Posted on 11/01/2007 7:01:20 PM PDT by Travis McGee
Yesterday, as the dollar fell to new record lows and oil and gold prices surged to new highs, Wall Street remained fixated on wholly meaningless government data that managed to report the lowest inflation in the last half century. These bizarre numbers were integral in allowing the Commerce Department to report 3.9% annualized GDP growth in the third quarter, which was heralded by the bulls as evidence that a resilient U.S. economy had shrugged off the problems in the housing and mortgage markets. However, the government’s ability to make “economic growth” magically appear is based purely on statistical finesse.
To arrive at this rate, the government had to assume that inflation during the quarter ran at an annualized rate of .8% (that’s less than 1%). That is the lowest rate of inflation used to calculate U.S. GDP since the Eisenhower administration. With oil priced at almost $100 per barrel, gold futures trading over $800 per ounce, the dollar hitting record lows, and the Fed printing money like it is going out of style, the government has the nerve to claim that current inflation is the lowest it has been in half a century. Unbelievable!
Just in case there is some confusion, the government adjusts nominal GDP gains using the GDP deflator, which represents the inflation rate during the time period being measured. This is done to strip inflation out of the GDP calculation so that only real growth gets counted: not nominal gains that result purely from inflation.
The consensus estimate for 3rd quarter GDP growth was 3.4%. The reason we beat that number was that the government adjusted the nominal 4.7% gain by a mere .8%. Had the government assumed a higher rate of inflation, say 2.6% (identical to the rate used to deflate second quarter GDP,) the 3rd quarter gain would have been only 2.1%, well shy of the consensus forecast. My guess is that inflation is actually running at an annualized rate closer to 10%. Therefore using a more honest deflator, the U.S. economy is actually contracting, which would explain the recent anecdotal evidence provided by various economic polls, voter dissatisfaction and consumer sentiment numbers. In fact, if one simply measures U.S. GDP using gold or any other currency, it is clear that we are already in a recession.
Similar illusions are created in other numbers, such as retail sales, corporate earnings, and stock prices, which are all rising merely as a result of actual inflation being higher than the official reports. For example, higher retail sales reflect consumers paying higher prices for the products that they buy. They may in fact be buying less stuff, but are paying more for it. Further, part of the gains result from tourists using their appreciated foreign currencies to buy products cheaper here than they can in the own countries. I have heard about Canadians checking into U.S. hotels with empty suitcases, crossing the border to indulge in weekend shopping sprees.
Corporate earnings, particularly those of multi-nationals, are padded as their foreign currency denominated earnings translate into more dollars when those earnings are repatriated. However, such gains are illusions, as companies merely earn more dollars of diminished value for the goods they sell. The actual volume of exports does not necessarily improve much, as evidenced by weak industrial production and manufacturing employment. When those additional debased dollars are paid out as dividends, they confer no real increase in global purchasing power to shareholders.
Similarly, just as inflation causes prices to rise for goods and services it causes stock prices to rise as well. Though such gains may be less than the actual increase in the cost of living, as long as the government gets away with using bogus CPI numbers which fail to fully reflect inflation, Wall Street takes credit for nominal gains as if they were real.
However, as ridiculous as the phony GDP number was, yesterday’s biggest joke was a report on global competitiveness put out by the World Economic Forum in Davos, Switzerland, which ranked the U.S. economy as the world’s most competitive. To arrive at this conclusion, the forum has obliterated the obvious under a mountain of theory. In determining country rankings, the WEF weighed strengths in their "12 Pillars of Competitiveness", including: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation. Completely ignored however are the measurable results of competitiveness, notably a trade surplus and a strong currency.
It is as if the WEF decided to judge a weight loss contest without using a scale, by instead focusing only on mental attitude, dedication, perseverance, and nutritional education! As a result the prize is awarded to the fattest contestant. Based on the empirical evidence of a gargantuan trade deficit, staggering global indebtedness, and a declining currency, the United States is clearly not the most competitive economy in the world.
I think it's wishful thinking on your part because you DON'T want to believe the growth numbers.
When Schiff can back up his words with mathematics; I’ll listen.
However, as long as all that he presents are his “feelings”, then he’s just another Economic AlGore. He’ll have a fanclub, I sure, ... (they all do)... heck, he maybe even win an award or two; but that’s about it. [shrug]
Bring numbers or stay home, Schiff.
well yes that’s true, quality does count. The Chinese just build enough product overage to cover the replacements. They assume you will tire of sending them back before they run out of replacement junk to send you.
I would like to believe those numbers but I am always reminded that they are produced by a government agency. I tend to believe the stock market and the commodities market much more than the govt. You should too.
Why raise interest rates? Why not lower to the lowest possible rate and then stop printing money?
You are correct. The inflation numbers from the government don’t include a lot of things, like food, energy, taxes etc. Things that are absolutely going up more than .8%
Doubtful.
Consider the lowly can of tuna. It has reached nearly farcical water/solid proportions.
While the price PER CAN has increased a relatively modest 25% in price over a two year period, the contents have dropped by at least 50%.
Apparently, the canneries cannot afford to retool the plants to stop using the old 16oz can so they just change the water/oil ratio.
The label is still correct (ie the former 16oz can of tuna now holds around 7-8 oz of fish) only the price and amount have changed.
There are many anecdotal examples like this, universally adjusted by the experts to discount their significance.
At the end of the day, people, regardless of income levels have a sinking sense "something is not right"
They are correct.
Best regards,
Peter Schiff is a noted Bear, well known as 'Dr. Doom'. He was trained by his father, Irwin Schiff, who wrote books explaining why you don't have to pay your income tax. As a result he is now in a Federal Pen!
What are you buying that’s up 15 to 17% in the last 12 months. Even dairy products except Milk aren’t up that much.
Exactly right. The forclosure numbers are up in some formerly “hot” markets. I’m here in WPB, FL and the For Sale signs on homes are like campaign signs on a monday before election day. Most are on homes that were purchased at the peak and not on those of us who bought 5 or more years ago.
Huh? Interest rates are controlled by the amount of money we print. If interest rates were lowered to the ‘’lowest possible levels’’ it would be because we were printing money like Robert Mugabe.
Anecdotal = unscientific.
The inflation # DOES include food & energy in them. They also release a seperate # that does not. If you do not see the word "core" it is the overall inflation including food & energy.
So why are grocery stores showing annual growth of 1-5% and not 25+% in the last 2 years? Surely you don’t think we’ve cut eating amounts by 25% in 2 years.
Whatever
Best regards,
Best regards,
The government produces at least two rates of inflation. One, 'Core Inflation', does not include food and energy, the other does. As far as taxes are concerned, they are not generally considered consumable goods.
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