that in no way should reduce the incentive of people to try earn some additional income. In essence it could initially be argued as a complement to the gig economy.

The UBI should start to be tested in low amounts that are slowly moved upward in line with the experiences.

It should be clear from the very start that all UBI needs to be funded with real money… no funny inflationary money. Initially it should be funded exclusively with taxes already collected; although special taxes like on pollution could also be useful to align UBI with other important objectives.

From the very beginning we need to identify who could provide the payment services in the cheapest way possible. 

And then of course it needs to be clear that UBI is NOT a government handout. It is a societal dividend decreed by all the shareholders, all the citizens.

http://perkurowski.blogspot.fr/2016/04/the-wealthy-and-poor-should-all-be.html

PS. Since corporate taxes only dilute citizen's representation, all such revenues should help to fund a Universal Basic Income.

In God We Trust to see that…

The dollars, for which value the US is responsible, are printed with the abbreviated prayer of “In God We Trust”.

A more complete version would be: “In God We Trust to see that the politicians and the bureaucrats do not print and circulate more dollars that what the economy could back or, otherwise, that the American taxpayer finds it in him the capacity and the willingness to pay taxes so as to make up any shortfalls.”

The keeping the big lean tax

No matter how optimistic we can be about that all the assets the US government acquires during the current financial crisis will be fairly priced, there is no doubt that the whole crisis is going to be extremely expensive for the public sector. The costs will have to be paid by taxes or, in its absence, by inflation.

In this respect society has a vested interest in finding new equitable ways of how to pay for it, and that these are aligned with the new global realities and interfere as little as possible with the recovery of the economy. The following is a second proposal that follows up on “An income tax on profits from intellectual-property monopolies.”

The keeping the big lean tax: Tax progressiveness based on market share.

There is nothing wrong with a corporation striving to obtain a large market share. Indeed since it is the result of having a better motivated and better organized commitment to exploit comparative advantages in order to satisfy the market with better products or services at better prices, the fight for more market share benefits us all.

That said, while the market share grows, for all the good reasons, growing market powers might tempt the corporation to use competitive tools of dubious nature which could diminish the marginal returns for the society, to such an extent that they could perhaps even turning into costs that erode all previously obtained benefits.

I therefore propose we introduce tax progressiveness based on market shares. For instance if a corporation has below 10 percent of market share a 30% income tax rate applies but, if it has a 100 percent market share then it should be taxed at for instance a 50% rate, with a linear function for the in-betweens. Alternatively, if we want to avoid making the “after-tax” subsidies of inefficiencies higher it could be a progressive sales tax.

Of course the market share tax is not be applied to those corporations who have the financial returns on their activities otherwise regulated, such as the electricity distribution companies.

Of course in banking where the bigger-you-are-the-more- it-hurts-when-you-fall-on-us, a tax on size should be immediately applied, before we run out of the small local banks that do not need the credit rating agencies to know us.

PS. In the case of some behemoths, like Facebook, I prefer they help fund an unconditional Universal Basic Income with 40-50% of the ad revenues they obtain exploiting our own personal data.

Is inflation really measuring inflation?

Sir, over the years, the Central Banks have grown a lot more independent, which is good, as long as it does not diminish their accountability and allow them to focus blindly on goals of their own choosing, monitor the results, and live forever after happy in a big club of mutual admirers.

Inflation is the number one of those monsters that central bankers proudly show off as having been tamed but sometimes we must have our lingering doubts about whether it really is so. In an economy where whatever few savings we can set aside buy fewer and fewer assets like houses, it is sometimes hard to accept that there is no inflation, no matter how much central bankers tells us so. 

As inflation is just the result of the formula, or the basket, or the sampling techniques that we use for measuring it and is therefore a truly incestuous economic concept, there might be very good reasons for revisiting the whole issue of what, how, and why we measure it, even if this means some new hard work load for our overburdened central bankers. With the world going through major changes, inflation, as we think we know it, might very well have degenerated into something quite different from what we initially had in mind when we first thought about how to measure it. 

Meanwhile just to put some check on their egos, every time I see a central banker, I urge him to take a shopping trip to the closest IKEA so as to see who really should get the credit for controlling inflation as we currently know it.

Extracted from my Noise and Voice 2006

And on the same theme in Financial Times May 2006

And here, warning the Financial Times in August 2020, that the inflation had already returned. 

November 2021: To help moor (my) inflationary expectations, get rid of what facilitates it.

PS. The Consumer Price Index is calculated based on actual consumptions. But the real inflation that consumers register, is that of the products and services they no longer can afford to buy as prices have gone up too much for their diminished budgets. What would be the inflation rate on the consumer basket of e.g., two years ago?

