[Mase]

How much of the economy is now actually sustained by too much debt, masking off the adverse fundamentals?

Thanks for the all the colorful charts. Like every economic Eeyore, you live in a very gloomy place.

Since quitting Prozac you must have missed the fact that the economy is rapidly expanding, inflation is low, unemployment is low, interest rates are low and wages are high. In spite of all this good news you're trying to sell the idea that everything is bad (or going to be that way soon). Is it really all just a mirage?

Thankfully, your protectionist/isolationist message has little appeal outside the usual third-party types. Must be pretty frustrating to know so much yet receive so little affirmation. Pat Buchanan feels your pain.

From Forbes:
The idea that Americans are overspenders and undersavers and addicted to debt is all myth. Household balance sheets have never been more robust. Last year Americans increased their financial assets--checking accounts, money market funds, mutual funds, IRAs, etc.--by an impressive $590 billion. Credit card debt in-creased a paltry 4%. Take our financial household assets (not counting houses and other tangible assets such as automobiles and jewelry) and subtract liabilities such as mortgages and credit card debt, and the American consumers' total financial net worth comes to an eye-popping $26.1 trillion. Consumers today have more than $4 trillion in savings accounts, more than $1 trillion in checking accounts and directly hold another $10 trillion in equities and mutual funds. Their life insurance and pension assets are in excess of $10 trillion. To put it in perspective, Americans' total debts, including mortgages, are dwarfed by their liquid assets.

Our per capita liquidity exceeds that of Japan, a nation noted for its high savings rate. As Bear Stearns' brilliant economist David Malpass notes, "The U.S. household sector is the world's biggest net creditor."

Why the bum rap for America's savings rate? Because of the crazy way our government computes that number. Washington leaves out of the household income number such items as realized capital gains and payments from pension plans and 401(k)s. As for consumption, long-lived assets such as autos and furniture are treated as if they were disposable pens. As Malpass puts it, "Consumption includes education. The absurd result: Spending less on education would raise the ‘personal savings rate,' even though it would reduce future U.S. growth."

This is why, in reality, consumers added $590 billion to their savings last year, while the government reported total consumer savings to be a paltry $100 billion.

Corporate America is also in excellent financial shape, with cash and liquid assets exceeding short-term debt by nearly$2 trillion.
Forbes

In 1959, 62% of Americans owned homes or about 110 million people. Today, 70% of Americans own homes or 206 million people. Americans have more home equity now than any at any other time in history. This has happened even though median home prices have risen dramatically. You're trying to tell us that all this occurred while wages and purchasing power were falling?

I don't know Paul. I read articles like the one from Forbes and then look around me and see all the wealth we've achieved in this country and I wonder where it is you live.

[Paul Ross]

Okay, let's just pop your silly balloon with just one of your house-of-cards assumptions, where you try to overstate U.S. savings and challenge the orthodox numbers:

s for consumption, long-lived assets such as autos and furniture are treated as if they were disposable pens.

This analysis ignores the reality of depreciation. If you tried to sell your car right after rolling off the lot, or your furniture, even brand new, it is going to be steeply depreciated in fact. Most people who buy cars on finance are "underwater" on their loans right up until the last year of the loan. Hence, no equity until that last year! No equity, no 'savings.' And by then, it is usually substantially older, and requires major maintenance. New tires, belts, hoses, and perhaps gaskets and valve train work.

So your "cure" would actually be "error" plain and simple.

[Paul Ross]

You think I am Eeyore? LOL! BTW, You will never hear Eeyore laugh. So who do you think you are? Tigger? The Rabbit? Certainly not the owl, particularly when you spout the following errant nonsense:

you must have missed the fact that...inflation is low

Oh, really, why do you think Greenspan has the pedal to the metal now trying to up interest rates without forcing an immediate recession?

Could it be because there is a LOT of inflation that is not "officially" reported, h'mmm? Housing rents inflation understated and CPI Understated, Gillespie Research

Some history that Gillespie did on the economic indices of official Washington numbers would give even couldn't-care-less-about-anything Tigger pause before accepting the blarney you allude to uncritically:

"In 1996 -- the middle of the Clinton economic miracle -- the Kaiser Foundation conducted a survey of the American public that purported to show how out of touch the electorate was with economic reality. Most Americans thought inflation and unemployment were much higher, and economic growth was much weaker, than reported by the government. The Washington Post bemoaned the economic ignorance of the public. The same results would be found today.

