UK’s “The Market Oracle” Corroborates My Data on American Economy

http://marketoracle.co.uk/Article5562.html

This article, published on a British investing web site, corroborates what I’ve been saying about the American economy and makes exactly the point that I made in Chapter 1 of Five Short Blasts - that the state of the American economy is much worse than the government’s macroeconomic indicators would lead you to believe.  Pay particular attention to Mr. Edelson’s graphs of GDP growth, unemployment and inflation.  I’ve been repeating over and over that:

1. GDP is a poor measurement of the health of our economy.  Mr. Edelson’s graph represents per capita chained GDP - the better measurement I’ve been pushing - which shows that the U.S. economy spends more time in recession than it spends in real recovery.
2. I’ve been saying that unemployment (the official rate is currently 5.5%) is grossly understated and that the weekly jobless claims report, which shows that about 13% of our work force files for unemployment every year, is a much better measure.  Mr. Edelson corroborates this with his “shadow unemployment” rate of 13.7%!
3. I also made the point in the book and continue to make the point that inflation is understated.  Mr. Edelson’s graph reveals that inflation is currently running at 12.6% instead of the government’s official rate of about 5% (less, if you let the government strip out things like food and energy to arrive at what it calls the “core rate”).  Read Mr. Edelson’s explanation of how the government has used gimmicks to strip out most of inflation’s effects. 

The article goes on to recommend an investment strategy, which doesn’t necessarily reflect my own views.  Take it for what it’s worth.  But I highly encourage you to take a look at the article and check out Mr. Edelson’s graphs.  Here’s a few hi-lites from the text of the article.  First, his take on GDP:

Larry Edelson: Thank you! Since the 1980s, Washington has changed and manipulated the way it measures almost every major economic stat — inflation, GDP, unemployment, even money supply — to fit its own political agenda.

John Williams ( www.shadowstats.com ) is a real number cruncher, and he has exposed this deception by continuing to measure those key numbers the same way the government used to, using the same metrics the government used to swear by!

… We had a much deeper recession in 2002, an attempt to recover, and more recently, a second recession starting in late 2006 or early 2007. In other words, the big picture for this entire decade is a double-dip recession. Meanwhile, the government claims we’re not in a recession. It’s ridiculous.

Next, his take on unemployment:

The unemployment situation is also much worse than the government admits: The government publishes a whole series of unemployment numbers — U1, U2, all the way up to U6. But the most widely used unemployment rate — the one the public hears about every month — is U3. Here’s the line representing U3. It’s now at 5.5%.

Plus, the government also publishes the unemployment rate called U6, which is the government’s broadest measure. That’s now at 9.7%.

Martin: Most people aren’t aware that the government itself admits we have 9.7% unemployment in the U.S. But on top of that, you’re saying it’s even worse?Larry: Yes, during the Clinton Administration, the government decided to stop counting long-term discouraged workers — people who had given up looking for a job for more than a year.

Result: The number of discouraged workers in their stats dropped from the 5 million range to less than 500,000.

Martin: So 4.5 million discouraged workers magically disappeared from the government’s unemployment count?

Larry: Into thin air! Like they didn’t exist! So you have to add those discouraged workers back into the ranks of the unemployed, just like they did before the Clinton years.

Martin: So what’s the broadest measure of unemployment today, based on the way the government used to calculate it?

Larry: It’s this red area — 13.7% unemployment. That’s much closer to the true unemployment rate in the U.S.

Martin: That’s hard for most people to believe.

Larry: Is it really? I think it’s very consistent with the fact that so many Americans are suffering an income crunch. And it also jibes with the fact that so many Americans have had to borrow so heavily to make ends meet.

Martin: That makes sense. If people are wondering, “Why was the Fed so frightened in the early part of this decade? Why did they pump up the housing bubble? Why did Americans take out so many home equity loans?” — then this picture you’re painting of the true GDP and the true unemployment helps us answer those questions.

Finally, his take on inflation:

The key is how the official Consumer Price Index — the CPI — is also being used to brainwash the public, unfortunately.

Here’s the CPI: 5% inflation. I guess if you don’t eat, don’t drive or don’t buy anything, or if you’re in high office and all that is taken care of for you, then maybe you’re experiencing low inflation. But for nearly all other Americans, the government’s CPI figures are horribly understated.

Martin: Explain how that’s done.

Larry: Starting in the 1980s, the government made two major, fundamental changes to the way they calculate the CPI.