PS. #AI #OpenAI #ChatGPT: “If you had access to real time data provided by a great number of outlets and other sources, would you be able to provide reasonable inflation figures estimates without us having to incur in current time lags?”

 

The truth, in theory and in practice, is that everybody's inflation, might be nobody's inflation.

Hardships

Hardships

HOW MUCH easier it is to give recommendations to companies about what to do during an economic crisis, than, as I have been asked, to people of flesh, blood and unseasoned hearts!

What's more, I think it would even be disrespectful to try to give her information on how to find a solution or how to make more money, like an ingenious housewife. Everyone knows what is within their reach and I can only wish them the best. Much less would I dare to give any recommendation to a desperate father, who does not have the resources for the medicines his sick son needs, other than praying to God, if he is a believer.

What I would dare to talk about is how to face the emotional pressure, which naturally arises in a crisis like the current one. Ah...Kurowski became a psychologist! They will say... Noooo, what's up! My recommendations have no other foundation than my intuition and if someone has the audacity to publish them, it's just my luck.

Perhaps, because I am a financial consultant, I get the image of the overwhelmed debtor, who tosses and turns in bed unable to sleep, until he opens the window and yells at his neighbor, the banker, "Friend, I can't pay you!" thus shedding an immense weight after having screwed his friend over. The above shows that it is not advisable to swallow our anxieties, but that we should share them openly with our wife, children and friends and not just with our pillows.

Perhaps, because you are an economist, you understand that individual shame should not cause any shame, since unemployment of the magnitude that exists in Venezuela suggests a state of war and, in war, no one has to feel ashamed that a crazy missile Just reach your house.

Perhaps, because you are a father, you see the urgent need to seek to learn from difficulties, that we must learn to enjoy the little things in life as much as possible, which are also free.

However, as a Venezuelan, overcome by deep anger at the ridiculous and unjustified situation in which we find ourselves, I am sure that the solution is in our hands and not in that of imported healers. Colleagues, let's stop looking for an escape door. That's depressing! Let's dedicate ourselves to finding the gateway to a better Venezuela, through which we can all pass.

P.S. To my compatriots who are not fighting, I remind them of the superhuman challenge of being human and avoiding ostentation.

https://radicaldelmedio.blogspot.com/2002/07/pelando.html

Translated by Google

A necessary change of optics

The fact that the Venezuelan currency was named the Bolívar and the misguided sense of that a devaluation of the same would be disrespectful to the memory of our Liberator, supported the refusal to devalue the currency during 1982 even in the face of economic reality. As a consequence, the devaluation in February 1983 was much more drastic than necessary and hastened the country’s dive over the precipice of economic chaos. We still have not managed to stop this dive.

Our sense of direction was lost basically due to inflation. Today, the private sector must follow strict accounting rules which call for re-expression of accounts. The Income Tax Law has also introduced the concept of adjustment for inflation as well as the application of tax units (unidades tributarias). In spite of this, we note a curious lack of activity aimed at requesting that the public sector establish more links with reality.

When we analyze the problems inherent in the Venezuelan economy, either we are blind, or we don’t want to see, or someone simply doesn’t want us to see. I will detail some of our economic variables in United States Dollar terms in order to allow our readers to form their own criteria as to which alternative applies. We have expressed dollar terms in real 1982 values.

1) In December 1982 the total of all deposits in the Venezuelan financial system (normally known as M2) were the equivalent of US$ 31.3 billion. In July 1997, this figure had dropped to US$ 7.8 billion, that is to say, only 25% of the 1982 total. Even if we consider possible changes in the multiplier, this indicates and incredible drop in the real economic activity in the country.

Not a day goes by without some “expert” in economics expressing preoccupation about excess liquidity. This attitude could be compared to when a physician begins to worry about left-overs when the patient is in a serious state of inanition. The real problem that has traumatized the country is not the excess liquidity (food) but the lack of economic growth (appetite).

2) In 1982, Venezuela’s international reserves had reached US$ 10 billion and were equivalent to 32% of M2 as described above. In July 1997, these reserves totaled US$ 10.1 billion (in 1982 terms) and represented 130% of M2.

It is important to note that in 1982, the country did not have sufficient dollars to satisfy the demand should all deposit holders in the nation wish to purchase dollars. As it were, the Bolívar had to be devalued in 1983. In July 1997, the situation was just the opposite; all the deposit holders in the country put together do not have enough Bolívares to purchase the dollars held by the Central Bank.

If we apply a broad analytical brush to the before mentioned figures and note that the international reserves belong to the state while M2 belongs mostly to the private sector, it is evident that the latter has become much poorer in comparison to the former. When we see that in spite of these results there is still support for maintaining and even increasing tributary pressures, the reigning economic philosophy seems to have a lot in common with a Gulag-style Soviet purge.

