Since the process of adjustment began in the early 1980s, the officially reported CPI-U number has diverged ever further from the underlying figure calculated on the traditional methodology. Some of those who have researched the issues of hedonic adjustment, geometric weighting and substitution reckon that these methodologies now strip out at least six percentage points from inflation calculated on the traditional basis. On this basis, true inflation might be at least 9%, rather than the 3.4%reported in December.

If critics are right – and we are convinced that they are – then the implications are enormous, because inflation calculations reach into every aspect of economic life. The significance of distorted inflation reporting has impacts on:

• Americans' cost of living, and the purchasing power of the dollar over time.
• Wage rates and settlements.
• Benefit levels, and the cost of social payments to government.
• Economic growth.
• Real interest rates.

According to official figures, aggregate inflation between 2001 and 2011 was 27%, meaning that the dollar lost 21% of its purchasing power over that period. But, if we accept that real inflation may have exceeded the official number by 6% in each of those years, the loss of dollar purchasing power was about 55% between 2001 and 2011. Between the third quarters of 2001 and 2011, average weekly wages increased by 31%, fine if the dollar lost 21% of its purchasing power over that period but evidence of very severe impoverishment if the dollar in 2011 was worth only 45% of its 2001value. In short, if millions of Americans feel poorer now than they did ten years ago, the probable explanation for this is that they are.

Eoin Treacy's view The fudging of government unemployment, inflation and growth statistics has been a sore point among those seeking to preserve their standard of living in real terms for quite some time. Academic arguments centring on the value of a free service, or how much rent someone with no mortgage would theoretically pay themselves, help to conveniently smooth stubbornly volatile price measures but do little to reflect the reality of everyday life.

Failure to honestly measure economic output, growth and participation represent one set of problems. Failure to address glaring holes in the financial regulatory framework is quite another. MF Global's recent failure and its loss of, supposedly segregated, client moneys is the latest in a long line of examples of corporate malfeasance where nothing substantive has been done to address the underlying problems. Simply put, banks need to be able to fail without jeopardising the entire global economy. Clients need to be reassured that their money is safe. This is as true of Europe as it is of the USA. The failure to regulate and supervise securitization, CDS, high frequency traders, bank leverage and lending practices represents a failure of governance which has still to be corrected.

US companies are some of the primary beneficiaries of globalisation. Corporations are becoming increasingly global and less tied to their domestic markets. We have dubbed such companies Autonomies to reflect their success. Having been one of the main instigators of globalisation, the USA now faces an interesting question of patronage. China in particular favours its domestic industry with what some might term unfair advantage and simultaneously creates jobs. US diplomacy helps support US businesses abroad but high taxes and increased regulatory and environmental burdens at home act as a disincentive to invest in US job creation. Manufacturing is beginning to regain a foothold in the USA due to lower labour costs and a newfound respect for flexibility among unionised workers, but substantially more is needed if the hollowing out of the US economy is to be reversed. (Also see David's piece in Comment of the Day on January 3rd).

The USA and much of Europe have been fuelling growth with debt for an uncomfortably long time. Despite the inherent contradiction, the solution so far has been to fix a debt problem with more debt. This is unsustainable but investors have yet to signal impatience with overarching debt burdens and the associated denigration of fiat currencies. Real yields across a whole host of assets are negative but demand for government paper remains robust. 10-year TIPS' real yield is a relevant example. Gold's 10-year uptrend is perhaps the most potent example of hard money's outperformance relative to weak paper currency.

The US economy is not beyond repair. However, tough decisions need to be made. Unfunded liabilities will be reformed one way or another because at current levels they simply cannot be paid. The financial sector needs to be monitored closely. A benign environment needs to be created to foster job creation and capital investment. A coordinated energy policy must be adopted that dispenses with ideology, embraces practicality and harnesses the USA's abundant resources. None of these is impossible but strong leadership is a prerequisite.