Posted on 09/26/2006 5:09:16 PM PDT by EarthSolvent
SHADOW STATISTICS by Chris Mayer
“Listen,” I interrupted, “what nationality are you?” “I’m English,” she replied. “That is, I was born in Poland, but my father is Irish.” “That makes you English?” “Yes,” she said…
- Henry Miller, Tropic of Cancer
Ben Bernanke, Fed chairman, recently delivered an upbeat view of the U.S. economy. It was cheerful, optimistic…and delusional.
The official government statistics hide many warts on the face of the U.S economy. Like makeup dabbed on an aging film star, they are an attempt to cover the wrinkles and present a veneer of youth. To most people, this is no revelation. Like plastic surgery and tummy tucks, it is what stars do to keep up appearances.
However, few know the extent of the deceit. What if you learned that inflation were closer to 7% than to the official 3%? What if unemployment were closer to 12%, rather than the official 5%? What if the economy were actually contracting, as opposed to growing?
What follows is a partial peek at the economy - sans makeup. And, more importantly, what it means for you and your hard-earned dough.
It was the genius of writer George Orwell that he chose to build his dystopia on the foundations of language and information - how it is used to deceive, manipulate and control. His chilling novel 1984 stands out precisely because it is only a distortion of things that are happening now and that have always happened. Orwell’s dystopia is a mirror in a funhouse, as you see enough of your own world in this disturbing reflection.
Thankfully, there are still some people doing the important work of getting at the truth behind the official statistics - piercing the veil of Newspeak, sweeping away the cobwebs of sham. John Williams is an economist dedicated to doing just that. His Shadow Government Statistics reveals the extensive rot under the floorboards of the U.S. economy.
Let’s take the official inflation rate, tracked using the consumer price index, or CPI. The idea behind the CPI is to have a fixed basket of goods and track how the prices of these things change from year to year. It only gained prominence after World War II, as a way to adjust autoworkers’ labor contracts, a practice that soon spread.
Over time, its importance grew and more people looked to it as a gauge of general price inflation - and, hence, to get a feel for the health of the economy.
The thing is, the way the CPI is calculated changed dramatically over the years. Politicians have figured out that these statistics are useful in winning elections. Ergo, nearly every administration has altered the calculation. And always, the changes made the CPI lower. Every effort to change the CPI, by design, aims to make the economy look “better” than it looked before the changes.
The accumulation of these changes creates a huge difference over time. It’s like making a series of small changes to a ship’s course in the midst of a long voyage. Soon, you wind up way off course, miles and miles from where you think you are. The chart below is from William’s Web page. It shows the extent of the difference, which is just massive. The rate of inflation using only the pre-Clinton era CPI is closer to 7%!
The “Experimental C-CPI-U” is another innovation, introduced by the Bush administration to lower the CPI yet again, once again to paint a kinder portrait of the old hag known as the U.S. economy.
But it’s about more than just making the economy look better. For example, since increases in Social Security payments link to the CPI, a lower CPI also saves the government money. According to Williams, if you used the CPI when Jimmy Carter was president, you’d get Social Security checks 70% higher than today’s levels. Yes, 70% higher.
The government also duped all those people who thought it was such a great idea to buy TIPS (Treasury inflation-protected securities). Changes in the CPI determine the interest paid on these bonds. The higher the CPI, the more interest paid to bondholders. Some people loved the idea, figuring here was a bond that would keep pace with inflation. Given the government manipulates the CPI, you can be sure the interest rate paid will not keep pace with inflation - nor has it ever.
The manipulation of the CPI explains the great disconnect between what the man in the street feels when he pays his bills and what the confident, well-dressed Fed chiefs and politicians try to tell him. The cost of living is rising a lot more than they want you to believe. At a 7% annual rate of inflation, the cost of living would double in about 10 years. Looked at differently, the purchasing power of your dollar will fall in half.
What about unemployment? The government, since the time of the Kennedy administration, has been changing the definition of “unemployed.” Again, many small changes over time lead to dramatic end results. According to Williams, if you back out the changes, you get an unemployment number closer to 12%!
Let’s look at the federal deficit - basically, the amount of money the government is losing every year. The official deficit for 2005 was $319 billion. However, this excludes unfunded Social Security and Medicare obligations. Throw them into the mix and calculate the deficit the way a business does in its financial statements - and you get an annual deficit around $3.5 trillion.
That’s more than 10 times the so-called “official” deficit. By Williams’ calculations, you could raise the tax rate to 100% - dump everyone’s salaries into the U.S. Treasury - and still have a deficit.
