Recession Continues in 2nd Quarter of ’08, Now Entering 4th Consecutive Quarter

July 31, 2008

The recession that began in the 4th quarter of 2007 continued in the 2nd quarter of this year and is now entering its 4th consecutive quarter. 

“Wait a minute!”, you may be saying.  “GDP grew at an annual rate of 1.9% this past quarter.  How can you call this a recession?”  The classic definition of a recession is two consecutive quarters of decline in GDP.  But that’s a terrible definition.  A much better definition is declining per capita chained GDP – in other words, GDP adjusted for inflation and population growth.  If this figure declines, then that means that every American’s share of the economy is getting smaller. 

In the 2nd quarter of ’08, per capita chained GDP declined 2.6%.  While total GDP grew at an annual rate of 1.9%, inflation rose at an annual rate of 4.2%.  So chained GDP fell by 2.3%.  And since the population grew during the 2nd quarter by about 900,000 people, or about 0.3%, then add that to the drop in chained GDP for a decline in per capita chained GDP of 2.6%.  This was the third consecutive quarter of decline.  Many experts expect at least two more quarters of such decline. 

By far, the biggest contributor to the decline is the trade deficit.  Eliminating the trade deficit would boost GDP by 5.7%.  Cutting legal immigration would also boost per capita chained GDP by 0.1% by slowing the growth in the number of “capitas.” 

Here’s some key excerpts from the article:

An emergency dose of government stimulus helped the economy grow at a 1.9 percent annual rate in the second quarter …

… Revised data from the Commerce Department released with the second-quarter figures on Thursday showed national output shrank in the final quarter of 2007…

… The moderation in core prices came despite a jump in overall prices of 4.2 percent …

… Payrolls have declined for six straight months, and analysts expect a drop of 75,000 to be reported for non-farm payrolls in July.

And matters are getting worse.  Just today, first time unemployment claims rose to 458,000 this week.  That’s an annual rate of about 15.5% of the entire labor force applying for unemployment every year. 

How bad will things have to get before the government acknowledges that our trade policies are unsustainable?

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

July 23, 2008

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 ( ) 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.

I’d Trade This Economy for the 1970s in a Heartbeat!

July 16, 2008

This article appeared a couple of days ago and I can’t let it pass. The assertion that this economy is comparable to the 1970s is way, way off the mark. Trust me, I entered the civilian work force in 1974 and remember vividly the conditions then. Today’s economy is far worse.

For many Americans this feels like the worst economic crisis in their lifetimes, and some leading investors are starting to say they may be right.

… Most comparisons turn to the low growth, high inflation, weak dollar and soaring energy prices of the 1970s, but this time with a housing crisis and spiking commodities prices thrown in, all threatening a prolonged recession.

“It is the most serious financial crisis of our lifetime,” said billionaire investor George Soros, noting a growing effect on the U.S. economy as a whole, rather than just financial markets. “It is an idle dream to think that you could have this kind of crisis without the real economy being affected.

… Economist Jeffrey Sachs, who advised Eastern European governments after the fall of communism, also compared it to the early 1970s, which he said noted led to years of slow growth and economic difficulty.

“The ’70s were pretty bad,” Sachs said. “There were serious dislocations in the world economy. It was very tough and I hope we don’t go through that again.”

Younger people who didn’t live through the 1970s would probably read this stuff and think that it was really bad.  Let me tell you, I’d trade today’s economy for the 1970s in a heartbeat!  Here’s a comparison, based on my personal experience, to illustrate why today’s conditions are so much worse. At the time I entered the work force in 1974:

It was at the height of the Arab oil embargo, and I paid 45 cents per gallon for gas. Adjusted for inflation, that’s only $1.93 per gallon today. Instead, we’re paying $4.20 per gallon.

I was hired into a company from which I would retire thirty years later with a nice pension. In 1974 it was unheard of for a corporation not to offer a pension plan and full health coverage. Try finding that today.

My final year at Notre Dame cost just over $3,000. That’s less than $13,000 in today’s money but that same education today now costs over $40,000.

I was able to cover half of that tuition with a summer job making $3.65 an hour as an unskilled laborer working for a fence company. That’s $15.62 per hour in today’s money. How many summer kids are earning that kind of money now?

In 1974, U.S. per capita consumer credit was about $3800 (in 2005 dollars). Today it is about $8,000.

In 1974, our national debt was about $500 million, or about $2 trillion in today’s dollars. But today our national debt is approaching $10 trillion.