First, they began making adjustments for the quality of the products. For example, if a textbook has color pictures in it, they say it has a higher value and, therefore, they recognize only a portion of the price increase.

Martin: But as a practical matter, if a college professor requires a certain textbook, the student still has to buy it and pay whatever it costs, right?

Larry: Of course! The second major thing they did was to plot some key items on a log scale. The net result is that they reduce the weight of items that go up in price, but increase the weight of items that go down in price. It’s absurd, but they did it for a reason: To hold down the inflation adjustment for Social Security payments. Their real agenda was to underpay retirees by covering up the true inflation.

Martin: Let’s assume the government never changed the CPI. And let’s calculate the CPI the way they did before these changes were made.

Larry: Then you’d get the red area in this chart: According to Shadow Government Statistics, consumer price inflation in America is now galloping along at the rate of 12.6% per year.

Martin: 12.6% consumer price inflation in the United States today!

Larry: Yes. And I think that jibes with most people’s experience. That’s why foreign investors are getting fed up with our dollar. That’s how the world is buried in a tsunami of counterfeit dollars — and every one of them is falling in value, gutting the buying power of your dollars at the rate of 12.6% per year! At that rate with compounding, your cost of living doubles in less than six years!

Martin: Which is maddening for people on fixed incomes.

Larry: Absolutely maddening. You have millions of people who scrimped, saved and invested to build a nest egg — to ensure a dream retirement. Now, many could wind up barely surviving, financially dependent on their families. Plus, you have millions of people who are losing their #1 source of retirement savings — the equity in their homes. Worst of all, you have millions of people who trust the government’s numbers and are sleepwalking towards disaster. That’s what we’re so worried about.

If you’ll check my “2008 Predictions” you’ll see that, back in November of 2007, I predicted a recession and, counter-intuitively, rising inflation and interest rates.  Here’s Edelson’s forecast:

Martin: In your opinion, what’s the worst-case scenario?

Larry: The worst-case scenario is a hyperinflationary depression. But whether it goes that far or not, I think we’re going to see one of the greatest inflationary spirals in decades. That sums up my views.

FAIR Update on Immigration Legislation

I just received the following update from FAIR, the Federation for American Immigration Reform, on current legislative activity, primarily aimed at illegal immigration. 

Legislative Update
July 21, 2008

E-Verify Reauthorization Stalled With Time Running Out

Congressional efforts to reauthorize E-Verify, the electronic work
authorization verification program, have stalled despite bipartisan
efforts of many Members to bring a bill to the floor. The program,
vital to combating the unlawful employment of illegal aliens, will
expire in November if legislation to reauthorize the bill does not
pass both the House and Senate before the fall recess. In March,
Representative Ken Calvert (R-CA), along with sixteen cosponsors,
introduced H.R.5596, which would extend the E-Verify program for a
ten-year period. Plans to bring the bill to the floor were halted
earlier this month when Representative Sam Johnson (R-TX) insisted
that language be added to the bill that could jeopardize future
funding of the operation of the program. In short, Rep. Johnson’s
language would prohibit the Social Security Administration (SSA) from
ever spending any of its own funds to implement the program. Since the
program is a joint effort of the Department of Homeland Security (DHS)
and SSA, this means that if DHS ever fails to enter into a
reimbursement agreement with SSA, the SSA database could not be used to verify an employee’s legal work status.
Read the full article
http://www.fairus.org/site/R?i=h6eMYi4LiKZ0_a9-hRrQMQ..

. . . . . . . . . .

House Homeland Security Committee Questions Chertoff on Border
Security

On Thursday, the House Homeland Security Committee held a hearing to
examine border security and ask DHS Secretary Michael Chertoff about
the department’s efforts in that area. Chairman Bennie Thompson (D-MS)
voiced concerns about border security in his opening statement: “DHS
has failed to develop a comprehensive strategy to guide its border
security activities.” The Chairman added, “Without a comprehensive
strategy to coordinate the Department’s efforts across components, DHS
will not be as effective as it should be.” Thompson pointed to
“out-dated,” “ill-equipped,” and “understaffed” ports of entry along
both the Southern and Northern borders as evidence substantiating his
claim. (Statement of Chairman Bennie G. Thompson, July 17, 200
Read the full article
http://www.fairus.org/site/R?i=jzM9E-Z5-g3IlLiLzj8DTw..

. . . . . . . . . .

