Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘shadowstats’

• 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

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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 »

• Debt/Bailout Bubbles May Burst. Brighter Future Beyond 2012!

Posted by Ron Robins on July 19, 2009

A stressed American consciousness focusing on material acquisition to the virtual exclusion of satisfying higher inner values has given rise to an unwieldy debt mountain. Now the U.S. government is borrowing and spending massively as it tries to pump-up the economy while backstopping much of the countries debt.

Consumers and companies have largely hit a ‘debt wall.’ And with a possible derivative meltdown and the recognition of enormous unfunded U.S. liabilities, we may see the U.S. government itself hit the debt wall in the not-so-distant future. The subsequent reaction would topple the debt mountain and pop the bailout bubble. But I believe a new higher consciousness will arise from these extraordinary events creating a truly enlightened economy mirroring our higher, inner human values.

Bailouts, guarantees, and write-offs galore
So far in this phase of the crisis the U.S. federal government and Federal Reserve have already guaranteed or spent around $13 trillion! And the current 2009 U.S. federal budget deficit will top $2 trillion, or about 14% of U.S. GDP. More stimulus packages are likely and massive deficits for years into the future are projected as it is unlikely that the economy will gain self-sustaining traction to stop unemployment from increasing. Economists such as 2008 Nobel Laureate Paul Krugman and others in the Obama administration are already discussing the possibility of another huge stimulus package.

Furthermore, the International Monetary Fund (IMF) on April 21, 2009, estimated global financial system write-offs to exceed $4,100 billion. The write-offs to-date are not anywhere close to that figure therefore, enormous additional financial system losses are yet to come.

A two-phased crisis
I see two phases to the U.S. financial crises. Each alone is capable of bursting the bailout bubble. Phase 1, which we are currently in, involves the write-offs of bad mortgages, loans, deleveraging, extraordinary U.S. government and Federal Reserve guarantees and financing, and a potential derivative implosion. Any sudden interest rate hikes and/or currency movements could trigger an implosion in the $450 trillion (ISDA April 22 press release) derivatives market and cause further financial chaos.

To enable U.S. government bond sales, it is probable that the U.S. federal government will, if it is not doing so already, pressure the banks with whom it has ‘invested in,’ to purchase considerable amounts of its bonds. The banks in turn will get substantial loans from the Federal Reserve for these purchases. In essence this is back-door ‘monetization’ (read ‘quantitative easing’) of U.S. government debt. Monetization simply means the printing of new money by central banks to purchase assets, in this case, U.S. government bonds.

Of course the U.S. Federal Reserve, the Bank of England, and other central banks have already engaged or have announced significant monetization efforts. The central banks claim that they will be able to drain this liquidity (excess money) out of the system as their economies recover. Unfortunately, historical examples do not give much reassurance that this can be done, especially in a global trading environment and where the major countries have amassed such extraordinary levels of debt.

Deeply indebted governments and societies have the choice of trying to reduce their debt levels—which can produce a potentially deflationary recession/depression—or they can encourage central bank monetization efforts that offer a ‘chance’ to get the economy rolling and create sufficient inflation, thus lessening the relative debt load. However, once started hefty monetization efforts often prove impossible to contain, leading to uncontrollable inflation—and even hyper-inflation. Subsequently, interest rates soar, the countries currency plunges in value, its debt mountain topples, and bailout bubbles burst.

Adding to the impetus for monetization will be when Phase 2 of this crisis kicks-in in 2010 as the U.S. begins to face its looming, huge, unfunded liabilities for medicare and social security. These are estimated by Shadowstats at $65.5 trillion. To properly fund this liability would require the U.S. government to put aside trillions of dollars yearly. Clearly, the U.S. government has no possibility or desire to put aside such funds. In addition, the current proposals for health care reform may add considerably to these numbers.

Taken together, these two phases of economic crisis make it unlikely that the U.S. can escape its fate of the bursting of its debt and bail-out bubbles.

Beyond 2012 a brighter future
I believe the underlying collective consciousness of U.S. society is moving toward higher values, and the more balanced approach to consumption and savings is evidence of this. However, in the course of these changes the likelihood of the debt mountain toppling, the bailout bubble bursting, and the onset of high or hyperinflation are real possibilities. By the end of this process, sometime around 2012, the American collective consciousness will have sufficiently evolved to begin the path of developing a truly sustainable economy mirroring the values of an economics based on our higher inner human values and consciousness—and that path is the realm of Enlightened Economics.

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© Ron Robins, 2009.

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