Enlightened Economics

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• Currency Battle Is Tethered to Obama Trade Agenda

Posted by Ron Robins on February 17, 2015

“If members of Congress are to be believed, unless the president’s trade negotiator includes strict, enforceable prohibitions on policies to intentionally hold down the value of currencies, any completed trade accord will die on Capitol Hill. But, administration officials say, demanding the inclusion of such prohibitions would kill the trade deals before they were completed… Some 230 members of the House have pledged in writing to oppose future trade deals without action on currency, more than enough to stop the president’s agenda.”
— Currency Battle Is Tethered to Obama Trade Agenda , by Jonathan Weisman, February 16, 2015, The New York Times, U.S.A.

Commentary: Ron Robins
Many astute observers in the financial world are deeply concerned about ‘currency wars.’ I share their concern. Furthermore, I have long argued that central bank activities such QE and interest rate manipulations — though seemingly a relatively easy antidote to immediate economic ills — eventually lead to the breakdown of the very economic system it seeks to preserve. And one of the main reasons for that will be their knock-on effects on currencies.

To gain economic advantage or even just to maintain one’s present standing, nations are being forced into QE of various types as well as manipulating lower their interest rates, thereby increasing monetary aggregates and forcing down their currency values. Competitive currency wars are ensuing and economic distress is spreading. In the end, most, if not all nations will be forced to agree to abandon QE and interest rate manipulations.

Nature itself, is cyclic. So it seems is economic thinking with regard to manipulating or not economic activities. At this time the cyclic pendulum’s return to either truly free enlightened trading between nations, or to one that’s highly restrictive, is in our future. I believe in and hope for the former!

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• Positive ‘Spin’ Grows U.S. Economy… But For How Long?

Posted by Ron Robins on November 9, 2014

‘Spin’ — “Political hyperbole, especially when intentionally misleading” — The Online Slang Dictionary

American political and economic elites are forever spinning the idea that self-sustaining economic growth is imminent. And this time the spin might be working — but only for a while.

Underpinning the spin are U.S. government economic statistics. Unfortunately — and it seems unknown to even most economists — there are huge methodological and philosophical issues with these statistics, some of which I detailed in Dubious Positive Biases in Revised U.S. Economic Statistics.

In that post I investigated how unemployment rates, payroll numbers, the consumer price index (CPI), savings rates, and gross domestic product (GDP), have seen their statistical philosophical and methodological foundations changed. And these changes almost always make the economy appear in better shape than it would have been by using prior statistical methodologies.

Furthermore, these changed methodologies have not occurred by only wanting to make the statistics more honest. No. In fact, political interference (documented by Shadowstats) is behind most of the major changes so that the government of the day appeared in a better light.

The spin of this ‘growing’ economy has been taken to heart by the richest 20% of families — those who have been able to borrow for next to nothing and invest in foreclosed homes, stock and bond markets. They have invested and seen their investments rise markedly. They are happy.

But for most people — the other 80% — they are neither happy nor convinced of the efficacy of the present government’s economic spin. (See the exit polls of the November 4 midterm elections!) Truly illustrating the difference in economic well-being between the rich and everyone else are the results of a Gallup poll.

In August, Gallup found that, “Americans with an annual household income of $90,000 or more continue to have more economic confidence than those who live in households with less annual income. Upper-income Americans had an index score of -2 in August, up slightly from -5 the past two months. Lower and middle-income Americans, on the other hand, averaged -18, similar to -19 in July.” Recent data from multiple sources indicates this divergence continues to exist.

The difficulty for most working Americans is that according to the Bureau of Labor Statistics (BLS), workers incomes over the past few years are barely matching — if at all —  their rising cost of living as measured by BLS’s own (politically influenced) consumer price index (CPI). But ask most workers and they will tell you their living costs are up much more than the government’s CPI.

This is verified by independent inflation measures such as the Guild Basic Needs Index (GBNI) which includes only food, clothing, shelter and energy (thus covering most of the expenses for the majority of people). Using their latest data points from July 2009 to July 2014, the GBNI rose by a significant 22.8% compared to the 10.6% rise in the CPI over the same period.

