Lies, Damned Lies…and Statistics
The U.S. Economic Reports
By Dene McGriff
Mark Twain, who said “there are three kinds of lies – lies, damned lies and statistics”, would turn over in his grave if he knew what the government had been doing with its reporting. As a result of government hype and reporting, the June Consumer Confidence Index soared the month of June 2005 to 105.8 and the stock market rose triple digits on the news. Optimism abounds as the economy appears to be doing well. Housing continues to rise. The government tells us that new jobs are being created, inflation is under control and the economy is growing. If you listen carefully to the pundits on MSNBC, CNBC, CNN, FOX and the networks, they all say things are getting better and better. Just this morning (June 28, 2005) on NBC Good Morning America, Treasury Secretary Snow declared that all the economic indicators are good and the basics of the economy are sound. We are told that Real Estate will always go up. So will the stock markets (at least for the long haul). We Americans are bullish on the future.
This is the first of a multi-part series titled, “Game Over – Collapse of the World Economic System.” What we are facing is literally a disaster of Biblical proportions. The longer the growth cycle goes, the greater the fall in the end. We don't know when this will happen, but it will. There are extremely powerful forces keeping the whole system propped up and many prognosticators of gloom and doom have been proven wrong. If you understand what has happened and is happening, you will see why the eventual fall is inevitable.
In order to understand what is happening in the world of economics you have to understand things from God’s perspective – from a prophetic Biblical perspective and then you have to dig deep to find out what is REALLY happening in the world today. But before we do that, we have to realize that there is a great deception out there – a kind of George Orwell’s 1984 “double speak” being carried out by our government.
The same government that lied about Pearl Harbor, the Gulf of Tonkin, Kosovo and Iraq has been lying to the American public about the economy for years by changing rules and definitions, twisting and turning – spinning the news with the full support of the pundits who work for the corporate controlled news networks. Analysts whose real job is to sell and hype stocks ignore the facts and keep the smiley face on so that people will continue to buy stocks, refinance their homes, use their credit cards and run deeper and deeper into debt thinking they are attaining the American Dream. Let’s face it, the analysts job is to build up the market – not tell the truth.
Greenspan and the Federal Reserve continue to act confused about what is happening. They give the impression of trying their best to keep the American economic engine on track. He assures us that inflation is under control, that the housing industry just has a little “froth” in it, but that the economy is growing soundly at a 3.5 to 4 percent clip.
So can the United States continue to have massive budget deficits, massive trade deficits and continue to lose productive capacity to other countries and still be the great consumer nation of the world? Are we looking at a mere slowdown or something worse? We, as Americans, are an optimistic people with such faith in our country, and if past performance is any judge, reason to continue to have great faith. The question is, have changes been occurring right under our nose without our even knowing about it? Has there been a massive cover up to keep us in the dark?
So let’s look at the American government’s reporting on the economy: inflation, growth, unemployment, cost of living indices, etc. Let’s see how reporting has changed over the years in order to hide the real situation from the public and experts alike.
Inflation is one of the most important indices there is. Inflation represents the hidden tax we all pay. Since the beginning of the Federal Reserve in 1912, the value of the dollar has fallen by 95 percent. In other words $50,000 in 1912 would be the equivalent of a million dollars today. Is there anything you can think of that makes the post-war house in Los Angeles that sold in 1950 for $5,000 worth a half million today, or the house that sold for $10,000 in 1970 be worth $300,000 today? Are they newer, better laid out, more modern? Of course not. Just a few years ago, we were paying 29 cents a pound or less on sale for apples, oranges, bananas and grapes. Have you looked at how much they are now? But is this inflation? Not according to the government because food and housing are no longer in the inflation index. The fact of the matter is that inflation would be over 10 percent this year if we used the same methodology as in 1981. We are the consumers of the world.
1. Inflation is basically measured by the Consumer Price Index (CPI) which is one of the most dishonest statistics reported. You certainly can’t compare year to year because it changes year to year.
