What's Behind the Government's Fudged Figures

Bill Bonner - Mon 15 Mar, 2010

U.S government statisticians manipulating consumer spending figures

Mumbai, India

Beware the Ides of March... and the rest of the year too!

This is the day Caesar was slain. What’s it to us?

Well, it just reminds us that things go wrong. Even when you’re on top of the world. There are always countercurrents... undercurrents, beneath the surface, where you don’t see them... plots... conspiracies... and just bad luck.

On the surface, the US economy is recovering. Well, not even. It is stabilizing.

The Dow has been creeping up. It rose 12 points on Friday. Gold fell $6. Oil held at $81.

The most recent figures show the consumer becoming a little freer with his money. But look beneath the surface and you find government statisticians juking and jiving with the numbers. They seasonally adjusted downward the figures for January... which boosted the figures for February. Had they not done so, the figures for February would have been negative!

Still, consumers are not as lifeless as they have been... and on the surface, this is good news.

And who can blame consumers for being a little more ready to spend money? The newspapers tell us that the Great Recession is over... and that we’re in a recovery. The lumpen consumer probably thinks he’s going to find a job soon... and that his house is going up in price.

But beneath the surface, there are powerful downtrends still underway. These trends began in 2007. They were misinterpreted, naturally, by leading economists and policymakers as a “liquidity crisis”. In fact, they were signs of a debt crisis. The private sector had far too much debt.

Economists who never expected trouble reacted to it in a predictably moronic way – they rushed to the rescue with more debt. Now, they think they’ve triumphed... They’ve prevented another Great Depression. They’ve saved the world!

We’ve written so much about that; you surely don’t want to read any more on that subject.

But here’s the interesting point: by failing to address the real causes of the crisis, the feds only allowed those undercurrents to grow more powerful and more dangerous.

Instead of reducing the world economy’s reliance on debt, they increased it!

On the surface, the rescue efforts look vaguely like a success. The private sector stopped spending. Government increased its spending to make up for it. Okay so far.

Alas. .. net, the world’s debt is still increasing – by a huge margin. Over the next 3 years, the biggest 20 economies in the world – the G20 – are expected to slip over the 100% mark, with more debt than GDP.

Now, let’s do a little maths. The US has total tax receipts equal to about 15% of GDP. If the interest on the debt is only, say, 3%... that means you’re spending 20% of tax receipts on debt service. But suppose inflation rises... and interest rates go back up to where they were in the late ‘70s. Back then, the feds had to pay 15% interest to borrow money for 10 years. At that rate, financing the whole federal debt would take 100% of tax revenues – just for the interest.

Obviously, that’s not going to happen. Something else is going to happen. What? Hard to say. Some combination of default and inflation, most likely...

Of course, this doesn’t bother the feds. That story is still beneath the surface... It’s a crisis that hasn’t happened yet. They couldn’t see the crisis in the public sector coming in ’07. They can’t see the next one coming either.

Economists can’t tell a government job from a private sector job... and can’t tell a $1 of government spending from a dollar spent by the private sector... and can’t tell a dollar’s worth of GDP from a dollar’s worth of real prosperity...

... which means, they can’t tell the difference between what’s happening on the surface to what’s happening underneath.

In a sense, this is just another manifestation of the same “battle” we wrote about years ago. On one side are the feds. On the other is Mr. Market.

The feds want to inflate. Mr. Market wants to deflate. The feds want a boom. Mr. Market wants a bust. The feds want to inflate another credit bubble. Mr. Market has a knife in his hand.

On the surface, the feds are winning. At least, that’s the way it looks if you get your information from reading the newspapers or listening to CNBC. And in a sense, these reports are correct. Superficially, the battle is going the feds’ way.

But deeper down... the debt is still there... and it is growing bigger. And Mr. Market sharpens his dagger.

More news...

By rights, the dollar should be going up.

US retail sales data was probably the most important release of last week. And it was much stronger than expected. Considering all the bad weather that hit the US in February, this figure really was very strong. It underscores the US economic recovery.

That’s the message from our macroeconomic trader colleague, John Lewis. John’s not bullish, nor bearish. He just says what he sees and tries to find a way to profit from it. We’re working with John on a possible trading service – one that analyses big macro themes... and then makes simple trades to play them.

We asked John why – if the news is so rosy in the US – isn’t the dollar responding.

“Foreign exchange markets can sometimes trade counter intuitively and that has happened last week,” he explained.

“Of course it’s reasonable to expect strong US data to support the Dollar. But markets have frequently suffered from bouts of risk aversion. That’s when traders run scared from risky assets like equities and buy ‘safe haven’ assets (the Dollar) for protection against an unquantifiable risk.

“When risk aversion recedes as traders become more confident, riskier assets do better. And safe haven trades are closed. So yes, last week’s strong data was Dollar positive, but not sufficiently so to counteract the rush out of safe haven trades back into equities. That’s why the Dollar performed badly.”

