& Market Trends
Lessons in Cooking and Spinning
Finance Group, LLC
June 12, 2003
A government is no different in behavior than any corporation
in its desire to show the best possible report. For a corporation,
there is a bias in reporting high revenues and earnings. For
government statistics, it certainly makes the US appear healthier
if the GDP is bigger, personal income is higher, and the number
of people working is greater. However, when accounting games
are used to push up reported numbers that reach a certain level
beyond reality, a false sense of security can lead to very bad
decisions, both for individuals and the government.
If you are
curious about seeing some "jaw dropping" numbers on
the economy, take a look at Table 8.21 of the Bureau of Economic
Analysis, titled "Imputations in the National Income and
Product Accounts" (since the latest data that is available
is for 2001, linear trends can be used to estimate current numbers).
Right off, you'll notice that if total GDP is about $11.5 Trillion,
at least $1.7 Trillion of GDP is "imputed."
What is an
imputation, and why should we care? Imputations are the part
of GDP that the government decides to estimate, where no cash
changed hands, kind of like we "scratched each other's backs."
Wouldn't it be a tragedy if this type of activity wasn't counted
as REAL GDP? Some of the largest numbers are for items such as
$300 billion of Personal Income, imputed for the value of having
a checking account (free of charge); $680 billion for the value
of owner occupied housing (you should really be paying yourself
rent), and $65 billion for the benefit people get from using
the property of nonprofit institutions, like going to a church
or having a place to hang out during the day. We believe the
$300 billion for the value of checking accounts doesn't even
pass the laugh test. Perhaps there was value back in the 1950's
when it was expensive to clear checks and a case could be made
for some measure of value. But, in today's world, just try and
bounce a check, use your ATM card in Europe, or pay your credit
card one day late.
fees in the hundreds of billions of dollars, in real cash. To
boost Personal Income by $300 billion (where no cash changes
hands) because banks don't charge you enough for the privilege
of living off your float, is a joke! Even when you have deposited
a check into your account, and the bank has good funds, they
can easily take up to a week or two to clear those funds for
use. Banks are so friendly!
Why do these
imputations really matter? Our economy has become a debt driven
economy. Consumers routinely spend 10% more than they make each
year by taking on more debt. Debt service and debt total levels
are at record highs. However, debt can only be serviced with
cash flow. With imputations there is no cash flow. While GDP
might be $11.5 Trillion, the cash economy is less than $10 Trillion.
The reality is that we have 15% less cash flow to service debt
than we think. If corporations "goosed" their revenues
because they could use "imputed revenues," the management
would go to jail.
of the data for Personal Income and Personal Saving are even
worse! Not only is Personal Income overstated by $300 billion
due to imputations for checking accounts, but total imputations
in Personal Income total over $720 billion. The total includes
such items as $90+ billion for owner occupied housing, and $350
billion of heath and life insurance paid for by corporations.
While these have value, the individuals never touch the cash!
Savings rate comes right out of "Alice and Wonderland."
First, we have the mythical $300 billion in "non-charged
bank fees," and the non-cash $90 billion in the rent home
owners don't charge themselves, pushing up personal savings.
Then the government estimates the value on new home construction,
less housing depreciation, which adds about $300 billion a year.
Just taking out the imputations on housing for new construction
less depreciation, swings the personal savings number from over
a plus $300 billion to a minus $100 billion. If you take out
the $300 billion in "non-charged bank fees," personal
savings is running a negative $400 billion a year.
thing is that housing is even part of "savings." The
very concept of savings brings up the vision of an individual
earning cash that they take to the bank and deposit in a savings
account. If you look at Personal Income figures, the consumer
is saving over 4% in the first quarter of 2003. If you look at
the Flow of Funds data, even with this 4% rate of savings, household
wealth declined. Obviously, something is rotten in the numbers.
Because the US is in a massive housing bubble, flowing through
the rising prices of homes directly into the calculation for
savings makes the reported savings number look positive when
it is actually negative (the Flow of Funds data just published
by the Federal Reserve shows that Household wealth declined in
the first quarter of 2003).
Why does this
all matter? Looking at our analogy of a corporation with revenues
and earnings, the farther away from cash the accounting becomes,
the harder it is to decide if the firm is actually solvent or
really profitable. The more revenues that have not yet been turned
into cash, the less real profits are. For the US economy, the
higher GDP, Personal Income, and Savings give a false read on
the cash position of the consumer and the more our economy begins
to look like the "road runner" that has gone over the
edge of the cliff, "but hasn't looked down." (By
the way, if you have a mortgage, don't look down, and stop reading
By now you
can realize that at least for the GDP accounts, the "GDP
Books are totally cooked." If analysis reverts back to the
actual cash economy and actual cash savings, we have entered
a phase in the economy where incomes are not sufficient to service
debt. Only income, plus more borrowing, can service debt. It
should be no surprise that the government will borrow over $400
billion, and individuals will borrow an additional $800 billion
to a Trillion in additional mortgage debt. The US government,
state and local governments, businesses, and households, will
need to increase their total level of outstanding debt to over
$1.8 Trillion this year just to keep spending at current levels.
Why is it that Americans need to borrow so much more than we
make to keep spending constant? Maybe real income, in the form
of cash that can be spent, is far less than it seems.
On to spinning
the data. The first level of spin is simply getting everyone
to look the wrong way or at the wrong data. This is the Fed's
favorite ploy. When there is a stock market bubble, look at productivity.
When there is a housing bubble, look at deflation.
At the moment,
the government and the Federal Reserve have persuaded the general
population that the state of the economy is in much better shape
than it really is. Spending must be preserved, and saving discouraged
(or punished with low interest rates and inflation) because of
the new housing bubble.
