Seeking Alpha
Brick & mortar retail
Profile| Send Message|
( followers)  

Our country is in a deep hole. As usual, Congressman Ron Paul sums up the situation succinctly. 

The national debt now stands in excess of $9 trillion, more than $30,000 per person. The total future debt obligations of the United States, including entitlements, are estimated at $59 trillion, which equates to over $500,000 per household. Social Security and Medicare will likely consume the entire federal budget by 2040, threatening the average American with an impossible tax burden. For over 30 years, I have been urging all Americans to educate themselves about monetary policy in order to better understand how a small group of unelected individuals at the Fed and the Treasury Department wield tremendous power over our lives.

The politicians who run this country do not want the general public to know how bad the situation truly is. Therefore, governmental agencies spin all data in the most positive way to keep the masses in the dark. The massive corporations that contribute millions to these politicians, cook their books, take huge risks and then beg for the government to bail them out when their bets blow up. Meanwhile, the average American doesn’t question the information their government and corporations feed them - living a life of self imposed delusion.  

There are many people who believe there is a governmental conspiracy to systematically fake the numbers regarding our economy. I do not believe that is true. Our government is the biggest bureaucracy in the world. Bureaucracies are run by bureaucrats that want to retain their positions. These bureaucrats try to please their masters. This leads them to tweak every process trying to “improve” the output. The tweaking always makes the figures slightly more positive. After many years, the continuous positive tweaking of the numbers has led to monthly figures that are at best misleading and at worst completely false. This is why we have such disconnect between the economic figures put out by the government and how people feel about their personal situation.

The number of Americans who believe the country is moving in the wrong direction has risen sharply, to nearly eight in ten, amid soaring food and gas prices, falling home values and unending war. Just 17 percent say the country is going in the right direction, according to an AP-Ipsos poll. The AP announcement of these results hits at the heart of the problem.

The survey reinforces the notion that consumers are particularly gloomy — possibly more than economic statistics justify. Despite record energy costs, slumping stock prices and the housing and credit crunch, reports show the economy to be still growing, if slowly. Inflation and interest rates remain at relatively tame levels. And the unemployment rate is lower than it was during the past two recessions, in 1990 and 2001.

Tom Raum, the AP writer, is unaware that those economic statistics have been positively skewed over time. Therefore, he doesn’t connect the numbers to American’s gloom.

I hear pundits like Larry Kudlow expound on the great American economy. They reference how bad it was in 1980 compared to today. In 1980 inflation was out of control after years of fiscal mismanagement and loose Federal Reserve policies. It took Paul Volker raising rates to almost 20% to kill inflation. When the pundits compare the CPI that is published today to the CPI in the past, it is an apples to oranges comparison. For a true comparison, you must add 7% to whatever the government publishes. If the American public thought that inflation was running at a rate above 11%, there would be an outcry for wage increases above the current 3% average.

click to enlarge images

The implications of this discrepancy explain why people don’t feel like they are getting ahead. The average American is paying in excess of 11% for the items they need to buy, while their wages go up by 3% or 4%. No wonder they feel that they are falling behind. They are! The adjustments to CPI over the years have had the effect of reducing social security payments.

John Williams, who has done the groundwork on these adjustments, comes to the conclusion that

...the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval.

We have Alan Greenspan and Michael Boskin to thank for the most recent “improvement” to the data.

Their adjustments to CPI are best summed up again by John Williams:

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

Does the 11.6% inflation rate seem crazy? If so, then the government has successfully pulled the wool over your eyes. Examine the chart below carefully. The government is telling you that your costs have increased less than 30% in the last 8 years. A barrel of oil has gone up almost 500%, a gallon of gas over 200%, and corn and wheat almost 300%. Home prices were up 60%. So, in the real world prices are 8 to 10 times higher than what the government is telling you. The average American is clearly falling behind.

The true misery index (unemployment rate + inflation rate) is near the all-time high. This explains why the University of Michigan sentiment index was the lowest since 1980 in June. 

A 72 year old, risk averse, grandmother, with a husband in a nursing home and $100,000 in her IRA is now only able to get 2% in CDs or a money market fund. She is paying 10% to 20% more for food, energy, and health care. The most susceptible Americans, our senior citizens, are being sacrificed to benefit the huge banks who loaned money to people who could never pay them back, and now need to be saved.

Ben Bernanke and the Fed have chosen to throw the savers under the bus to prop up banks that are essentially bankrupt. Not surprising, considering the Federal Reserve is essentially owned by the banks they are propping up. 

