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:
- 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.
- 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%!
- 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.