· Housing was taken out of the CPI in the late ‘80s. Don’t ask me why. It accounts for at least one fourth of household expenditures. They substitute "homeowners equivalent rent” for house prices. The run up in home prices is not reflected in the CPI. Food and fuel are taken out because they are too volatile. So what is left?
· The government has developed a diabolical method of pricing called "Hedonic pricing." Hedonic pricing is a way of reporting growth by tracking productivity rather than actual cost. If, for example, you buy a computer for $1,000 with a certain computing power and buy another one three years later for $800 that has twice the computing power as the other, the government says it is twice as valuable or worth $2,000 rather than the $800 actually paid. (Later, they play the game with different rules saying that the $1,000 that now costs $800 shows the increase in worker productivity). With one push of the button, they add $1,200 to the GDP. This is merely one example Hedonic pricing is done for thousands of products representing about 46 percent of the CPI!
Bill Gross of the Daily Reckoning says that
The CPI charade continues at the Bureau of Labor Statistics, where government bean-counters contrive ever more elaborate mechanisms to effect a benign inflation rate. Gross rails against the "con job perpetually foisted on the American public about the low level of [inflation] A low 'core' [inflation] number tells us that we can continue to run monetary policy with negative real interest rates and fiscal policy with $400 billion dollar deficits. A low core number allows us to pretend that American productivity is the best in the world, that the dollar should be strong, and that the markets, by golly are going up. No matter that a gallon of gasoline is over 2 bucks or that a half-gallon of milk will set you back $3.69..."
After stripping away all the accounting gimmickry embedded in the government's CPI calculations, says Gross, the "true" inflation rate would be much higher, meaning that the "true" inflation-adjusted GDP would be much lower. "My sense is that the CPI is really 1% higher than official figures and that real GDP is 1% less," the bond man says.
The BLS' works its statistical magic with the help of so-called "hedonic" price adjustments. "Talk about a con job!" Gross gripes. "The government says that if the quality of a product got better over the last 12 months that it didn't really go up in price and in fact it may have actually gone down!...Today no less than 46% of the weight of the U.S. CPI comes from products subject to hedonic adjustments...Peter Bernstein points out that since 1990, total CPI inflation was 2.7% a year, yet hedonically adjusted durable goods suspiciously managed to increase by only .1% annually."
Bernstein recommends, therefore, that the BLS produce a redesigned CPI that excludes all durable goods prices - the items most subject to hedonic calculations. "What people see and feel as inflation," says Bernstein, "is what they pay for services and non-durables." And what people have seen over the past 12 months is that the price of non-durable goods jumped 4.6%, while the price of hedonically adjusted items like computers and cars actually FELL by 1.25%. Thanks to these sharply rising expenses, the consumer's disposable incomes is becoming as thin as Kate Moss' waistline.
"The CPI as calculated may not be a conspiracy but it's definitely a con job foisted on an unwitting public," Gross concludes. "If the CPI is so low and therefore real wages in the black, tell me why U.S. consumers are resorting to hundreds of billions in home equity takeouts to keep consumption above the line. If real GDP growth is so high, tell me why this economy hasn't created any jobs over the past four years."
· Government reports emphasize the “core CPI” rate which excludes food, fuel and housing because of their volatility. Does that makes a lot of sense -- as if increases in these food, gasoline and heating fuel weren’t important to the average budget?
Take out food, housing and energy and what do you have left? As I said above, inflation would be over 10 percent using 1981 methodology.
2. Instead of reporting rates such as growth, GDP quarter by quarter or comparing year against year, the government annualizes figures. It is the only country in the world to report in such a misleading way. If the economy grows by .06 percent over the previous quarter, they multiply by 12 and say that is 7.2 percent growth which would be accurate if the same every month but it never is.
3. The government allows companies to report profit excluding three very important items: depreciation, executive bonuses and unfunded pension liability. This gives a terribly distorted picture to investors and the public in general. If they reported honestly, most companies that are currently reporting a profit, would have losses and the stock price would fall.
