-- Posted Thursday, 7 April 2005 | Digg This Article
I submit to you, dear reader, that most everything you’ve heard about the economic recovery is a pack of lies, a fraud, a joke, propaganda, twaddle and fiddle-faddle, sprinkled with a liberal dose of bullpucky and a pinch of hogwash for good measure.
Now that we’ve gotten the niceties and formalities out of the way, let me share with you how I REALLY feel.
Most readers already know that the official statistics are a pile of hooey, routinely manipulated to demonstrate an economic fantasy that doesn’t really exist. Basically the feds get to write their own report card every month and they’re not exactly loathe to take some liberties in compiling the numbers. (If there’s one thing feds are good at, it’s TAKING liberties.) We’ve been over this before, but let’s review a few blatant examples to lay the foundation.
First off, one of the biggest frauds: GDP. This fabrication is calculated using all manner of mumbo jumbo that I purport neither to care about nor understand. AND the official inflation data. Anyone who doesn’t sleep under a bridge and force windshield washings upon unsuspecting drivers for a living knows that official inflation data is about as out of touch with reality as Rosie O’Donnell is out of touch with the concept of stopping at just one helping. We all know that the inflation figures are routinely UNDERstated which leads to an OVERstatement of GDP growth.
The inflation data makes ridiculous assumptions about housing costs. Those numbers are calculated utilizing rental rates and as we all know, rental rates have NOT kept pace with surging home prices. As far as the Fed is concerned, the cost of housing has only risen modestly even as they pat themselves on the back for surging home values. You can’t really reconcile the dual “successes”, but the Fed trusts that the average consumer will continue to accept the official line and never question the obvious disparity.
The employment data. Now here’s a real piece of work. These numbers fail to account for disgruntled workers who have left the job search. The actual unemployment rate is estimated as twice as high as the official figures. Never mind that the bulk of job growth is a statistical fiction based on questionable assumptions. It may surprise you to learn that the job growth is NOT measured by doing a head count of ACTUALLY created jobs.
Last but certainly not the least absurd, Alan Greenspan’s favorite “hedonic pricing method” which makes all kinds of wacky assumptions that only a bureaucrat could love. At $25,000 a piece, the Fed doesn’t consider cars to be much more expensive than $10,000 cars twenty years ago because they’re better and loaded with more features today! Oddly enough, however, computers that cost $1000 are actually worth several times that when calculating capital spending data because, well, because computers are better and loaded with more features today. Inflation down, capital spending up. Voila! Economic recovery courtesy of Fed statistamathemagics!
Arguably when the basis for measurement of the economy’s health is pretty much a fraud, it’s likely that whatever you’ve heard from official sources about the economy as a whole is flawed. The reality is that the Fed’s policies have done very little to create a more dynamic, healthy or productive economy but instead have served primarily to boost asset prices, create new bubbles in housing and credit markets and cause consumers to plunge more deeply into debt.
Yet according to the headline data, it really looks like we’ve been growing, albeit at a “measured pace”, if I may be so bold as to borrow from the catchy repertoire of “meaningless terms that sound like something important to people who don’t really understand what’s going on” coined by our great financial wizard Alan “I’ll say anything you want to hear” Greenspan.
The headline data paints a rosy picture while totally disregarding the brutal reality that festers below the surface. For example, the GDP numbers indicate that the economy is growing. But the ever-expanding trade deficit makes it very clear that America isn’t producing much of anything, and if it is, it’s not selling enough of it.
What’s going on here? The economy looks healthy because consumers continue to buy more stuff. The bulk of that stuff is produced by the Asian economies, packaged and shipped to American companies which offer a host of credit plans that allow consumers to borrow more and more, spending what they don’t have to own new toys they don’t need. Not healthy. The consumer spends, the corporation bags a profit, the GDP figures swell and Asian economies own a bigger and bigger chunk of America with every passing month. Healthy when you’re trolling your votes. Unhealthy when you’re footing the bill.
All of this is made possible by the Fed’s easy money policies. Interest rates have been maintained at extremely stimulative levels. All that easy money floating around (money supply has increased by more than five times since the early 80s) has to find its way somewhere. Much of it ends up in the financial and housing markets. (Which is one major reason why the inflation data appears “mild.” It doesn’t account for asset inflation.)