House Committee Examines Who Should Pay To Fingerprint Exiting Foreign
Nationals

On Wednesday, the House Homeland Security Subcommittee on Border,
Maritime, and Global Counterterrorism examined the Visa Waiver Program (VWP), and questioned DHS’s proposed rule requiring the airlines to pay for a system to collect biometric data to verify that foreign
visitors leave the country. The VWP allows nationals of designated
countries to travel to the United States for tourism or business for
stays of 90 days or less without obtaining a visa. VWP travelers are
enrolled in DHS’s United States Visitor and Immigrant Status Indicator
Technology program (US VISIT) when they arrive at U.S. ports of entry.
(U.S. Department of State, Visa Waiver Program)
Read the full article
http://www.fairus.org/site/R?i=awO-3720WsufQ2xIBt6xfw..

. . . . . . . . . .

House Judiciary Committee Tweaks Immigration Law’s “Widow Penalty”

On Wednesday, the House Judiciary Committee passed by voice vote a
bill designed to eliminate what has become know as the “widow
penalty.” Under current immigration law, an immigrant spouse of a
citizen automatically faces deportation if their spouse dies less than
two years after their marriage and before the survivor’s permanent
residency application was approved. (See, 8 U.S.C. 1151(b)(2)(A)(i)).
The bill would allow a spouse in this situation to avoid deportation
by proving, “by a preponderance of the evidence that the marriage was
entered into in good faith and not solely for the purpose of obtaining
an immigration benefit.” (See, H.R. 6034)
Read the full article
http://www.fairus.org/site/R?i=QjTDB7C1FOXrCe6LLL2eQg..

. . . . . . . . . .

Recent Floor Statements
* Rep. Ted Poe (R-TX) commented on The Guilty Go Free Because Our
Government Has Blundered (July 17, 200
* Rep. Ted Poe (R-TX) commented on A Common Language (July 15,
200
* Rep. Joe Baca (D-CA) commented on Support Comprehensive
Immigration Reform (July 15, 200

Read the full article
http://www.fairus.org/site/R?i=bf5wEerpOw2RhkUEViM-Ng..

. . . . . . . . . .

For more information from FAIR, visit us on the web at
http://www.fairus.org/site/R?i=eO_VxWoMeB67ELTHoYaa3A.. .

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Latest News and Updates from FAIR

Immigration and Population Growth Updated!

http://www.fairus.org/site/R?i=W_LLyxUQEjVxd1yDnZCO2g..

May 30, 2008

Judge’s Ruling on Farmers Branch Ordinance Clears the Way for New
Ordinance to be Enforced
http://www.fairus.org/site/R?i=p-x5dxKQGCyf-Yf1_umWFA..

May 29, 2008

Guide to State and Local Action to Deterring Illegal Immigration

http://www.fairus.org/site/R?i=ghkQQzyw5U83Gru8DM4ZqQ..

May 14, 2008

Remittances to Mexico
http://www.fairus.org/site/R?i=gTBKYjMi4hpXS34F8HU3HQ..

May 6, 2008

African Americans: the Forgotten Minority Updated!

http://www.fairus.org/site/R?i=LvvtdHe5dDe3E5HHS8bNOg..

May 6, 2008

. . . . . . . . . .

Take

http://www.fairus.org/site/R?i=nW2c3MjBiCzZuxVN_Jo-fA..

. . . . . . . . . .

Visit the best immigration
news blog on the web.

Take

http://www.fairus.org/site/R?i=xlN3CC5SS0E0TzCJy7FujA..

“Five Short Blasts” Theory Explained: Part 3

This post is the third in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read the previous articles yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

* * * * *

In Part 2, we debunked the myth that improvements in productivity drive incomes higher. Instead, we found that it is only a growing demand for labor (growing faster than the supply) that will drive incomes higher. What’s critical is that per capita consumption keep pace with productivity (which is per capita output). Otherwise, wages will begin to decline and unemployment and poverty will rise, resulting in a declining standard of living. I closed Part 2 by claiming that there is something at work in the economy that is doing just that - driving down per capita consumption.

Actually, there are three constraints on per capita consumption:

1. First of all, income is obviously a constraint. You can’t consume more than you can afford to buy. Well, not for long, at least. You can borrow money and consume beyond your income, but that’ll catch up with you at some point. Anything that tends to reduce incomes or creates the perception of having less money to spend will tend to drive down per capita consumption.

It’s this constraint that gets all of economists’ attention. They use macroeconomic measures to determine our overall ability to consume - measurements like store sales, total consumer spending and so on. If these start to lag, the Federal Reserve will lower interest rates to boost your perception of how much money you have to spend.