Should we be worried, square up, and sit on our hands then?

“On balance, no. If a pattern of steadily improving data can emerge, rather than the recent run of mixed data, trends will re-establish. Equity traders will remain focused on Equities, leaving foreign exchange traders to focus on their market.

“The Dollar should then begin to benefit from a run of stronger data. Sometimes trading is like that. You just have to ride it out and remain focused on the big picture, but always be open to evidence that might mean you’re wrong.”

For every bull there is a bear. For every short seller there’s a buyer. That’s just the way markets are. Trading is about being on the right side more than on the wrong side – something John seems to do very well. Watch out for details of his macroeconomic trading service in the months ahead.

Oh, and whilst we’re on the subject of Forex. We saw an interesting letter from one of Tom Tragett’s readers this morning. We’d like you to see it.

You may know Tom’s Forex Trade Alert already – we have recommended it here before.

But this new letter is from someone who’s been following Tom’s trades and doing rather well. We think he explains the attractions and potential of Forex trading rather well...

“I went from knowing nothing about forex trading to paying for my holiday with it...”

Take a look here and imagine harnessing this for yourself:

An open letter from a private Forex Trade Alert reader.

Forex Trade Alert is a regulated product issued by Fleet Street Publications ltd. Spread betting is not suitable for everyone – ensure you fully understand the risks involved and never risk more than you can afford to lose. Commissions, fees and other charges can reduce returns from investments. Please seek advice if necessary. 0207 633 3600.

And more thoughts... opinions and obiter dicta...

*** Remember our Trade of the Decade? Short US bonds; go long Japanese shares. This from David Rosenberg:

“By the way, the Japanese economy is turning into the “sleeper” of the year — very quietly turning in some very impressive data of late and it has been the best performing economy in the industrialized world since the bottom a year ago and few realize this — there are press reports out of the Nikkei that the government is about to lift its assessment of the economy. Investors take note that the Japanese equity market is one of the few in Asia that is in the green column year-to-date!”

*** And here’s an interesting item that gives you the temper of the times:

“Government Workers Feel No Economic Pain,” reports the Washington Times.

By David M. Dickson

“The recession and the ongoing jobless recovery devastated much of the private-sector work force last year, sending unemployment soaring, but government workers emerged essentially unscathed, according to data released Wednesday by the Labor Department.

“Meanwhile, the compensation for state and local government employees continued to easily outdistance the wages and benefits for workers in private business, a separate Labor Department report showed.

“Private-industry employers spent an average of $27.42 per hour worked for total employee compensation in December, while total compensation costs for state and local government workers averaged $39.60 per hour.

“The average government wage and salary per hour of $26.11 was 35 percent higher than the average wage and salary of $19.41 per hour in the private sector. But the percentage difference in benefits was much higher. Benefits for state and local workers averaged $13.49 per hour, nearly 70 percent higher than the $8 per hour in benefits paid by private businesses.”

*** This weekend we went to a wedding reception in Mumbai.

There were beautiful women dressed in brightly colored traditional gowns. Men favoured western business suits, but a few sported the outfits usually worn at Hindu weddings... with flowing, coloured tunics, baggy white pants and little embroidered slippers.

These were the men and women who are leading the Indian economy in one of the most remarkable growth stories in economic history. India has been upstaged by China. The middle kingdom’s story... from communist rags to capitalist riches in a single generation has a lot of dramatic punch. But India’s story may have a longer run. Because India grows without relying too heavily on exports. And it seems to have a large class of people who may be capable of keeping that growth on track.

“I now work for Blackrock,” said a pretty young woman. “I did my undergraduate work at the University of Texas. Then I worked in New York for a while.

“My sister lives in Georgetown, not far from you...”

Another man was a Sikh, with a turban on his head.

“I’m a metallurgist. I believe in machines. When I have money, I buy machines. I don’t trust stocks...”

The Sikhs – a military caste – were regarded with deep suspicion for a while. Incidentally, the French prohibit people from wearing a turban when they get an official photograph. This is to provide the government with an accurate picture of the person, presumably. But since the Sikhs wear their turbans all the time, a more accurate picture would show what the man looks like with his turban on...

“I went to the University of Nevada,” said one of the guests. “I went to MIT,” said another. “I went to the University of Pennsylvania...”

“I got a patent on... I’m a bio-chemist... I’m on the board of... I run a business that...”

One after the other, the CVs were impressive. These are people who have money, training, ambition, manners...

“There is no Social Security in India,” explained a colleague. “And no welfare. We’re too poor for that. People know they have to work to support themselves and their families. And the economy is still an entrepreneurial economy. The people who have money usually run their own businesses. The money is still in the hands of entrepreneurs instead of professional managers. It’s more like the economy in the US during the early part of the 20 th century, in other words, than like today’s US economy.”

Until tomorrow,

Bill Bonner
For The Daily Reckoning

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