Neither the Kaiser Foundation nor the Post understood that there was and still is good reason for the gap between common perceptions and government reporting: government data are biased in politically correct directions and increasingly have diverged from common experience and reality since the mid-1980s. Inflation and unemployment reports are understated, while employment and other economic data are overstated, deliberately.

For several years, I conducted surveys among business economists as to how they viewed the quality of government economic data. The following were actual comments:

· The senior economist of a major retail company told me, "Quality varies. The retail sales numbers are terrible, but money supply data are great."

· The senior economist at a major bank offered, "There's a problem with money supply, but I think retail sales are pretty good."

The point is that when an economist knows a sector well, he also recognizes the limitations and distortions of related economic reporting. Gathering and reporting accurate information on a timely (one-month) basis for components of the U.S. economy is nearly impossible. Nonetheless, most career government statisticians in Washington work diligently to provide the best information possible within the limits of the existing reporting system. A number of reporting distortions, however, are not accidental.

What follows is brief background on the reporting system and how the numbers can be viewed. Separate installments will address the specifics of employment, inflation, GDP and budget deficit reporting. Other areas will be addressed upon request.

The first regular reporting of now-popular statistics such as gross national/domestic product (GNP/GDP), unemployment and the consumer price index (CPI) began in the decade following World War II. Modern political manipulation of the government's economic data began as soon as practicable thereafter, with revisions to methodology often incorporating positive reporting biases. As a result, investors and most economists, relying on the government's data, often miss underlying economic reality. Consider:

· During the Kennedy administration, unemployment was redefined with the concept of "discouraged workers" so as to reduce the popularly followed unemployment rate.

· If Lyndon Johnson didn't like the growth that was going to be reported in the GNP, he sent it back to the Commerce Department, and he kept doing so until Commerce got it right. The Johnson administration also was responsible for gimmicking the accounting that hides most of the federal deficit.

· Richard Nixon had a highly publicized war with the Bureau of Labor Statistics on the unemployment data. Nixon wanted to report the unemployment rate as the lower of the seasonally adjusted or unadjusted number, at any given time, but not specify same to the public. While that approach was unconscionable at the time and never used, basically the same methodology was introduced in 2004 as "state-of-the-art" by the current Bush administration.

· The Carter administration was caught deliberately understating inflation.

· Systemic changes were introduced during the Reagan administration to boost reported GNP/GDP growth on a regular basis. The wildest manipulations, however, happened at the time of the 1987 liquidity panic. In addition to intervention in the futures markets by the New York Fed to help prop the stock market after the October 19th crash, direct and heavy manipulation of the trade deficit data, under the direction of the Federal Reserve and U.S. Treasury, was used in conjunction with massive currency intervention to help bottom the dollar and to contain the currency panic at year-end 1987.

· The first Bush Administration began efforts at the systematic reduction of the reported rate of CPI inflation, and worked an outside-the-system GDP manipulation aimed at helping with the failed 1992 reelection bid.

· As former Labor Secretary Bob Reich explained in his memoirs, the Clinton administration had found in its public polling that if the government inflated economic reporting, enough people would believe it to swing a close election. Accordingly, whatever integrity had survived in the economic reporting system disappeared during the Clinton years. Unemployment was redefined to eliminate five million discouraged workers and to lower the unemployment rate; methodologies were changed to reduce poverty reporting, to reduce reported CPI inflation, to inflate reported GDP growth, among others.

· The current Bush administration has expanded upon the Clinton era initiatives, particularly in setting the stage for the adoption of a new and lower-inflation CPI and in further redefining the GDP and the concept of seasonal adjustment.

As a result of the systemic manipulations, if the GDP methodology of 1980 were applied to today's data, the second quarter's annualized inflation-adjusted GDP growth of 3.0% would be roughly three percent lower (effectively netting to zero percent or below). In like manner, current annual CPI inflation is understated by about 2.7% against the pre-Clinton CPI methodology (would be about 5.7%), and the unemployment rate is understated by about seven percent against its original design and what many people would consider to be actual unemployment (would be about 12.5%).

As to the financial results of federal operations, the application of accrual accounting and generally accepted accounting principles to federal operations shows an actual fiscal year 2003 deficit of $3.7 trillion, as reported by the U.S. Treasury, versus the reported cash-basis $374 billion.