2. A second constraint is resources. We’re beginning to see this with oil. The world is starting to run short; prices are rising and people are forced to cut back on their driving, reducing the per capita consumption of oil in the U.S. Economists recognize this constraint but pay it no mind. They shrug it off with the assertion that market forces will drive higher efficiency, recycling and substitution to off-set the shortage. Why are they so glib about resource shortages? Because an economist named Malthus raised alarm about this very issue over 200 years ago. But when crop yield grew even faster than the population, he was mocked as a sort of “Chicken Little,” and his theory led others to dub economics “the dismal science.” In spite of the fact that Malthus was not wrong, but merely ahead of his time, anyone who dares to suggest that resource shortages could become a problem is immediately branded a “Malthusian” and dismissed by economists.

3. There is a third constraint which no one recognizes, and it is this constraint which is at the heart of the theory I’ve presented in Five Short Blasts. That constraint is space - the finite, inhabitable land space available, whether in a country, a continent or the earth as a whole. You’re probably wondering how that could possibly be a constraint on per capita consumption. The best way to illustrate this may be to use a hypothetical example.

Picture in your mind one relatively large island in a world that is otherwise covered by sea. And let’s say that half of this island is available for housing for its citizens. The other half is used for farm land, mining, parks, infrastructure and so on. When this island is relatively sparsely inhabited, each family, on average, lives in a 2,000 square foot single-story house on a 1/4-acre lot. On average, each homeowner has a two-car garage and his/her family owns two cars. Each has an assortment of gardening tools for maintaining their lawns, shrubs and gardens. Some have larger, houses, more cars and bigger lots. Some smaller and less. But, on average - in other words, in per capita terms (the number of things owned per person) - this is the way it works out. Also, on average, each family consists of four people and one of them is a worker, providing the family’s income.

Over the course of many years, the population of this island rises to the point where the land available for housing, 50% of the island, is now fully occupied. But still the population grows. No problem. The average lot size, at 1/4 acre, is relatively large. Developers find that they can build the same size houses on smaller lots. The smaller lot sizes actually make the homes more affordable. But what happens to the consumption of gardening tools? Some people have started buying less, because they don’t need as much for their small lots. So, although total sales still grow, in per capita terms a slow decline has begun.

As population growth continues further, even the smaller lot approach becomes unsustainable. Another developer comes up with a brilliant solution - stack the houses vertically! Everyone can still have 2,000 square foot homes, but now some live in apartment buildings. Although the apartment owners are only allotted one parking spot each, the elimination of yard work altogether is a counter-balancing selling feature.

So the per capita consumption of gardening equipment declines further. And now the per capita consumption of cars has begun to decline as well. And consider this: although the square footage of homes remains unchanged, what has happened to the per capita consumption of building materials required to construct them? For example, with several homes now under one roof, the per capita consumption of roofing materials has gone into decline. So too has the per capita consumption of concrete and rebar used in the foundation. And, eventually, as the population grows more, the apartment sizes are getting smaller. Now the per capita consumption of everything used to build and furnish housing is in decline.

And think beyond the homes and cars. As this island became more densely populated, the per capita consumption of infrastructure like roads, pipelines, transmission lines and power lines also declined. So too has the per capita consumption of playground equipment and fencing in the parks. And once all of the boat slips in the marinas were filled, the per capita consumption of boats declined too.

At the same time that per capita consumption is declining across the board on this island, the per capita contribution to the labor force remains the same - one out of four people. The productivity of the workers on this island has remained the same or improved. That, coupled with declining per capita consumption, means that the demand for labor is falling. This falling per capita consumption, in the face of steady or rising productivity, is rapidly driving up unemployment and poverty. Voters’ approval rating of the government of this island is slipping.

Now, let’s step back and look at the situation on this island from two different perspectives: as seen through the eyes of the CEO of the company that builds cars on this island, and as seen through the eyes of one of his auto workers. The CEO sees that, as the population grew, car sales rose proportionately. At some point, though, the growth in sales slowed - continuing to rise, but not at the same rate. Nevertheless, sales are still rising and the CEO is quite pleased.

What the auto worker sees is that, thanks to rising productivity, employment in the car company held steady while sales volume continued to rise. In spite of this productivity improvement, the company began cutting wages and benefits. Why? Because, for some strange reason, unemployment was on the rise and, with surplus workers in the labor market, the competition for jobs at the car company was growing more intense. With unemployed workers willing to take jobs at the car company for less pay (some pay is better than none, after all), this is putting downward pressure on wages.

