Oderint Dum Metuant

A million seconds is 12 days.
A billion seconds is 32 years.

As previously stated in Part I of this series, the manipulation of economic reality starts with the desire to maintain the status quo.  In Part II we had a glance at debt bubbles and related issues. Let us complete Part III with a quick look at statistical fiddling, ‘bubble’ trouble and a U.S. Central Bank policy.

Let us examine just a few tricks used by governments to ‘massage’ employment statistics:

(1) Disabled people are generally not included in the employment statistics. Anyone

collecting various forms of disability payments is usually excluded from the official employment

statistics. This is a common practice in the USA;

(2) EU citizens working abroad due to a lack of jobs within the EU are generally not counted

as ‘unemployed’ by the EU;

(3) Underemployed people are not counted in the unemployment statistics;

(4) Workers involved in ‘busywork’ programs funded by the government are generally shown to

be ‘employed’ by statistics;

(5) Self-employed people that barely make a few euros, or dollars, a day are counted as

employed;

(6) Refugees and asylum-seekers are generally paid out of a different fund and hence don’t

count as unemployed (usually);

(7) In the USA, graduating students from secondary school or university who have never held a

job are not counted in the unemployment data. Indeed, they are generally ineligible for

unemployment benefits since they were never part of the labor market in the first place (A

minimum of 26 weeks of work contributions is the basic prerequisite to qualify for benefits);

(8) Unemployed people who die may be counted as having gained employment, thus falsely

bolstering the employment data – statistically speaking, that is.

On a similar note, it is estimated that approximately four-hundred thousand unemployed Americans dropped from the unemployment rolls in July 2010. These were Americans who had already reached their 99-week limit of unemployment benefits and were not entitled to an additional payment even though President Obama extended unemployment benefits. Once the cumulative 99-week limit is reached an unemployed person is cut off! Cutting these people does wonders for ‘massaging’ the unemployment statistics. Most western economies are not creating significant employment.

Now let us quickly examine a few ways to alter GDP and inflation numbers via ‘official’manipulation:

(1) Reflation using stimulus money - a common practice in the USA. In short, the Government

hands out money and counts the spending of that money as growth. This allegedly increases the

money supply for everyone and may skew ‘growth’ statistics towards the positive side. However,

there’s debt and no real productivity. Governments borrow and spend money. In the EU, buying of

government debt by the ECB and establishing ‘liquidity solutions’ functions in a similar way to

‘stabilize’ the economy and increase the money supply over time. Debt bubbles begin inflating;

(2) Using a geometric average rather than simple arithmetic average will drop a consumer

price index by 1% depending upon the items measured. This keeps inflation ‘in check’ thus

massaging inflation figures downwards in order to ‘prove’ a deflationary situation;

(3) Claiming ‘growth’ when in fact the alleged ‘growth’ is actually due to a large drop off

in imports into a given country. People buy less imports and it looks as if the balance of trade

has shifted in favor of the country in the form of so-called growth. Said ‘growth’ is then

alleged to have created ‘jobs’;

(4) GDP can be boosted by insurance companies increasing premiums upon clients. For example,

a health care insurer in California recently announced a 15% rate increase. If such increases

were excluded from U.S. figures, the GDP numbers would be somewhat less than shown.

Increases in insurance premiums actually count in a country’s GDP. Of course, the average person generally does not benefit from paying more. This is an insidious way to increase GDP.

The aforementioned is pretty basic material. Let us delve a bit deeper.

THE MERRY OLD LAND OF OZ…

The ‘formula’ determining recession or depression is not the same beast as it was back in the 1930’s. The formula in use today allows for adjustments that show ‘recession’ instead of a ‘depression’. For instance, when today’s formula is applied to the numbers from the Great Depression, the ‘depression’ turns into a ‘recession’ - seasonally adjusted, leaving out food and fuel, etc. Real unemployment is well over 20%. The soup lines of old are now replaced by various social benefit programs in the West, such as the Food Stamp Program in the USA. Smoke and mirrors.

It is interesting to note that one of America’s largest retailers - Wal-Mart - increased prices up to 65% on various items, such as oatmeal, in the past several months. A variety of non-food items also showed significant increases in price. This is not typical of a deflationary environment. Prices are jumping on various essentials such as food, yet we are told by the great watchers of our global economic system that deflation may be looming. Deflation or inflation? Both - an unseemly mix.

Why may food prices be on the rise in the USA?

With over 40 million Americans now participating in the USDA Food Stamp program (and another 4-5

million projected to be added onto the rolls by next year) there appears little incentive for grocers to reduce prices. Why? The Government is increasingly footing the bill! It appears that a social welfare program is thus utilized as a type of an indirect corporate bailout.

Next, should the world worry if the US, and other nations, resorts to seemingly endless‘Quantitative Easing’? Let us have a look.

According to various sources, the US M3 money supply plunged at a 1930’s pace earlier this year. Why? The US Government beats around the bush when this query arises. Here’s one answer - Most banks, various corporations, and many individuals, are hoarding cash. Bailout funds were being used for investment purposes other than origination of consumer loans. This situation has thus provided the impetus for another round of Quantitative Easing (QE2).

Let us glance at the thought processes behind this policy.