The misleading CPI figures contribute to the false readings on GDP. I have heard numerous talking heads over the last month say that we aren’t in a recession because GDP has not gone negative. The GDP numbers are adjusted for inflation. If we are underestimating true inflation by 7%, then GDP is systematically overstated. When adjusted for the true CPI, our economy has been in a recession for most of the last 8 years. No wonder that Americans are in such a bad mood. Maybe if we had used the $700 billion that have been poured into the “War on Terror” for productive initiatives in the United States, we wouldn’t have had such lethargic growth. 

In America, anyone can become rich. This is a hallmark of capitalism. The reason the vast majority of people don’t feel like they are getting ahead is because they aren’t.

According to Jim Jubak,

Incomes are a lot less equal than they used to be. In 1979, for example, the top 1% of earners had an income 9.4 times that of the average person in the bottom 90%, according to the Economic Policy Institute. By 2006, that ratio had climbed to almost 20-to-1.

This is the classic rich getting richer and poor getting poorer story. Real average weekly earnings for all Americans over the last four decades has been cut in half due to the persistent year after year inflation. Workers no longer can rely on unions to fight for wage increases. Employers have the leverage to keep wages low, while everyday costs rise. 

Again, the serial cheerleaders like Larry Kudlow and Ben Stein are on TV every day saying that the economy is not bad because the unemployment rate is only 5.7%. How could we have a recession with the unemployment rate at 5.7%? We can have a recession, because the unemployment rate is not really 5.7%. The government only reports the U3 rate, which is of course the lowest level. If you use the U6 rate, unemployment is currently 9%. U6 includes discouraged and marginally attached workers. Only our government would exclude people who want a job, but are discouraged because they can’t get one.

According to John Williams,

Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year.

When you include these workers, the unemployment rate is in the range of 13% today, on par with the levels of the early 1980’s.

The world breathlessly awaits the monthly figures on job gains or losses provided by the Bureau of Labor Statistics. There is usually a huge move in the stock market based upon these numbers. The fact is that they are not accurate within hundreds of thousands. They are a pure guess based upon models developed by these government bureaucrats. It takes up to two years before the figures are relatively accurate.

Early in the Bush administration the BLS decided to make the monthly figures more “accurate” by making a birth/death adjustment to the reported figures. Amazingly, the adjustment makes the jobs picture more positive. This adjustment was supposed to take into account all the jobs created by small businesses that didn’t make it into their monthly survey. Over a long period of time, this adjustment may make sense, but on a monthly basis at turning points in the economy is wildly wrong, like now.  In the midst of an implosion in the housing market and a meltdown of the financial system, the BLS is telling the American public that we have added 115,000 construction jobs and 23,000 financial services jobs in the last three months. If you believe this, I have some beachfront property in Baghdad I’d like to sell you.

After all the slicing, dicing and manipulation of the data, the true picture is in the chart below. The disconnect, that the mainstream media is reporting regarding people’s mood about the economy is not a disconnect at all. Using the true figures, things are as bad as they were in 1980. The major difference is that the government and consumers now have massive amounts of debt to finance. If the Federal Reserve were to increase rates to where they should be, the whole Ponzi scheme would collapse. So, they keep rates at 2% and try to convince the unknowing masses that everything is just fine. 

The only way to change what is going on in this country is to view everything that the government reports with a skeptical eye. Dig into the details to seek the truth. Listen to people who are willing to pull back the curtain and reveal that the Wizard of Oz is just a bumbling fool.

Read the views of David Walker, Pete Peterson, John Mauldin, Barry Ritholtz, and Ron Paul to get the straight scoop on the economic situation of this country. Burying your head in the sand is not an alternative. As usual, Ron Paul sums up the situation as well as anyone. 

America became the greatest, most prosperous nation in history through low taxes, constitutionally limited government, personal freedom and a belief in sound money. Deficits have exploded, entitlements are out of control and our personal liberties are threatened like never before. The "solutions" proposed so far--stimulus packages, bailouts and interest rate cuts--just amount to printing more money, which will lead to greater currency devaluation, contribute to the rising costs of living, and further squeeze the middle class and our senior citizens.

Regarding the homeowner bailout bill (That was written by Bank of America) that George Bush signed into law last week, Ron’s views are dead on.

The solution is for government to stop micromanaging the economy and let the market adjust, as painful as that will be for some. We should not force taxpayers, including renters and more frugal homeowners, to switch places with the speculators and take on those same risks that bankrupted them. It is a terrible idea to spread the financial crisis any wider or deeper than it already is, and to prolong the agony years into the future. Socializing the losses now will only create more unintended consequences that will give new excuses for further government interventions in the future. This is how government grows – by claiming to correct the mistakes it earlier created, all the while constantly shaking down the taxpayer. The market needs a chance to correct itself, and Congress needs to avoid making the situation worse by pretending to ride to the rescue.

Source: The Great American Economy? Take a Closer Look