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Manipulating the Masses

By: John Williams & The Daily Reckoning Crew

-- Posted Thursday, 4 May 2006 | Digg This ArticleDigg It!

London, England

Thursday, May 04, 2006


*** Here's a shocker: those employed on Wall Street believe that stocks are on the rise...

*** Happiness mongers are out in full force...Friedman tries to wrap his head around the oil crisis...

*** Keep your eyes peeled for Empire of Debt billboards in the D.C. area...we are not economists - nor do we play them on T.V....and more!

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The Dow is going to 12,000, according to the latest cover story in Barron's, the leading investment daily. That's what the "portfolio chiefs" say in its latest "Big Money Poll." What a shocker. People who make a living on Wall Street think stocks are going up. Have they ever thought they were going down? Not in our memory.

And here in London, columnist Irwin Stelzer has a bout of hallucination in the Sunday Times. "The normal nervousness of investors and market watchers has been converted into paranoia," he claims, when in fact all the news is good. What are investors worried about, he wants to know. Why is gold going up?

The happiness mongers are out in full force. Something must be amiss.

Unlike them, we don't claim to know better than anyone else what the future will bring. Instead, we look to the present and try to see what it has brought already. And, what we see is a public as short on worry as it is on cash. And that, dear reader, is precisely why the economic news is so good, because consumers are spending their fool heads off. People are still buying houses, as Mr. Stelzer points out. The GDP is still increasing.

Why? Because people are spending money they haven't earned yet. Worried people don't do that.

Meanwhile, debt levels are soaring. Bankruptcies are increasing.

Inventories of unsold houses are mounting. Even the pawnbrokers report that business is picking up briskly.

We have to wonder whether Mr. Stelzer will turn out to be like the young ship's officer on the Titanic, who commented - after it hit an iceberg - on how he thought the orchestra never played better. He had not bothered to look below decks.

Naturally, the dollar is sinking. The U.S. deficit has now reached 7% o GDP, but that is just more good news in Mr. Stelzer's book. It "will correct the imbalances gradually," he if he knew.

As the dollar sinks, the price of oil rises and so do consumers' costs.

Even at today's prices, according to the Times writer, gasoline is not as expensive, in real terms, as it was three decades ago. Well, that's a comfort. The poor homeowner can barely make ends meet as it is. Imagine what a fix he will be in when the price of oil goes higher.

Even Thomas Friedman at the New York Times thinks the biggest challenge facing the United States today is oil, but the black goo is way too slippery for a writer as slow and clumsy as Friedman.

As the Times' leading columnist, the man has achieved fame and fortune not merely beyond his merits, but so much beyond belief that it is as if a draft animal had won the Nobel Prize in physics. True to form, in his column today he gets so tangled up in his loopy ideas, he practically strangles himself.

On the one hand, he points out that high oil prices enrich evil regimes around the world. On the other hand, high energy prices help reduce demand for oil in America, which should lower prices. And then, poor Friedman runs out of hands.

Giving up on analysis, he switches to political action! He proposes a new political party, "something like the 'American Renewal Party,' that would focus on energy policy as its key platform position:

"My gut says [Friedman listens attentively to the gurgling of his own repulsive body parts] that some politician...will take a flier on telling Americans the truth [maybe his gut never met a politician...he should have gone to the very bottom of the GI track]."

What truth does the columnist long to hear? Alas, here is where the cords of reason begin to cut into his own cushy neck:

"The only way Americans are ever going to enjoy relatively cheap gasoline again is if we raise the price...and fix it at that higher investors know it is not coming down."

That should do it, dear reader. Oh, we do hope the American Renewal Party gets up and running. What fun it will be to see what these clowns do next!

Two days ago, the dollar sank to its lowest level against the euro in almost a year. Gold rose...up $1.30 on June contracts.

At this point, we anticipate a correction in the price of gold, but not a correction in the silly opinions of the happiness mongers. That will take a gold price well over $1,000 an ounce.

More news from The Rude Awakening...


Eric Fry, reporting from Manhattan:

"As we have noted in several prior columns, the 'Commercials' are considered the 'smart money,' based on their tendency to position themselves correctly at important inflexion points.'

For the rest of this story, and for more market insights, see today's issue of The Rude Awakening:

Oil Correction


And more opinions on various subjects...

*** A letter from Wiley, our book publisher, about our "billboard campaign" in Washington DC:

"It's confirmed that all of the rail dioramas are installed and all but two of the bus taillight posters are installed. These remaining two will be installed today or tomorrow.

"The bus route begins out of the "Four Mile Run" Garage and the ads will rotate through the following areas: Alexandria; Arlington; Fairfax; Annandale; Springfield; Burke Center; Pentagon; Centreville; Vienna; Fair Oaks; Federal Triangle; Capital Hill; Constitution Avenue; The Mall; McLean; Tyson's Corner, and Chantilly. We will be sent pix of these posters installed.