4. 4. The government acts as if national debt and income are completely unrelated and have nothing to do with one another and have no adverse effect on the economy and our future. Note the debt as of 2001 was $32 trillion - 3 times the total GDP of the American economy. And it is growing! So what do you do? Print more money! And what is the effect of printing more money? Inflation! You got it! Every month your dollar will buy a little bit less. This is the true silent killer of the American economy and your future.
5. I discussed the Social Security issue in another article but suffice it to say that the greatest threat to the retirees is inflation! Imagine what a measly $1,000 a month will buy in ten years! This is another case of government lies. The system is in trouble because the government has spent the money (but they don't tell you that).
Employment statistics are among the worst lies. Unemployment statistics include ONLY those people who are drawing unemployment and is not a reflection of those who are out of work, looking for a job or have just given up. At the end of six months they automatically drop off whether they have found jobs or not. Instead of 5 percent, the true number of unemployment and underemployment is more likely in the 15 to 20 percent range.
When the government talks about job creation, be careful. These are not actual numbers but estimates. They use a “birth/death model” to estimate how many people statistically enter the job market every month. For example, in March of 2005 the government claimed that 110,000 were created. Their own “birth/death model” statistics said that 179,000 should have been created so this meant a net loss of 69,000, not a gain of 110,000!
Further, all jobs are not created equal. Nearly half of the jobs created in the past few years have been related to the housing boom – construction, real estate, banking, etc. What happens when these jobs end if the bubble were to pop? You also have to consider what sector the new jobs are in: in manufacturing, service industries, etc. What is the average wage of the new jobs being created compared to the old? Was a $30 an hour factory job replaced by a fast food job at McDonalds?
Dr. Kurt Richebächer, renowned European economist, reports that,
"What has been the economic reality in the United States in the past four years, with real GDP growth of 10.4% and an increase of overall real wage payments by 3.9%?
"At any rate, it is the worst employment performance on record for the United States in the postwar period, and also the worst in the world. We owe the following details and the chart below to the Economic Policy Institute in Washington.
"Since the start of the recession, 46 months ago (March 2001), the U.S. economy has added a negligible 62,000 jobs. Private-sector employment, however, is still down 703,000, contracting by 0.6%. Though the job numbers improved in 2004, the growth rate for nominal hourly earnings -2.6% -was the lowest in the history of this wage series, which began in 1964. At the same time, consumer price inflation accelerated from 1.9% in the prior year to 3.3%.
"Last year, this pattern of decelerating wage rate growth versus accelerating inflation rates led to the first inflation adjusted decline in hourly wages since 1993. Over the four years since 2000, average weekly earnings have edged up overall by a paltry $1.08, to $276.70. That is an increase by a fraction of 1% over a period of four years."
The Federal Reserve
Before we leave this subject, we must say something about the Federal Reserve, one of the biggest lies of all. You should know that it is not “federal” but a private corporation owned by stock holders (bankers) and secondly, it has no “reserves” but can print all the money it needs. The long and fascinating story is told by Edward Griffin in his classic, “The Creature from Jekyll Island”, one of the most eye opening books I have ever read.
It tells the story of “central banking” – the effort of a few bankers to get their hands on the means of controlling money and credit. It is merely a “cartel” with a government façade. It was supposed to stabilize our economy but has managed to enslave us while adding untold wealth to its stockholders. It is the story of seven wealthy men who planned a clandestine meeting on Jekyll Island off the Georgia coast. The goal was to create a central bank without calling it one in the guise of protecting the public interest. The meeting was attended by Nelson Aldrich, Republican whip of the Senate and father-in-law to John D. Rockefeller; Jr., Henry Davison, Senior partner of J.P. Morgan; Charles Norton, president First National Bank of New York (later CitiBank); Piatt Andrew, Assistant Secretary of the Treasury; Benjamin Strong, head of J.P. Morgan Bankers Trust and Paul Warburg, partner in Kuhn, Loeb & Co. representing the Rothschilds and Warburgs in Europe.