In 1974, our national debt per capita was about $10,000 (in 2005 dollars). Today, in 2005 dollars, it’s about $30,000.

In 1974 we had a trade deficit of about $4 billion, or the equivalent of about $17 billion in current dollars. Today, our trade deficit is approximately $750 billion, eliminating approximately 10 million jobs.

In 1974, we had a population of 213 million and were only slightly dependent on foreign oil. Today our population is 306 million and we are dependent on foreign suppliers for about 60% of our oil, giving them a stranglehold on our economy.

When you hear someone say that things are better today, or no worse than they were during some previous decade, ask someone who lived it whether or not that’s true.  I’m sure that someone who lived through the Great Depression would tell you that today’s economy is better, but I doubt that anyone since then would make that claim. 

What’s scary is that our economy has been so badly eroded by decades of enormous trade deficits that it could easily collapse into a situation in which the 1930s would look like the good old days.

FDIC (The Agency That Insures Your Bank Account) Being Phased Out

July 16, 2008

There’s been a lot of talk from government officials, attempting to prevent panic and a run on banks, assuring us not to worry, that our bank deposits are insured by the FDIC up to $100,000.  What no one has discussed is the fact that the FDIC is slowly being phased out by inflation.  Did you know that the $100,000 limit on insured savings has been in place for 28 years?  It was last increased in 1980, from $40,000 to $100,000. 

Depository Institutions Deregulation and Monetary Control Act of 1980
This act, which is passed as a response by Congress to get S&Ls out of interest- rate mismatch, is an effort to deregulate S&Ls.

This act:

  • Increases THE FDIC deposit insurance coverage from $40,000 to $100,000.

Since 1980, the CPI (consumer price index) has risen by 257%.  Therefore, the value of deposits insured by the FDIC has declined by 257% since 1980.  If this isn’t a gradual phase-out of the program, I don’t know what is.

Also, did you know that the FDIC only had about $52 billion in assets at the beginning of this year?  How many bank failures would it take to wipe out that fund?  Very few.  Then what?  Then taxpayers are on the hook – you and I.  The government will simply pick up the tab and add it to the national debt for our kids and grandkids to pay.

Inflation: Is the Government Lying?

May 14, 2008

This may be the clearest evidence I’ve ever seen that the government fudges economic statistics and lies to the American people about the state of our economy.  Check out this article.  With food and energy prices soaring by the day, the government has the gall to say:

Consumer prices rose a smaller-than-expected 0.2 percent in April as energy prices held steady, a Labor Department report on Wednesday showed.

… During the month, energy prices were unchanged…

… So-called core prices, which exclude volatile food and energy, were up just 0.1 percent…

Can you believe this?  Only yesterday, the Commerce Department reported that import prices were up 1.8% last month alone, on top of the 1.0% rise the prior month.  And yet, the CPI is only up 0.2%?!?!?! 

Why is the government fudging on the CPI (consumer price index)?  Three reasons:

  1. They’re concerned about the psyche of the stock market.
  2. They don’t want to give the Federal Reserve justification for reversing policy and raising interest rates.
  3. Most importantly, the annual raise in Social Security benefits is determined by the CPI.  They fudge the CPI to cheat the elderly out of the money they need to survive, very slowly whittling Social Security down to nothing. 

This data should prompt outrage and journalists should be demanding answers on how the CPI could be so benign when all of the evidence points to the contrary.  Will they?  I very much doubt it.  Journalists with that kind of analytical thinking have vanished, gone with the winds of globalization.



Middle Class Can’t Afford Homes

January 31, 2008

This article is proof of what I’ve been saying about our current recession.  You have to look past the most obvious symptoms – like the burst of the housing bubble – to find what’s really going on if we want to take meaningful action. 

Even in spite of the decline in housing prices, the middle class still isn’t even close to being able to afford an average home.  Why?  Because incomes haven’t kept pace with inflation?  Why?  Because we’ve carved out much of the entire manufacturing sector of our economy and given it away to foreign countries for nothing in return. 

Labor obeys the law of supply and demand as much as any other commodity.  Take away a big piece of the labor demand and the price will drop.  Wages will go down.  Balance our trade equation with a tariff structure (one indexed to population density), and that demand for labor will come back home and restore wage growth. 

We can cut interest rates and pass stimulus packages until the cows come home; in the long run it won’t make a bit of difference in stemming our economic decline.  We have to take meaningful action to address real problems instead of treating only the symptoms.  You can’t cure the flu by wiping your runny nose.  Neither can we fix our economy with actions that don’t address the real problem.