"The rail station dioramas are in fixed positions and are installed at the following stations:

"Gallery Pl/Chinatown

Judiciary Sq

Potomac Ave

Capitol South

Federal Center SW

Metro Center

Federal Triangle, and


If you happen to find yourself in DC and stuck behind a bus near the Capitol Building, maybe you could shoot us an e-mail to confirm these bad boys are up. We'll share the pictures with you once we get them.

*** The Harvard Political Review, er, reviewed Empire of Debt. Here are the money paragraphs:

"Although Bonner and Wiggin raise very serious concerns in their description of America 's indebted society, their argumentation is often overly simplistic. Federal debts are now the highest they have ever been, but as a percentage of GDP debt levels are at a relatively modest 40 percent. During the economic boom after World War II, an era that the authors laud as one of the peaks of American economic power, the debt-to-GDP ratio reached 109 percent. Growth rates are of course much lower than those of developing countries, but considering the per-capita incomes they are starting from - eight times less in China than in the United States - this comes as no surprise.

"Moreover, much of the current account deficit is comprised of cheap, easy-to-produce imports such as textiles and toys; America still hold an edge over most countries in the production of technologically sophisticated goods, and it is ultimately technology that fuels productivity growth, not how much a nation can cut its costs. These criticisms are symptomatic of the authors' general tendency to oversimplify vastly complicated economic issues, many of which are still hotly debated in economic circles today.

"The fact is, there is a reason that trained economists and financiers are not running for cover and, contrary to the contention that they have all been deluded by the trappings of the American empire, it is much more reasonable to believe that such a catastrophe is neither imminent nor will it be as disastrous as Bonner and Wiggin claim. Empire of Debt fails to tackle the complexities of the economy and consequently presents a misleading picture of the actual state of affairs.

"In the end, the authors take an excessively alarmist stance that is founded on an irrational fear of debt. The best reason to read this book is for the interesting historical anecdotes, not as an introduction to macroeconomics."

Forgive us, dear reader, for being overly simplistic, but we do have hard time imagining how this economy, global or otherwise, will yield enough revenue to help the United States finance its current $44 trillion in obligations.

Of course, we never claimed to be "trained economists." That is the purview of muckity-mucks at Harvard. In Empire of Debt we trace the DNA of the idea that "deficits don't matter" straight back to a team of "7 Harvard and Tufts Economists." In 1937, they advised FDR: "It's a public debt...we owe it to ourselves...therefore we never have to pay it back."

We wonder what the Chinese, Indians, South Koreans, Russians, or Swedes think of such brilliance? Oh, that's right, they've already told us.

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The Daily Reckoning PRESENTS: As we've said before in this space, government economic reports are slightly skewed - at best. Shadow Statistics' John Williams explains what driving factors at work behind these fraudulent statistics...


by John Williams

If you believe the government, annual inflation is running less than 3.5%, unemployment is less than 5%, annual GDP growth is about 3.5%, and the 2005 federal deficit was $318 billion.

In reality, however, annual inflation is over 8%, unemployment is around 12%, and annual GDP growth is flat. Not only does common experience support the latter set of numbers, but also taking a close look at how government economic reporting has been manipulated over time. What will surprise many, though, is that the annual 2005 federal deficit was $3.5 trillion (not billion). That extraordinary number is as reported by the U.S. Treasury, using generally accepted accounting principles.

In 1996 - the middle of the Clinton economic miracle - the Kaiser Foundation conducted a survey of the American public that purported to show how out of touch the electorate was with economic reality. Most Americans thought inflation and unemployment were much higher, and economic growth was much weaker, than reported by the government. The Washington Post bemoaned the economic ignorance of the public. The same results would be found today.

Neither the Kaiser Foundation nor the Post understood that there was - and still is - good reason for the gap between common perceptions and government reporting: government data are biased in politically correct directions and increasingly have diverged from common experience and reality since the mid-1980s. Inflation and unemployment reports are understated, while employment and other economic data are overstated, deliberately.

For several years, I conducted surveys among business economists as to how they viewed the quality of government economic data. The following were actual comments:

The senior economist of a major retail company told me, "Quality varies. The retail sales numbers are terrible, but money supply data are great."

The senior economist at a major bank offered, "There's a problem with money supply, but I think retail sales are pretty good."

The point is that when an economist knows a sector well, he also recognizes the limitations and distortions of related economic reporting.

Gathering and reporting accurate information on a timely (one-month) basis for components of the U.S. economy is nearly impossible. Nonetheless, most career government statisticians in Washington work diligently to provide the best information possible within the limits of the existing reporting system. A number of reporting distortions, however, are not accidental.

The popularly followed economic series are subject to two forms of manipulation. First is the event-driven alteration of data, where specific employment numbers, for example are massaged to help political circumstances. Such is the nature of what appears to be happening at present, with presidential approval ratings doing some historical bottom bouncing.

The second type of manipulation is more insidious, though, where reporting methodologies are altered so as to build reporting biases into a series.