Finally, let’s view this situation from the perspective of an economist working for the government. What you see is that, despite total growth in GDP on this island, unemployment is one the rise. You consult with the CEOs of various companies, including the car company, and all tell you the same thing: “We need more growth!” Remember, as an economist, you don’t measure or study per capita consumption and have no reason to think that it might be declining. Your training tells you that, to stimulate growth, you need to pump more liquidity into the economy. You need to lower interest rates and make more money available for lending. And a little more population growth would help too. And, in fact, this may actually work for a while. But the problem keeps coming back. So you lower interest rates further and get more creative with lending standards. And the government offers job retraining programs to unemployed workers.

This all sounds quite familiar, doesn’t it? In Part 4, we’ll leave behind this once-idyllic hypothetical world, return to the 21st century on planet Earth, and see how this same situation may be playing out here.

“Five Short Blasts” Theory Explained: Part 2

This post is the second in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read Part 1 yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

* * * * *

In Part 1, we boiled down GDP, economists’ favorite measurement of economic growth, and found that every bit of the growth in per capita chained GDP is accounted for by gains in productivity. Only if those gains are accompanied by real increases in income (adjusted for inflation), as politicians, business leaders and economists say they are, will our standard of living rise. But I ended Part 1 by claiming that this is not true. There is no correlation between productivity improvement and wages. It’s something else that drives increases in income. In this article, I’ll explain.

The U.S. Department of Labor’s Bureau of Labor Statistics in 1987 began publishing compensation data for hundreds of categories of labor involved in a wide range of industrial activities like manufacturing, wholesaling and retailing, among others. They report on compensation, productivity, hours worked, and so on. I plotted the data for compensation vs. productivity as shown in Figure 1-5.

Figure 1-5

I was quite surprised at what I found. There was no correlation whatsoever. None. The chart looked like a shotgun pattern. Increases in productivity were no more likely to produce a gain in income than a decrease, and vice versa. In fact, the biggest gain in productivity since 1987, in NAICS code 3341, the manufacturing of computer equipment, a productivity gain of 3,800%, actually yielded a 24% decline in compensation.

It makes sense when you think about it. If productivity is improved and a product can be made with less labor, what is the employer’s motivation to pay his workers more? His need for labor just went down. He just tossed some workers back into the labor pool, increasing the competition for jobs. He can now get away with paying them less, not more.

Does that mean that productivity improvement is a bad thing? Not at all. It’s human nature to find ways to accomplish work more efficiently. It’s productivity improvement that keeps companies competitive with each other, and it keeps our nation competitive with others in global trade. It allows for an improved standard of living by freeing up labor to work on unmet needs and challenges. But, clearly, it’s not what drives incomes higher.  There must be something else. 

But as I compiled the data for Figure 1-5, I noticed what seemed to be a better correlation between compensation and another variable - total hours worked. So I decided to try a plot of compensation vs. percent change in total hours worked. The result is Figure 1-6.

Figure 1-6

Again I was surprised, not so much that there was a correlation but at how strong that correlation was. It’s rare to see such a powerful relationship. But when you think about it, it makes sense. The percent change in total hours worked is simply a measure of the demand for labor. If it’s rising, then employers must compete for those workers and offer them higher wages to attract and keep them. If the demand for labor is falling, then there will be an overabundance of those workers and employers can pay them less. It’s the old law of “supply and demand” at work, the most basic precept of economics.

Speaking of “supply and demand,” we can’t forget about the “supply” side of that equation. I need to modify my above conclusion. If the demand for labor is growing faster than the supply, only then will an increase in compensation be the result. If the demand for labor grows, but not as fast as the supply, then we will actually see compensation slowly decline.

Now the question becomes, “what is it that drives the demand for labor?” It’s people who consume workers’ production. If they want more of that particular product, then the demand for labor to produce that product will go up. If we double the number of people who use that product, then the demand for labor to produce that product will also double.

Or will it? We have to remember that workers and consumers all come from the same pool of people. If we double the population, then not only have we doubled the number of consumers but we’ve also doubled the number of laborers too, more or less. What happens if the ratio doesn’t stay the same? What if consumption, for some reason, doesn’t keep pace with the growth in the number of workers? Then the demand for labor needed to produce that particular product will decline. If there isn’t a corresponding increase in the demand for workers to make some other product, then the overall demand for labor across the total spectrum of products will decline, which will begin to drive down wages for everyone. That would be a very bad thing with lots of bad consequences - rising unemployment and poverty, and all of the other side effects that accompany them, things like increased social spending by government (funded by higher taxes), a rising crime rate, and so on.