Interestingly, while living costs have risen and left individuals with less disposable income, savings rates have increased. It seems the experience of financially difficult times for most people in recent years, including unemployment, severe losses in home equity, and for many the need to save for a fast approaching retirement, has convinced them to save more. Savings rates are now averaging above 5% says the Bureau of Economic Analysis (BEA).

But again, savings rates would be much less if previous methodologies were used. For instance, in 2006 and 2007, savings rates were about -2% but had become +3% after methodical revisions. Savings rates prior to 1985 were mostly above 10%.

Perhaps of even greater concern is that consumer debt is once again growing much faster than incomes indicating the U.S. is on the continuing treadmill to further financial crises. Between July 2011 and July 2014, Federal Reserve data show consumer debt grew from $2,722 billion to $3,233 billion, a rise of 18.8%, compared to personal income gains over the same period of just 11.8% ($13,294 billion and $14,860 billion.)

The real concern with consumer debt was highlighted by Constantine Van Hoffman, writing for CBS Moneywatch on September 11, 2014. She wrote that, “[quoting CardHub] ‘by the end of 2014 U.S. consumers [with about $7,000 each in credit card debt] will be roughly $1,300 away from the credit card debt tipping point, where minimum payments become unsustainable and delinquencies skyrocket.” And this is with ultra low-interest rates. What happens when they rise?

Rapid debt accumulation in excess of income growth indicates people demanding goods and services now no matter the eventual financial cost to themselves. To me, this suggests — barring extreme confidence about their future circumstances — the possibility of deep inner insecurity and lack of personal fulfillment among individuals. Unbeknownst to our political and economic leaders, this mental state is really the central issue that has to be resolved before lasting economic sustainability can be gained. (See, The Missing Ingredient in Economics — Consciousness.)

Government and financial institutions are aware of the harm caused by excessive and irresponsible debt growth and asset valuations. Alan Greenspan, former Chairman of the Federal Reserve, has remarked that central banks are afraid to ‘prick’ asset bubbles for fear of causing market chaos. So, our economic elites believe they must continue to spin the illusion of economic good times no-matter the reality. Eventually, as in 2008, the illusory good times end, and sadly, financial difficulties and ruin occurs for many.

As understanding grows about the spinning of government economic statistics, as increasing savings rates restrain consumer spending, and as consumer debt rises far faster than incomes, it is just a question of time before the spin stops working and a bust ensues. For now though, the spin is working for the 20%. And they are happy.

© Ron Robins 2014

Posted in Consciousness/Psychology, Economics, Monetary Policy, Statistics, Unethical Statistics | Tagged: , , , , , , , , , , , , , | Leave a Comment »

• Dubious Positive Biases in Revised U.S. Economic Statistics

Posted by Ron Robins on April 9, 2014

Why do most of the methodologically revised U.S. economic statistics tend to create a picture of a more positive looking economy? Do these revised statistics really give a better—or illusory—understanding of economic activity? And is it coincidental that the benefits flowing from these more positive looking statistics largely accrue to powerful elites who also have the muscle to influence the statistical methodologies? Now those who should be investigating and informing us of these concerns, our economists and media, fail to do so.

We see this ‘positive bias’ appearing in the most important economic statistics, including unemployment rates, payroll numbers, the consumer price index (CPI), savings rates, and gross domestic product (GDP).

Considering the unemployment rates and payroll numbers, we find that the Bureau of Labor Statistics (BLS) has implemented many changes that have resulted in lower unemployment rates and higher payroll numbers.

One particular change in 1994 to the unemployment rate was most significant. At that time the BLS decided to exclude the long-term (over one-year) unemployed discouraged workers from measurement. The chart below, from ShadowStats, shows that revised rate, now referred to as the Official U3 rate, as the red line.

The unemployment rate including these long-term unemployed discouraged persons is the ShadowStats blue line. The broadest government unemployment rate U6 is the gray line, which ShadowStats says, includes “short-term discouraged and other marginally attached workers as well as those forced to work part-time because they cannot find full-time employment.”

Using March 2014 unemployment data, notice the huge difference in unemployment rates between the pre 1994 methodology, which ShadowStats estimates at 23.2%, and the much-publicized Official U3 rate of just 6.7% and U6 at 12.7%!

sgs-emp

With reference to the BLS payrolls data, John Williams, ShadowStats founder, has regularly spotted “spurious revisions used to spike payroll employment levels.” He said of the March 2014 payroll report, that, “[The] increase of 192,000 was bloated heavily by concealed and constantly shifting seasonal adjustments… [that the] numbers remain of horrendous quality… generally not comparable with earlier reporting.”