Personal Income, and Savings are grossly inflated on a "cash
basis," the unemployment statistics are also being manipulated
to down play the severity of the recession. The government has
now come out with monthly revisions, which will help them keep
the psychological Unemployment Rate suppressed way below reality.
at the data that is harder to manipulate. Help Wanted Advertising
for new jobs has never been lower than today in the entire history
of the index. Manufacturers have cut jobs at US factories for
34 months in a row. The length of time people have been out of
work is setting new records. The percent of people in the labor
force is hitting new lows.
In order to
keep the headline unemployment rate down, the number of people
on SSI disability has been increased by over 1.6 MM to 5.6MM,
and there are over 2MM people out of the labor force and in jail.
If you include those who want full time work (and only have part
time work), and those who want a job and need a job (but haven't
looked in the last four weeks because there are no jobs), the
unemployment rate would be over 10%.
the government adds imaginary workers to the job totals every
month. When May's unemployment report came out, you might have
noticed that the number of people who actually lost their jobs
over the past couple of years was revised up over 400,000. Since
the government has unilaterally decided that we are in an economic
recovery and, in normal economic recoveries a lot of people start
their own businesses, each month the government estimates that
between 40,000 to 100,000 workers find jobs. Once a year, the
statisticians have to reconcile assumption with reality. When
they did this in May of this year, 400,000 jobs (that weren't
there) vanished, so the total number of people who lost jobs
increased from 2.1MM to 2.5MM.
Since the government
and the Federal Reserve want you to believe we are in economic
recovery to encourage spending, they will find lots of imaginary
workers to add to the list of employed over the coming year.
Perhaps the imaginary workers can learn to vote?
cooking the books also goes to the heart of Inflation, Productivity,
and GDP growth. Several years ago, the government realized they
would never be able to pay social security benefits to the elderly.
Congress had made a tragic mistake and had indexed the increase
in benefits to the cost of living.
The Fed and
Bureau of Labor statistics came up with a brilliant idea. What
if they discovered that the CPI overestimated the rising cost
of living? Obviously, the government would have to pay fewer
dollars in the future. When baby boomers were young, this tactic
looked wise and clever. Now that baby boomers are becoming old,
under-reporting the CPI could become serious, particularly when
the stock market can't be trusted as a perpetual wealth creation
The CPI has
been "fixed" in two ways. First, with falling computer
and technology prices, we can purchase more and better computer
equipment for the same money. The same holds true for cars, and
many other goods. The products are assumed to be "better"
so inflation remains low. The second fix is to use a chain weighted
If you like steak, but the cost of beef goes up so you end up
buying less expensive chicken, prices for you didn't really go
up that much. However, if you really like steak, your standard
of living has just gone down, because you can no longer afford
This is good
news for the government because the Federal Reserve can assert
prices have hardly gone up! Between the government deciding how
much better products are each year, and the chain weighted price
index, the government may have shaved the CPI by 1% to 1.5% a
year. Clearly, there is a big disconnect on the CPI. If the average
American examines their car, home and health insurance costs,
gas prices, food, college tuition, real estate taxes, etc., they
will realize that prices are skyrocketing. Clearly, looking at
the CPI, the American worker lives in one world, and the Government
lives in another.
this is wonderful! First, even if job loss continues every month
it is likely the GDP reports will show growth. The falling prices
of computers and IT add about 1% a year to "real" price
adjusted GDP growth, even though each year the same number of
dollars is being spent on computers and IT. Second, if GDP is
growing and jobs are declining, productivity is growing - by
definition. How can an economy be growing if it has lost 2.5
million jobs, has manufacturing employment down for 34 months
in a row, and must rely on homeowners to borrow an additional
$200 billion a quarter against their homes to pay for food and
insurance. The answer has to be in the clever definition that
can make "black look white," because it makes no common
statistics could now fit in great works of fiction like Animal
Farm, Brave New World, 1984, Fahrenheit 451, etc. Because the
government has "fixed a CPI problem" that wasn't
a problem we can lose jobs every month, and shrink the real
economy, yet show real GDP growth and solid productivity gains.
Dishonesty or spin in government continues: The US has economic
and productivity growth that is guaranteed - by definition; the
US has 15% of GDP and Personal Income that is made up, "imputed;"
and, a definition of savings that makes savings positive only
because of the housing bubble.
What data can
you trust? Initial unemployment claims are still real numbers
though only 40% of those who lose their jobs are eligible to
file. Look at the US Treasury statements. People who have jobs
pay taxes. The latest quarterly US Treasury statements show that
receipts of personal income taxes are down by 12% from the preceding
year. Doesn't common sense suggest that workers paid 12% less
to the US government because they are making less in Personal
Income? Thank Alan Greenspan and the BLS to impute income and
show Personal Income growing!
Look at the
Flow of Funds data. The data for the first quarter of 2003 shows
household debt growing at 10%, and mortgage debt growing at 12%.
It also shows that household net worth dropped! This is astounding.
According to one set of government accounts, personal savings
is running a strong 4% plus. When you view the entire picture
even with housing prices going up, personal wealth actually dropped,
and the percent of equity held in homes hit an all time low after
dropping 2% last year. People are spending the equity in their
homes faster than it is accumulating. Households are eating their
"seed corn" because their income does not support their
lifestyle and level of spending.
When you examine
government statistics, think about the way the books are being
cooked and how the government is spinning the data. Then, think
about why the Fed is making money so "easy" and why
they continue to encourage you to overpay for homes and stocks.
The government is looking for volunteers to take on more debt
and keep spending. Greenspan is actually beginning to give investment
June 12, 2003
Finance Group, LLC