The result is that consumers feel wealthier and thus feel comfortable borrowing more money to buy more toys. They refinance their homes and pretend they now have more money, conveniently ignoring the fact that they must pay all that money back with interest. That consumer debt translates into consumer spending which of course boosts the economic data.
In the end, there’s very little in the way of real, net growth. Easy money inflates the markets. (Said another way, it creates asset bubbles.) Consumers borrow against their perceived new wealth, feel happy and secure with their new toys and the economic data registers gains.
But where’s the increase to wealth and savings, the REAL stuff that REAL expansions are made of? Consumers are spending debt that is backed by inflated markets which are driven higher by the decreasing value of the underlying currency. In essence, it’s all a big numbers game, a huge Ponzi scheme where one asset is devalued in order to create the appearance of growth in another.
Whatever real wealth is generated in this process routinely boards a ship and sails its arse over to Asia. You see, producers accumulate the wealth that consumers toss away. Production generates wealth. Consumption generates “not wealth.” Get it? In the worst case, consumers go into debt buying what producers produce. And welcome to the worst case!
We are no longer a nation of producers. America is the world’s biggest consumer. When’s the last time you saw a new factory being built? Where’s our textile industry? Gone. Where’s our steel industry? Almost gone. That TV in your house: made in America? Nope. How about the computer? Your appliances? Washing machine? Nope, no way and nada. The automobile industry is on its last legs, as GM’s recent news makes abundantly clear. Wave “bye-bye” as soon as the Chinese advance their factories to a competitive level.
We’re consumers and borrowers. And that’s no formula for wealth. Wealth is built from savings and our savings rate continues to flirt with historical lows. Consumption isn’t a bad thing, mind you. But when it’s the primary thing, we have a problem.
What is bad is that we’re borrowing in order to consume. We’re selling our future production in order to consume now. This is a recipe, THE recipe for financial ruin. And other nations are the benefactors or our profligacy. It’s done at the individual level and at the national level. America has gone from being the world’s largest creditor to the world’s largest debtor. Every month other countries accumulate another chunk of America. More than half of our debt is held by other nations.
The headline data talks about growth but under the surface it’s just a massive transfer of wealth, a slow bleed from West to East. This isn’t growth. It’s a steady erosion of our economic might. All debts must eventually be reconciled. Will we pay off our national debt own American “free and clear?” Never. We can’t. Not possible. It’s gotten out of hand.
Worse yet, the only way to sustain the current illusion of growth is to keep expanding debt, to continue borrowing more and more. Which is precisely what we’re doing, precisely the Fed’s strategy. Keep printing money, keep folks borrowing and keep this big asset transfer going for as long as possible, all the while “legitimizing” it by labeling it “economic growth.”
I don’t know how or when it ends, but no credit bubble has ever ended well. Bubbles can’t and don’t go on forever. Regardless of how it ends, we’ve undoubtedly sold off enough of our future that the days of global U.S. economic dominance are numbered.
Can we reverse course? Sure. Anything is possible with enough pain, hard work and discipline. We’d have to become producers again. We’d have to get competitive. Not easy to do when Asians are willing to work for a fraction of our costs. Is corporate American willing to stop feeding at the “easy-financing-forever-indebted-to-us” trough and make honest money by manufacturing real stuff? Doubtful, but possible. Is government willing to give up the pork, entitlements and transfer payments? Well, that would put a whole lot of politicians out of work, competing with real, hardworking people for real, honest jobs. That one, I’m afraid, will NEVER happen.
Nothing is inevitable. It’s possible to reverse course. It’s possible but it won’t happen as long as Oprah always comes on at 4pm and the snack bowl remains “chock full’o’Twinkies.” Until it hurts, I sincerely doubt anything will change. Until we have to change, we won’t.
In the end, a lot of folks will get hurt when the housing, stock and credit bubbles bust and they’re left having to pay off record levels of debt with simple wages that aren’t rising nearly enough to keep up with inflation. I don’t know when that will happen because I DO know that the feds will do every asinine thing available to them to ensure the bubbles don’t pop before they absolutely have to. And if there’s one thing I’m not good at, it’s estimating the full extent of political & central bank stupidity...
-- Posted Thursday, 7 April 2005 | Digg This Article