The only meaningful way to gauge how we’re doing in the “supply vs. demand” equation for labor is to look at everything in per capita terms; that is, we need to compare how the average person’s consumption of products stacks up against his average contribution to the labor force. If that ratio begins to decline, we’ve got a problem. If, on average, people begin to consume less while their per capita output (another way of saying “productivity”) rises, then we have an economically unsustainable situation.

Let’s consider an example. Suppose we have a population of 1,000 people and, on average, each person consumes one widget per year. Five hundred of these people are workers, while the other five hundred stay at home for various reasons. The productivity of these workers is such that each worker is able to produce two widgets per year. Supply and demand are in perfect balance. 1,000 widgets produced. 1,000 widgets consumed.

Now, suppose that we add another 1,000 people to the population, including the addition of 500 more workers but, for whatever reason, these added people are only able to consume one half of a widget per person on average. What will happen? Well, total widget demand will rise to 1,500 widgets. If you’re the CEO of The Widget Company, you’re very pleased with this huge increase in sales. But what if you’re one of the workers? The potential output of the workers has risen to 2,000 widgets, while the demand has risen to only 1,500. What will happen is that 25% of these workers will be out of a job. Again, the CEO of The Widget Company likes this situation. The oversupply of labor means he can pay less and make more profit on each widget he sells.

In this example, the per capita consumption of widgets fell from 1.0 to 0.75, while the per capita output (or productivity) held steady at 1.0 (2.0 per worker, which is 1.0 “per capita”). Per capita consumption declined while productivity remained unchanged. The result was rising unemployment.

This is why it’s important to track everything in per capita terms, both per capita consumption and the per capita demand for labor. It’s this balance that sustains our standard of living. If it gets out of balance either way, it can raise or reduce our standard of living. Now, throughout nearly all of human history, if productivity improvement freed up workers in one field, there was another product need that was going unmet due to a lack of workers. When cave men pooled their resources and became more efficient at hunting and gathering, someone was freed up to begin inventing the wheel. When they became more efficient at making wheels, then someone was freed up to begin making copper tools, and so on.

But what would happen if that reached a limit? What if per capita consumption couldn’t keep pace with the rise in productivity? Worse still, what if per capita consumption actually began to decline for some reason? We already know what would happen - rising unemployment and poverty, and everything that goes along with it. I think we can all agree that, from an economic perspective, anything that would drive down overall per capita consumption would be a bad thing, something to be avoided, something to be corrected if it took hold.

There is something that is doing exactly that, driving down per capita consumption, slowly but surely and dramatically, here in the United States and across the globe. In Part 3 we’ll find out what that is.

“Five Short Blasts” Theory Explained: Part 1

This post is the first in a series of articles that will explain the new economic theory I proposed in Five Short Blasts. With readership of this blog expanding dramatically, I want everyone to have the opportunity to understand this important new theory. Do I like selling books? Sure, but that wasn’t my motivation for writing it. My primary interest is in spreading the word about this new theory and its ramifications for public policy issues that are scarcely being addressed, if at all. Nothing less than the “American way of life” is at stake. If you’re someone interested in globalization, trade, overpopulation or immigration, I think you’ll find this series most interesting. The connection may not be apparent at first, but stick with me. With that said, let’s get started!

* * * * *

Out of necessity, our nation’s economic leaders, including our top economists, put all of their focus on macroeconomic measurements. They can’t be that concerned with “microeconomics” - the economies of individual citizens - because there are over 300 million of us. You and I would be dead long before they got around to paying us any attention! So they put all of their faith into the precept that if the overall economy is growing then, on average, our citizens will prosper too. On the surface, it seems to make sense. It’s held true throughout most of human history. Notice that I said “most.” Is it possible that there could come a time when macroeconomic growth - growth of the total economy - could actually become harmful to individual citizens’ standard of living? That seems counter-intuitive, doesn’t it? Economists would sneer at such a suggestion.

But I’m already getting ahead of myself. Let’s get back to measurements of economic growth and begin with a look at economists’ favorite measurement, Gross Domestic Product, or GDP. It’s the measure of all of a nation’s economic activity. It doesn’t matter if it’s beneficial or harmful activity. The cost of educating a student gets added to GDP. So does the cost of incarcerating a criminal. The cost of building a new car is added to GDP. So too is the cost of junking it.