Methodological changes to the CPI are also worrisome. Some non-government consumer price indices show exactly how much the government CPI has understated inflation that’s relevant to most people’s everyday experience. One such index is Guild Investment Management’s (GIM), Guild Basic Needs Index (GBNI). GIM says that because the BLS, “periodically alters its [CPI] content, making adjustments to the weighting of the components, and smoothing seasonal patterns. [That,] such tinkering with data… usually results in an understatement of the inflation rate and creates an unreliable, misleading cost of living index.”

The GBNI includes food, clothing, shelter and energy, covering 50-80% of most people’s expenditures. From the chart below see how over the five years to January 31, 2014, the annual increase in the GBNI was 4.7%, versus 2.1% for the CPI.

ShadowStats has re-worked the CPI as the BLS measured it with a fixed basket of goods in 1990 (see below), and in 1980 (not shown). Using the 1990 measure annual inflation in February 2014 was running at about 5%, blue line, versus under 2%, red line, for the Official CPI-U.

Changes to the personal savings rate methodology are of concern too. Negative personal savings rates in the past decade became positive. For instance, the personal savings rate (as a percentage of disposable personal income) in 2006 and 2007 was about -2% but has become +3% after revisions. Methodological changes in personal incomes and certain pension benefits, etc., had the effect of enhancing personal savings rates.

Regarding GDP, we see it has benefited from arguably bureaucratically lowered inflation rates. To arrive at ‘real’ U.S. GDP, the Bureau of Economic Analysis (BEA) reduces nominal (current prices) GDP by BEA’s own inflation measure. According to Mr. Williams, this measure shares many similarities to the CPI. One example is that it includes “quality-adjusted price indexes to deflate goods and services.” Hence, if a new computer has the same price as one several years ago but is many times more powerful, its price would now be deemed much, much lower, thereby lowering BEA’s price index and thus increasing real GDP.

To see exactly how these methodologies upwardly bias GDP, consider that BEA reported real GDP for 2013 at 1.9%. However, using the SGS-Alternate GDP that eliminates, as ShadowStats says, some of the “distortions in government inflation usage and methodological changes that have resulted in a built-in upside bias to official reporting,” real 2013 GDP would be about 4% lower and negative at around -2%!

These questionable brighter-looking statistics could be creating the illusion of a better economy. Coincidentally, such a possibly falsified, better-looking economy, greatly benefits some key political and financial elites who just happen to have disproportionate power to influence government statistical methods.

ShadowStats gives examples of the Johnson, Nixon, Carter, Reagan, Bush (first) and Clinton administrations engaging in acts to alter various economic statistics so as to put their respective administrations in a brighter light.

And the economic elite benefiting most from these more positive looking statistics pumping up the bond and stock markets are the ultra rich. Moreover, it is they who have an out sized influence on legislators and government policies and perhaps the most interest in adding gloss to the statistics.

Regrettably, those who should be critiquing and providing insight for the public about the meaning and consequences of the methodological changes to the statistics, our beloved economists, are missing-in-action. Economists, believing they are quasi-physicists of the economics realm, should be ashamed at their apparent near total public acquiescence to government statistical methods and methodological changes.

Sadly, the financial media is just as irresponsible too, parroting the statistical information spoon-fed to them by government. This is a situation suited to a dictatorship rather than an enlightened democracy.

When methodological changes to government economic statistics nearly always create a picture of a more positive economic reality, we have to doubt their integrity—especially when particularly powerful political and financial elites benefit the most from them. Alas, economists and financial journalists studiously avoid publicly critiquing the changing statistical methodologies. They treat government statistics as if they come down from God and written in stone. We deserve better in this enlightened age.

So, are these dubious, positively biased economic statistics providing improved insight into economic reality–or are they created to proffer the impression of a healthy economy?

© Ron Robins 2014

Posted in Economic Measurement, Economics, Statistics, Unethical Statistics | Tagged: , , , , , , , , , , , , , , , | 3 Comments »

 
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