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Why the economy still sucks, and is getting worse

By John Browne

In recent years, a high degree of economic, financial, and political uncertainty has resulted in acute volatility in stocks, real estate, commodities and precious metals. I believe that another aggravating factor has been the increasing skepticism through which the investing public views government statistics and statements.

To make prudent decisions, investors need to know key economic indicators such as economic growth, inflation rates, unemployment levels and the real cost and value of money. For the past 20 years or so, the key assumptions behind the calculation of these figures have been changed, or more accurately distorted, in favor of government image.

Perhaps the most important government statistic for investors is the inflation rate. The precise degree to which money is depreciating is the bedrock upon which all other financial determinations rest. The inflation rate is the prime input that determines the discount rate used for calculating the real present value of investment returns.

The basic U.S. inflation rate is published in the form of the Consumer Price Index (CPI). This purports to represent items selected to represent the spending of the average U.S. citizen. But a closer look reveals some troubling distortions. For example, health care expenditures are weighting at just one percent of spending. Americans who are struggling with obscenely high medical costs will recognize this as absurd on its face.

In addition to weightings, the actual price increases are largely arbitrary. For example, if the price of an automobile rises by 20 percent, but is 'assumed' to have added technology that equated to three quarters of the higher price, the price is deemed to have risen by only 5 rather than 20 percent. (SeePeter Schiff's mid January article that shows, among other things, that the government reported newspaper and magazine prices to have risen just 35 percent over the past 12 years while actual prices rose by more than 130 percent.)

For the past few years, the Fed has maintained that the U.S. inflation rate, which is represented by the Consumer Price Index, or CPI, has hovered around two percent. Most consumers who buy food, goods and services such as health in the real world, will find this figure derisory.

However, Shadow Government Statistics (SGS), an independent data service published by John Williams, calculates key U.S. Government statistics according to the methodology used during the years before the election of President Clinton. Using those yardsticks, SGS shows the U.S inflation rate over the past few years has hovered around six percent, or three times the declared Government rate.

The inflation rate is key also to calculating the key economic growth rate, or GDP. By deflating the nominal GDP by the Government's 'official' 2 percent inflation rate, the U.S. economy shrank by some 0.5 percent in the last quarter of 2012. But if a higher, and I believe more accurate 4 percent inflation rate had been used, the U.S. economy would have been seen to regress by 2.5 percent. At that rate of inflation the paltry yields paid on bank deposits, and by 10-year U.S. Treasury bonds, are currently in deeply negative territory.

Regarding stock markets, the Dow passed 14,000 last week, to great acclaim. However, if discounted by the 'official' CPI of approximately two percent per year the Dow would have to reach about 15,400 to equal its October 9, 2007 high of 14,165. But discounted at a 4 percent per year inflation rate, the Dow would have to stand at more than 17,500 to pass its all time high in real terms.

Of course, the low inflation rate also provides the government with breathing room on the fiscal side. Low inflation keeps a limit on the increases that federal agencies are required to pay out to beneficiaries of programs such as Social Security. With the budget so tightly constrained by huge deficits, the low inflation data is essential to government planners.

More chicanery can be seen on the unemployment front. The government currently claims the unemployment rate to be at jus

by Anonymousreply 2402/11/2013

More chicanery can be seen on the unemployment front. The government currently claims the unemployment rate to be at just 7.9 percent. But when calculating unemployment using the pre-Clinton methodology, SGS finds it to be around 22 percent. SGS does not exclude, as the government does now, all those who have left the workforce out of despair of finding a job, or those who who have accepted part time jobs in lieu of full time employment.

A world of politically manipulated 'official' statistics and misleading Government statements makes investment decisions more difficult. The result is that, despite falsely negative 'real' short-term interest rates and an abundance of debased cash, consumers and corporations continue to hoard cash. While the Dow has in fact surged in nominal terms, the leading U.S. equity funds continue to show significant outflows of investment funds. Rising stock prices have not convinced many Americans to get into the game. This should provide needed perspective on the current media euphoria.