So how has America been doing as measured by GDP? Great! Since 1962, our economy has grown at an annual rate of 7.3%, expanding from less than $600 billion per year in 1962 to $13.25 trillion in 2006. Wow! That means that Americans are twenty-two times as wealthy as they were in 1962, right? Uh, no.

A big part of this “economic growth” is nothing more than inflation, which helps no one. Since 1962, the Consumer Price Index, or “CPI,” has risen by a factor of 6.7. Take inflation out of the equation, and we find that “chained GDP,” GDP adjusted for inflation, is about four times what it was in 1962. By the way, I should point out that CPI is a price index, not a measure of the cost of living, which it actually understates. “But still,” you’re probably thinking at this point, “that’s pretty phenomenal economic growth.” “We’re still four times richer than people were in 1962! Right?” No.

We haven’t yet taken population growth into consideration. Population growth isn’t true economic growth. It’s contributes to the size of the overall “economy” but, beyond a certain optimum level (a concept we’ll explore in more detail later), does nothing to raise individuals’ standard of living. That is, if I apply the same economy to a population that is double the size, I still have the same economy from an individual point of view. The economy will be twice as big, and it will double the sales volume and profits for corporations, but for individuals it will have no effect on their incomes. From 1962 to 2006, our population grew from 186 million people to 299 million, a 60% increase. Factor this out of “chained GDP” and we arrive at a figure known as “per capita chained GDP” which, since 1962, has actually increased by 161%, an annual growth rate that is now down to 2.2% from the original “GDP” figure of 7.3%.

Well, OK, but we’re still 161% wealthier than folks in 1962. That’s not as exciting as being 2200% wealthier, like the raw “GDP” data would have suggested, but it’s still a decent increase, right? I mean, we’ve adjusted GDP for inflation and population growth. What else could there be?

Productivity. Every bit of this 161% increase in per capita chained GDP is due to productivity improvement - the amount of economic output per person. Finally, some good news here! We all know that increases in productivity lead to higher wages. At least that’s what everyone says - our politicians, our business leaders and especially economists.

Really? Are you that much wealthier than someone who did the same job as you back in 1962? Well, if you’re a top corporate executive, almost certainly. The rest of us? Probably not. Are you any wealthier at all? Maybe. Maybe not.

That is what everyone says - that productivity leads to higher wages. But it’s not true. There is absolutely no correlation between productivity improvement and higher wages. Productivity improvement does nothing to drive wages higher. If anything, it tends to drive wages down. Something else drives wages higher. Something that we’ll explore in Part 2. Stay tuned!

Foreign Investors Abandoning The U.S.

http://www.reuters.com/article/reutersEdge/idUSN1850357320080718?sp=true

Foreign investors are beginning to see the U.S. as a bad place to invest their money.  Their stock investments are losing money.  They’re getting killed by their investments in our mortgage-backed securities.  Their investments in corporate and government bonds are beginning to look risky.  Now they’re looking to Asia.  This is very bad news.

What this means is that interest rates are going to rise.  How far and fast remains to be seen.  Why?  Because the dollars that we send them in payment for imported goods can only be used in one place - the United States.  So their choice is either to sit on those dollars and wait for the promise of higher returns in the future in the U.S., or go ahead and just keep blindly plowing them back into U.S. stocks and bonds and securities.   

At the same time, the U.S. has got to maintain a cash flow balance to finance to the budget deficit and the trade deficit.  It has to issue bonds and sell them to someone.  That someone isn’t Americans.  There is no money left here.  It has to sell them to foreigners holding those dollars.  So, when the Fed holds a bond auction, if no one bids on the bonds at the rate being offered, the rate immediately and automatically is raised.  This will continue until the rate looks attractive enough to offset the perceived growing risk of owning these U.S. investments.  So look for bond yields to begin rising dramatically.  And it’s bond yields that determine interest rates in the U.S. economy, not the Fed’s official overnight funds rate that gets all of the attention. 

Won’t rising interest rates tend to slow an economy that’s already on the brink of recession?  You bet!  Could this turn into a downward spiral?  Right again!  The only way to escape such a spiral is to cut off the root cause by stopping the outward flow of dollars; that is, by eliminating the trade deficit.  And if we wait for currency valuations to do the job, we’ll be waiting forever, and we have very little time to act.  It’s time to walk away from the World Trade Organization and return to the trade policies of tariffs and trade surpluses that once built this nation into an economic powerhouse.

