Sunday, November 4, 2007

Peter Schiff says 3.9% economic growth baloney

While I am usually reticent to write about economic matters in detail. Lacking a degree in economics and having only a elementary understanding of investment strategies I am hesitant to wade into this morass. In reality however only a little common sense is required to see the dire state of our economy and country. Those with the degrees are themselves the ones that have created this mess over the last 40 years. The masters of economics theories that are tethered only to an unprincipled lust for profit.

The recent announcement of a 3.9% economic growth in the third quarter by our government seemed more than a little suspect to me. I have mentioned my concerns to many about our economic problems for months. In faithful conservative Republican circles I am often greeted with derision and hubris for even daring to mention that we are headed for some economic rough going in the not so distant future. As if the economy were itself some animated god impervious to the obvious laws of nature. Immune to the of cause and effect of mankind. Epithets like commie and socialist are often directed at me by the standard knee jerk Republican reaction to any type of real thought about our disastrous free trade and economic strategies. Some educated and some uninformed, all displaying a naive faith in an economic dogma that itself is flawed. Meanwhile, America's middle class bears the burden on their way to foreclosure. The American dream is being bankrupted by destructive and foolish deficit economic strategies that only benefit the fat cats on Wall street. And soon they too will have to pay the piper.

Peter Schiff of Euro Pacific Capitol recently wrote an article detailing just how ludicrous the government claim of recent economic growth is. By fudging the inflation index they are able to claim growth in our economy that in reality is in recession. By any objective indicator our economy is shrinking not growing. So if the government thinks they can prop up this deficit economy with false numbers they are only fooling themselves and those still believe in our own government. Who on earth would still be that gullible and naive?

I will post his entire article since he explains our economic situation much better than I can.

The US Commerce Department’s latest numbers are meaningless
By:Peter Schiff

Yesterday, as the US dollar fell to new record lows and oil and gold prices surged to new highs, the US Commerce Department delivered meaningless government data that managed to report the lowest US inflation in the last half century. Wall Street was hardly fooled.

The Dow Jones Industrial Average plummeted by 390 points, or 2.6 percent, to be followed down by Asian markets today. According to Bloomberg, the Morgan Stanley Capital International Asia-Pacific Index lost 1.3 percent to 170.10 as of 9:30 a.m. in Tokyo, falling from a record. The Nikkei 225 Stock Average declined 1.9 percent to 16,554.02. Australia's S&P/ASX 200 Index dropped from a high. All markets open for trading retreated

These bizarre numbers were integral in allowing the Commerce Department to report 3.9 percent annualized GDP growth in the third quarter, which was heralded by the bulls as evidence that a resilient U.S. economy had shrugged off the problems in the housing and mortgage markets. However, the government’s ability to make “economic growth” magically appear is based purely on statistical finesse.

To arrive at this rate, the government had to assume that inflation during the quarter ran at an annualized rate of .8 percent (that’s less than 1 percent). That is the lowest rate of inflation used to calculate U.S. GDP since the Eisenhower administration. With oil priced at almost $100 per barrel, gold futures trading over $800 per ounce, the dollar hitting record lows, and the Fed printing money like it is going out of style, the government has the nerve to claim that current inflation is the lowest it has been in half a century. Unbelievable!

Just in case there is some confusion, the government adjusts nominal GDP gains using the GDP deflator, which represents the inflation rate during the time period being measured. This is done to strip inflation out of the GDP calculation so that only real growth gets counted: not nominal gains that result purely from inflation.

The consensus estimate for 3rd quarter GDP growth was 3.4 percent. The reason we beat that number was that the government adjusted the nominal 4.7 percent gain by a mere .8 percent. Had the government assumed a higher rate of inflation, say 2.6 percent (identical to the rate used to deflate second quarter GDP,) the 3rd quarter gain would have been only 2.1 percent, well shy of the consensus forecast. My guess is that inflation is actually running at an annualized rate closer to 10 percent. Therefore using a more honest deflator, the U.S. economy is actually contracting, which would explain the recent anecdotal evidence provided by various economic polls, voter dissatisfaction and consumer sentiment numbers. In fact, if one simply measures U.S. GDP using gold or any other currency, it is clear that we are already in a recession.

Similar illusions are created in other numbers, such as retail sales, corporate earnings, and stock prices, which are all rising merely as a result of actual inflation being higher than the official reports. For example, higher retail sales reflect consumers paying higher prices for the products that they buy. They may in fact be buying less stuff, but are paying more for it. Further, part of the gains result from tourists using their appreciated foreign currencies to buy products cheaper here than they can in the own countries. I have heard about Canadians checking into U.S. hotels with empty suitcases, crossing the border to indulge in weekend shopping sprees.

Corporate earnings, particularly those of multi-nationals, are padded as their foreign currency denominated earnings translate into more dollars when those earnings are repatriated. However, such gains are illusions, as companies merely earn more dollars of diminished value for the goods they sell. The actual volume of exports does not necessarily improve much, as evidenced by weak industrial production and manufacturing employment. When those additional debased dollars are paid out as dividends, they confer no real increase in global purchasing power to shareholders.

Similarly, just as inflation causes prices to rise for goods and services it causes stock prices to rise as well. Though such gains may be less than the actual increase in the cost of living, as long as the government gets away with using bogus CPI numbers which fail to fully reflect inflation, Wall Street takes credit for nominal gains as if they were real.

However, as ridiculous as the phony GDP number was, yesterday’s biggest joke was a report on global competitiveness put out by the World Economic Forum in Davos, Switzerland, which ranked the U.S. economy as the world’s most competitive. To arrive at this conclusion, the forum has obliterated the obvious under a mountain of theory. In determining country rankings, the WEF weighed strengths in their "12 Pillars of Competitiveness", including: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation. Completely ignored however are the measurable results of competitiveness, notably a trade surplus and a strong currency.

It is as if the WEF decided to judge a weight loss contest without using a scale, by instead focusing only on mental attitude, dedication, perseverance, and nutritional education! As a result the prize is awarded to the fattest contestant. Based on the empirical evidence of a gargantuan trade deficit, staggering global indebtedness, and a declining currency, the United States is clearly not the most competitive economy in the world.

I saw Peter Schiff on Glenn Beck last week. Here is the recording.