Changes in CPI weighting methodology during the Clinton administration (and as proposed by the earlier Bush administration), for example, were designed to understate the CPI so as to cheat social security recipients out of some of their cost of living adjustments. That purpose was espoused particularly by former Fed Chairman Alan Greenspan.

Here is how of the reporting system shenanigans have evolved over time.

The first regular reporting of now-popular statistics such as gross national/domestic product (GNP/GDP), unemployment and the consumer price index (CPI) began in the decade following World War II. Modern political manipulation of the government's economic data began as soon as practicable thereafter, with revisions to methodology often incorporating positive reporting biases. As a result, investors and most economists, relying on the government's data, often miss underlying economic reality.


- During the Kennedy administration, unemployment was redefined with the concept of "discouraged workers" so as to reduce the popularly followed unemployment rate.

- If Lyndon Johnson didn't like the growth that was going to be reported in the GNP, he sent it back to the Commerce Department, and he kept doing so until Commerce got it right. The Johnson administration also was responsible for gimmicking the accounting that hides most of today's federal deficit.

- Richard Nixon had a highly publicized war with the Bureau of Labor Statistics on the unemployment data. Nixon wanted to report the unemployment rate as the lower of the seasonally adjusted or unadjusted number, at any given time, but not specify same to the public. While that approach was unconscionable at the time and never used, basically the same methodology was introduced in 2004 as "state-of-the-art" by the current Bush administration.

- The Carter administration was caught deliberately understating inflation.

- Systemic changes were introduced during the Reagan administration to boost reported GNP/GDP growth and to lower CPI inflation on a regular basis. The wildest manipulations, however, happened at the time of the

1987 liquidity panic. In addition to intervention in the futures markets by the New York Fed to help prop the stock market after the October 19th crash, direct and heavy manipulation of the trade deficit data, under the direction of the Federal Reserve and U.S. Treasury, was used in conjunction with massive currency intervention to help bottom the dollar and to contain the currency panic at year-end 1987.

- The first Bush Administration began efforts at the systematic reduction of the reported rate of CPI inflation, and it worked an outside-the-system GDP manipulation aimed at helping with the failed 1992 reelection bid.

- As former Labor Secretary Bob Reich explained in his memoirs, the Clinton administration had found in its public polling that if the government inflated economic reporting, enough people would believe it to swing a close election. Accordingly, whatever integrity had survived in the economic reporting system disappeared during the Clinton years.

Unemployment was redefined to eliminate five million discouraged workers and to lower the unemployment rate; methodologies were changed to reduce poverty reporting, to reduce reported CPI inflation, to inflate reported GDP growth further, among others.

- The current Bush administration has expanded upon the Clinton era initiatives, particularly in setting the stage for the adoption of a new and lower-inflation CPI and in further redefining the GDP and the concept of seasonal adjustment. Event driven manipulations appear to be underway in an effort to help boost flagging presidential approval ratings.

As a result of the systemic manipulations, if the CPI and GDP methodologies of 1980 were applied to today's data, you would get the 8%-plus inflation and flat economic growth discussed in the opening paragraph. Using unemployment methodology of 1960 generates an estimate of current 12% unemployment.

When Main Street, U.S.A., does not believe the government's reporting, the reality of common experience usually is the better estimate of what is happening in the economy. The damage from the fraudulent statistics, however, is much more serious than just politics as usual, the misguidance of overly trusting investors, or the massive cheating of Social Security recipients (payments would 70% higher using the CPI methodology of 1980).

The masking of the actual annual $3.5 trillion deficit is setting up the nation for an eventual national bankruptcy/U.S. dollar collapse. Putting that $3.5 trillion in perspective, consider this: If the government seized 100% of everyone's salary and wages, the government still would show a deficit. But that is a story in itself.


John Williams

for The Daily Reckoning

Editor's Note: Walter J. "John" Williams writes "Shadow Government Statistics," a monthly newsletter published at The site also provides broad background information on problems in the quality of government economic reporting. Click here:

Out of necessity, Williams had to become a specialist in government economic reporting. One of his early clients was a large commercial airplane manufacturer that had developed an econometric model for predicting revenue passenger miles. The level of revenue passenger miles was the company's primary sales forecasting tool, and the model depended heavily on the GNP (now GDP) as reported by the Department of Commerce.

Suddenly, the model stopped working, and Williams was asked if he could fix it. Realizing the GNP numbers were faulty, he corrected them for his client (official reporting was similarly revised a couple of years later) and the model worked again, at least for a while, until GNP methodological changes eventually made the underlying data worthless.

That began a lengthy process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present. For a number of years Williams conducted surveys among business economists as to the quality of government statistics (the vast majority of economists thought it was pretty bad), and the survey results led to front page stories in the New York Times and Investors Business Daily, considerable coverage in the broadcast media and a joint meeting with representatives of all the government's statistical agencies. Despite minor changes to the system, government reporting has deteriorated sharply in the last decade or so.

-- Posted Thursday, 4 May 2006 | Digg This Article

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You can begin your free subscription by clicking here, entering your email into the box, and clicking 'Subscribe'.


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