“Five Short Blasts” Theory Explained

I’ve had an almost a single-minded focus on our trade deficit lately, and for good reason.  It’s impossible to overstate its role in ruining the U.S. economy.  But I think it’s time to shift gears.  Readership of this blog has been growing nicely since I moved the site to WordPress and I’m sure that a lot of readers haven’t read my book, Five Short Blasts.  I think this may be a good time to back up and explain the theory.  This is going to require a series of posts which I plan to write over the next couple of weeks.

It’s going to be fun.  This will involve debunking a lot of economic myths that have been spread by economists who refuse to give consideration to what may be the most important economic parameter.  It will necessarily be a very abridged version of the explanation given in the book but I think that I can do it justice in a series of articles.  So stay tuned!  If you haven’t read the book, you won’t want to miss this series!  Just subscribe to the RSS feed if you want to be alerted each time a new article appears.  And if you have questions about any of it, just put your question into a “comment” at the end of the article.  I’ll answer each and every one.  There are no stupid questions.  This is a brand new economic theory.  You won’t find it any place but here. 

The first article will be posted very soon.

How to Cut Our Dependence on Foreign Oil: Step 1

Stop exporting oil.  In 2006, while importing $331 billion worth of oil, we also exported $36 billion worth.  In other words, we could reduce our dependence on foreign oil by over 10% overnight by taking this one simple step.  Natural resources should be traded away only when they exist in excess.  It makes no sense at all to trade them away when you don’t even have enough to support the needs of your own people. 

By the way, when economists point to a rise in exports as proof that the falling dollar is helping our trade deficit, how much of that rise is due to oil exports?  A lot.  In June, the U.S. exported a record $5.7 billion worth of oil.  That’s an annual rate of $68.4 billion worth of oil, a 90% increase over the 2006 rate. 

Isn’t it just common sense that we should stop exporting oil?

Today’s Financial / Business Data: Predictable

Some interesting economic data was released this morning. First of all, housing starts rose unexpectedly, from an annualized rate of 975,000 in May to 1,066,000 in June. However, the increase was led by a 42.5% surge in multi-family dwellings, against a backdrop of a 5.3% decline in single family homes. This is a clear indication of the theory presented in Five Short Blasts at work. As the population continues to grow, people are moving toward smaller, multi-family dwellings. In other words, the per capita consumption of dwelling space is declining, just as Figure 5-2 on page 88 predicts.

Separately, the Labor Department reported that weekly first time jobless claims rose again last week to 366,000. This is an annualized rate of 19 million, or about 13% of the labor force. In other words, one out of ever 8.5 workers will file for unemployment in the coming year if this rate doesn’t rise further. But it’s been on the rise for a year now.

Finally, the Philadelphia Fed Survey of manufacturing shows that manufacturing activity in that region continues to decline, belying claims that manufacturing would rebound with the falling dollar as exports become cheaper and more attractive to foreign buyers. This runs counter to economists’ predictions of a rebound because our trade deficit has nothing (or very little) to do with currency valuations. (See previous posts on this subject.)

Falling per capita consumption of dwelling space, rising unemployment and shrinking manufacturing - none of this is any surprise to someone who understands the theory presented in Five Short Blasts.

Bad News about Birth Rate, Good News in Readers’ Reactions

http://www.usatoday.com/news/nation/2008-07-16-baby-boomlet_N.htm

The birth rate in America is on the rise. Although the article reports only a record number of births, but not the birth rate, you can do the math yourself with the data provided for annual births and see that the rate is on the rise. And the fertility rate is rising too. It’s up to 2.1 births per female. This is far in excess of the 1.79 needed to attain population stability (along with a dramatic decrease in immigration). Why less than 2.0? Because of the steadily increasing life expectancy. If life expectancy were holding steady, 2.0 births per female is the rate needed for a stable population. But, because each generation is living longer than the previous, the fertility rate must drop below 2.0. (Consider the extreme: if life expectancy approached infinity, then the fertility rate would have to fall to zero. If no one ever died, there would be no room for anyone to have children.)

For some good news on this topic, just scan the comments at the end of the article. The vast majority are written by people concerned about population growth. Clearly, attitudes have changed and people are concerned about overpopulation. The time is right for our nation’s leaders to open a dialogue with the American people about population. How many is too many? Can our standard of living and quality of life really be maintained in an environment of unending population growth? Can real progress be made toward energy independence and toward mitigating climate change if we keep adding more and more oil consumers? Will any of our problems be easier to solve with a larger population? It’s going to take a lot of courage to be the first politician to broach the subject, but the time has come.