John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

by Anonymousreply 102/07/2013

 

by Anonymousreply 202/08/2013

Thanks, R2, but logic is ignored.

by Anonymousreply 302/09/2013

No it's better. Silicon Valley has MORE jobs than when the recession started. Los Angeles and New York City also are above pre-recession levels.

The only people that still are out of work are those low waged minimum pay workers that have no skills. Those jobs are gone and not coming back.

Those who maintained high levels of skills never were out of work and that's how it goes.

Don't bitch about lack of work when you have no skills. Go DO something about it.

by Anonymousreply 402/09/2013

That's not true R4, and insane besides.

by Anonymousreply 502/09/2013

Good God R4-

Are you that stupid?

That's like saying the government decided to invest $1Trillion in lobster fishing and equating a boom in Maine to a generally booming economy.

You do realize that $1Trillion was taken, by force, from other taxpayers to pay for those lobster boats?

by Anonymousreply 602/10/2013

[quote]Silicon Valley has MORE jobs than when the recession started.

Even if this is true, it's a bunch of imported H1-Bs and low-paid "interns" who've filled those jobs. The Americans in SV have taken to meth production to make ends meet.

[quote]The only people that still are out of work are those low waged minimum pay workers that have no skills. Those jobs are gone and not coming back.

Tell that to the age 40+ tech workers sitting at home or working at Target (if they are lucky enough to have unforeclosed homes, or were lucky enough to get jobs at Target.)

by Anonymousreply 702/10/2013

You could at least include the link to the Libertarian investing site, idiot.

by Anonymousreply 802/10/2013

R4, something tells me you were born on third base and yet still think you hit a triple.

Remember President Obama was right - you did not build that alone.

So STFU.

by Anonymousreply 902/10/2013

Why am in not surprised that none of the replies notice that it is increasing government control of the economy that is causing the problem?

Until 99% of federal laws are repealed, taxes and regulations are slashed by 90%, the dollar is made to compete with private currencies and powers are returned to the states this will just get worse.

by Anonymousreply 1002/10/2013

Yes, Alabama and Mississippi are such forward-thinking economic powerhouses....

by Anonymousreply 1102/11/2013

More bull shit intended to prop up the interest of greedy profiteers at the expense of the middle class

by Anonymousreply 1202/11/2013

r10, you are delusional.

by Anonymousreply 1302/11/2013

Such cogent arguments, R11&12!

by Anonymousreply 1402/11/2013

Bullshit. Whatever you have to tell yourself.

by Anonymousreply 1502/11/2013

p.s. I do agree with r10.

by Anonymousreply 1602/11/2013

R10 is wrong of course. Government power made the credit society we live in possible. It has been a breakdown in government power over the financial sector and corporate governance that has enabled corruption to seek into every corner of society. It is now the norm and not the exception, for the CEO to be a crook and an addict. It is now the norm and not the exception, for bankers in Wall Street to attack the society that made their wealth possible. This country is sinking into the mire of a Latin American cynicism, not because of immigration, but because of a criminal conspiracy of dumbass libertarians and randians.

by Anonymousreply 1702/11/2013

R17 = Progressive douchebag

by Anonymousreply 1802/11/2013

Ugh, I thought we got rid of this Libertarian troll.

by Anonymousreply 1902/11/2013

So we discount reality now because it comes from a libertarian site?

The numbers are cooked and you all know it. Honestly, Democrats are becoming more and more like freepers everyday.

by Anonymousreply 2002/11/2013

The numbers are somewhat cooked, but that in itself does not make the economy bad. What makes the economy bad are false economic theories such as those favored by libertarians.

by Anonymousreply 2102/11/2013

Pretty much anything a libertarian has to say is best discounted.

by Anonymousreply 2202/11/2013

[quote]Why am in not surprised that none of the replies notice that it is increasing government control of the economy that is causing the problem?

Because when you're a Certified Libertarian Idiot(TM), ideology trumps reality.

by Anonymousreply 2302/11/2013

R20-

If facts don't meet the reality they construct, government worshiping quislings will find a way to deny it.

It's sad, sick, and a reason our economy is is still shitty- they believe the government can control the world, and worship it like a god.

by Anonymousreply 2402/11/2013
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