Years of such deficits have created a mountain of obligations for the U.S. government. As Williams says, “The fiscal 2005 statement shows that total federal obligations at the end of September were $51 trillion; over four times the level of GDP.” These debts are unsustainable. The bills must go unpaid. If the U.S. government were a private corporation, its bankruptcy would be beyond dispute.
This is why Social Security and Medicare are not going to exist in the not-too-distant future. As Williams says, “There is no way the government can pay the Social Security or Medicare it has committed to.”
Williams believes GDP is contracting now. The government reported only a 1.1% increase in the fourth quarter. Even in an election year, and despite the government’s best efforts to paint a pretty face, all it could muster was a measly 1.1%. More likely, the economy actually contracted 2% in the fourth quarter. This means we are in a recession NOW.
This is not conspiracy-theory stuff. As Williams points out, it’s all disclosed in the footnotes in the government’s reports. All he is doing is backing out many of the changes to more realistically compare these numbers with the numbers of the past.
The great H.L. Mencken, a scathing attack dog of idiocy in all its forms, wrote about “damning politicians up hill and down dale for many years as rogues and vagabonds, frauds and scoundrels.” We need more Menckens. In the meantime, we’ll have to make do with Williams and his cogent analysis of government skulduggery.
Oddly enough, these insights do not change our approach here in the pages of Capital & Crisis. In fact, Williams’ work reinforces several things we’ve already covered in past letters. To wit:
Yields on real estate investment trusts (REITs) and utilities - to say nothing about the bond market - appear even more pathetic against an inflation rate of 7%. The yield for risks taken is simply not adequate. If the slumbering bond market awoke to the reality of a 7% inflation rate, there would be a sell-off the likes of which this country has never seen. Interest rates would bolt upward like a frightened cat.
And the U.S. dollar is a doomed currency over the long haul. Bernanke, the self-professed student of the Great Depression, accepts the mainstream view that the Fed’s great mistake then was not to flood the system with dollars. He won’t make that “mistake” again. Expect the printing presses to run day and night at full capacity when the trouble starts.
Trying to pin down the economy in precise numbers is futile anyway. It’s too big, too complex. All macro statistics are severely flawed. This is why I seldom write about them. Investing using macro statistics is like trying to find the nearest post office with a globe. They are so vague as to be useless.
The basic idea I want to leave you with is this: The economy is far weaker than generally portrayed. Most investors ignore the rat’s nest of risks and invest indiscriminately in stocks - without proper due diligence. As investors, we need to stick to our fundamentals more carefully than ever.
Regards,
Chris Mayer for The Daily Reckoning
One of these days the News is going to kill me:
I’m in my 60’s and have lived a decadent lifestyle (love stuff full of Trans Fats) all my life and am in the greatest category for a heart attack
How is the News going to kill me? … I will open the paper, view the News on the internet or hear on my radio something positive about the economy, the war in Iraq or, even worse, something good about GWB and … BANG … the “big” one.
Sheeeeeezzzz
Hey you've got to give the peanut farmer some credit -- by any economic model it is essentially impossible to have rising unemployment, rising inflation, rising interest rates and negative economic growth all occur at the same time.
Those of us old enough use the Jimmy Carter yardstick to determine the inflation threat.
Inflation ranks just below being eaten alive by gophers on my list of worries.
Modern economists often miss the real strength of our economy because they lack a measurement of what I call the relationship between "real money" and "imaginary money".
Real money is tangible. It is based on some good or service and there is a finite supply of it. The vast majority of money, far more than real money, is imaginary money. In effect, it is money created as a by-product of using real money.
For example, let's say that you are paid a dollar. Instantly, you now owe the government, say, 20% of that dollar in taxes. Instead, you spend that dollar, and the next person who gets it also instantly owes the government 20% in taxes. By the time that bill has changed hands five times, 100% of that bill is owed in taxes.
But it isn't. What has happened is that the real dollar has created an imaginary dollar, that only exists electronically. It only comes due on April 15. Until then, there is the equivalent of two dollars floating around in the economy.
Another example goes back to the S&L crisis. Say you owned a building worth $1M. But your friend at the S&L gives you a $10M loan based on that $1M collateral. Instantly, he has created $9M in imaginary money. But money you can spend as if it was real money.
This explains why economists who predict recession and depression are seldom right. They may not be taking into account 90% of the money out there, the imaginary money. In fact, the more imaginary money a society creates, the stronger its economy, because only a vibrant economy creates a lot of imaginary money.
That is, lots of transactions is not indicative of recession or depression. It means that people are still making and spending money.
Like a week-old dead, 1200 lb Sturgeon.
Actually I think you got it right the first time.
It was my subconscious at work -- it's so much smarter than my conscious mind.
Nice, good for you.
LOL
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