I am not into conspiracy theories – that these things were all planned out thousands of years ago, but on the other hand there may be such a thing as a “conspiracy concept” – the idea that a cartel of bankers around the world controls the entire money supply, which they do! Jim Puplava of FinancialSense.com says,
"A fiat monetary system allows power and influence to fall into the hands of those who control the creation of new money, and to those who get to use the money or credit early in its circulation… The insidious and eventual cost falls on unidentified victims who are usually oblivious to the cause of their plight. An actual transfer of wealth goes from the poor and the middle class to those in privileged financial positions." Mr. Puplava continues, "In many societies the middle class has actually been wiped out by monetary inflation, which always accompanies fiat money.”
Initially, people and businesses are helped by easy credit. That is why they call it a boom. But the poor and those on fixed incomes can’t keep up. Then comes the bust – affecting everyone. There is no doubt that loose lending practices and low interest rates caused the stock and housing bubbles. Let’s talk for a minute about housing.
Debate is currently raging over this issue. Is it a bubble or not? Will it burst? If so, when? Let’s look at some facts surrounding the bubble. This is another one of those areas where the statistics are hard to uncover. Let's think about it. Is the house I am renting worth three times what it was when I moved in five years ago? I would say it has run down some. My rent has only gone up $200 a month. Yet, the price has gone up three fold. That is really nice if you are the owner, but is it really a real of value and sustainable year after year? Can it keep going up in Sacramento by 20 to 30 percent a year? How many people can afford to buy an average house today? About 20 percent in California.
A house is a consumer item like a car. You use. It wears out and decreases in value. It is not a capital investment. It is a home, something that is consumed and ages. No matter how you cut it, consumption does not create wealth. In the real world, buying a new house or car doesn’t make people richer but poorer. Most people don’t buy houses with capital/cash. They buy them with money they don’t have -- on credit. They consume by living in their house today and pay back the loan tomorrow based on future earnings. But instead of viewing a house as something that should be paid, people view it as an asset and take their money out by refinancing.
Eric Fry reports that “Since the end of 2001, housing-related industries have produced a whopping 43% of the nation's total net private sector employment growth. Obviously, therefore, any slackening of real estate activity would slow employment growth in the industry. Indeed, this massive job-creator could become a job-destroyer.
“The nation's banking operations have also become heavily reliant on the real estate sector. Mortgage-related assets at U.S. banks have swelled to more than 60% of total assets…
"All bubbles essentially end painfully, housing bubbles in particular," warns Richebacher. "They are an especially dangerous sort of asset bubble, because of their extraordinary debt intensity. The debt numbers speak for themselves: In 1996, U.S., private households borrowed $332.2 billion...With the housing bubble in full force, it hit $1 trillion in 2004.”
Seventy percent of the volume in 2003 was from refinancing. In 2004 over half of the homes bought were for investment, second homes or just plain “flipping” (holding on to them for a few months and just reselling them for a profit). Most home sales today are from the “sub-prime” or high risk market – people who can least afford them, who are most likely to be laid off and who got an interest only Adjustable Rate Mortgage (ARM) rate and can least afford the inevitable increases. Two years ago, a small percentage were ARMs. Now the majority are. Why? Because people can't afford to buy with a 30 year fixed rate mortgage.
The fact that the housing bubble will burst is based it on one thing alone. Long term interest rates will rise and when they do, prices will fall, foreclosures will increase, etc. Banks and loan companies, possibly Fannie Mae and Freddie Mac will fail. The potential ripple effect through the economy is scary. The interesting thing is that it hasn’t happened yet and may hold off for some time to come. Long term interest rates remain low even as the Fed raises the prime rate. What is happening. Only in the past few weeks have I begun to understand why and the answer will astound you. Stay tuned for the next article.
The purpose of this first part is to show you the spin and lies that surrounds these issues. But what we have here is superficial. Its like a person covered with itchy sores. You can cover them with hydrocortisone and take Benadryl. You can do all kinds of things to treat the symptoms, but what is the cause? In the next part, we will look at the root problem of our financial system – why it is doomed to total collapse. In the final section, we will look at the Biblical perspective on this issue. It helps if you skip to the end of the book and find out what will happen. How will it all end?