3. In December 1982, the Venezuelan financial system had a credit portfolio totaling US$ 16 billion while in July 1997 this amount had shrunk to US$ 4 billion, again, in 1982 terms.

We have frequently heard and read that an increase in credit activity could put the country’s banking system in jeopardy. Since lending is the essence of banking by definition, and when we take into account the low volume of credit activity mentioned above, it can only mean the opposite. If lending doesn’t increase, banking slowly dies.

If we wish to recuperate an economic orientation that makes sense for the country, it is imperative that we begin to express public finance figures in terms of real figures. By this I don’t imply that we should use the US dollar as denomination to express our national accounts. I do propose, however, that we find an element that reflects reality so that we at least liberate Bolívar from having his name associated with creative or even fraudulent accounting.

Chaos in the accounting world

The way in which accounting information is raised, processed and presented is of unquestionable relevance as an important part of the commercial and economic development of the country. 

There is a direct relationship between the quality of this information (how it is presented and interpreted) and how the diverse economic agents will act in the interests of the Nation as a whole. 

A few years ago, the Venezuelan Institute of Certified Public Accountants published their Statement of Accounting Standards No. 10 in which it established “Norms for the inflationary adjustment of financial statements” better known as “reexpression”. 

The application of these regulations is obligatory as of the 31st of December 1995 and, in effect, calls for the elimination of the traditional financial information based on historical data.

The object of the following commentary is to call attention to the serious problems created by the application of these standards. 

In no way is the implied criticism motivated by a blind defense of traditional regulations and the presentation of economic information based on historical data. 

In the same vein, it is not an effort to establish responsibilities for the chaos caused by the application of the norms, which must evidently be amply shared.

The principal problem is that the immense majority of the players, may they be accountants, managers, directors, shareholders, investment advisors, credit analysts, politicians, lawyers, professors or members of the Securities and Exchange Commission and the Bank Superintendency, don’t have the slightest idea of what this is all about, and more significantly, of what the reexpressed financial statements mean. In essence, the blind leading the blind.

All financial statements are applied using “generally accepted principles”. This implies a certain level of awareness and understanding and if these do not exist, there is an evident contradiction and inherent falseness to this assertion. 

The most extreme example of this is evident in the public accountants, upon who the accountancy board has imposed an obligatory practice without previously insuring that they have previously acquired the necessary knowledge to apply the standards. 

The most frightening fact is, however, that those few who have managed to gain some understanding of the standards, are in effect those that most seriously criticize them. 

A minimum amount of caution would call for the simultaneous publication of both reexpressed and historical financial figures, since the latter, although not devoid of problems, still constitute the base upon which the country has developed its analytical capacity. Another problems is the lack of coordination between the accounting principles and other traditional legal norms. 

What implication does this have with regards to the Commercial Code (Código de Comercio)? On what basis will dividends be paid out? What financial statements must be presented to public registrars? 

The answer from the legal establishment for these questions is often “consult your auditors”. Auditors will in turn often say “those are matters to be settled by your shareholders and legal council”. In reality, all these questions should be directed at those who drafted this legislation and, in this sense, we should be asking the Finance Committee of Congress to initiate an investigation and come up with some answers, quickly.

In order to understand the possible implications, it is enough to state as an example that the new accounting principles often result in the reexpression of financial figures to such an extent that a firm posting losses is turned into a firm with positive results and vice-versa. By saying this, I am not implying that the reexpression in these cases is not based on real facts. 

However, due to the importance and delicate nature of the same, the process should occur under the hands-on supervision of qualified experts and all parties must understand how it works and what it means. 

As most often happens, however, the reexpression is executed through the use of costly computerized methods, “black boxes” that perform these intricate multiplications and divisions at pentium-level velocities, spitting out the final results, unfathomable to most mortals, and therefore basically useless as decision making tools. 

Perhaps we should be developing simpler alternatives for reexpression based on the saying “lo perfecto es enemigo de lo bueno” and that would allow the survival of accounting methods that don’t require massive computers, software or auditing Swat teams.

Where responsibilities lie if and when fraud is committed through the improper use of reexpression must be closely analyzed. Accountants have previously been limited to simply registering historical facts. 

Today, prodded by their own accountancy board to interpret figures, they have seen their own quotas of responsibility sky-rocket.

We urgently need to solve the inconsistencies and avoid the dangers of this Pandora’s Box. I realize these comments may seem exaggerated to some, but unfortunately they are true. All that is required to understand the possible implications for the country of this accounting chaos, is a bit of that elusive resource named intellectual honesty. For the benefit of all, let's apply it.