According to US Federal Reserve Chairman, Mr Ben Bernanke, in some comments on the Great Depression from a 2004 speech, "Hoarding [of money] effectively removed money from circulation, adding further to the deflationary pressures. Moreover, as I emphasized in early research of my own (Bernanke, 1983), the virtual shutting down of the U.S. banking system also deprived the economy of an important source of credit and other services normally provided by banks.”

Given the aforementioned reasoning, it must be a good idea for the Fed to pump even more ‘liquidity’ into the system? Let’s see.

Here's an excerpt from "The Liquidity Trap and U.S. Interest Rates in the 1930s" (Christopher Hanes, 1 Feb 2006; Journal of Money, Credit & Banking) that appears to have some relevancy to the current US Federal Reserve policies:

“Recent experience of low inflation has revived interest in the liquidity trap, ‘a situation in

which conventional monetary policies have become impotent, because nominal interest rates are at

or near zero: injecting monetary base into the economy has no effect’ (Krugman 1998, p. 141).

Many discussions of the liquidity trap argue (or assume) that it constrains a central bank's

ability to control interest rates at any maturity as soon as interest rates have been pushed to

zero at the shortest maturity--in modern financial markets, the overnight maturity. Monetary

policy may still be able to influence real activity through exchange rates (Orphanides and

Wieland, 2000, Svensson, 2000, McCallum, 2001) or effects of money balances on demand for assets

in general, including durable goods (Brunner and Meltzer, 1968a, Meltzer, 2001). But the

"interest rate channel" of monetary policy--special influence over yields on liquid assets, and

hence on required returns for less liquid financial assets such as bank loans--is blocked. In the

common view, a central bank cannot affect term premiums unless it can "twist" the yield curve by

changing the maturity structure of outstanding government debt, which is doubtful (Johnson,

Small, and Tryon, 1999, King, 1999, Eggertsson and Woodford, 2003, pp. 20-23). Thus, a central

bank influences longer-term rates only through expectations of future overnight rates. Once

overnight rates have been driven to their floor, a central bank has no reliable mechanism to

validate, or contradict, these expectations…On this definition, the United States was in a

liquidity trap through most of the 1930s. According to Krugman (1998), U.S. interest rates were

‘hard up against the zero constraint’ (p. 137).”

Mr Hanes goes on to state, “In the 1930s, bankers complained that low interest rates weakened

their capital positions by reducing earnings (Meltzer 2003, p. 548), while a banker observed: ‘We

are vitally interested in protecting our capital funds from depreciation when the ultimate

increase in interest rates comes and brings along a depreciation in longer-term securities’ (p.

507).”

The article is much lengthier and very intriguing. As may be extrapolated from Mr Hanes' 2006 article, a few problems may exist with the Fed's current 21st century policy. Time will tell.

Are There Still Potential Security Gaps in the U.S. Financial System?

There appears to be a slow move afoot to create easier mortgage financing in the USA. Credit Unions usually restrict membership to certain types of people (e.g., public employees, farmers and so on). However, some credit unions are advertising nationally in various newspapers regarding mortgage offerings to the general public if they ‘donate’ to a foundation in order to ‘qualify’ said member of the general public for membership in a restricted credit union. This serves to expand the membership. An expanded membership increases the likelihood of an increase in an ‘asset’ base when the extra members originate loans. Loans are counted as assets by the credit unions. A credit union may show positive growth for awhile during this process. However, once the newly added members begin to default - the party begins to wane.

Such ‘relaxed’ guidelines are popping up all over the USA with little fanfare (for obvious reasons). Credit unions in the USA are offering jumbo adjustable-rate mortgages (ARM’s) set to adjust a few years from now. Many US credit unions avoided the fiscal calamities of the past few years. Will this change as time drags on?

Does the U.S. Government know of the apparently ‘relaxed’ guidelines that may potentially foster conditions of the sale of a portion of the millions of distressed properties? A possibility for increasing housing prices and also the derivatives based upon said ‘distressed’ properties may occur should unscrupulous buyers get back into the real estate market en masse. Such a scenario sets the world up for a huge crash in the not too distant future. Is a new bubble being ‘inadvertently’ set up by some US financial institutions?

The Sum of All Things

Please recall from Part I that the Golden Ratio is a unique number approximately equal to 1.618. The inverse of the Golden Ratio is approximately 0.618 (i.e., 61.8%). In the book “America's Great Depression” by Murray Rothbard (1963), a more encompassing, and accurate, measure of the money supply that included currency, demand and time deposits, savings-and-loan shares and the cash value of life-insurance policies was employed than the measurements utilized by Milton Friedman and Anna Schwartz in their book entitled “Monetary History of the United States, 1867-1960” (1963).  Using the more all-encompassing Rothbard figures, the money supply increased by the Golden Ratio number of 61.8% between 1921 and 1929, with an average annual increase of 7.7%. Various credible sources state that the U.S. money supply fell approximately one-third between 1929 and 1933. Approximately one-third? What a peculiar retracement.

Bel! Mort!

An ending begins,
A beginning ends;
Saw a curve,
It bends!

P.S.  To be more precise, it takes 31.688 years for a billion seconds to elapse when leap years are taken into account (but it rounds up to 32).

Other References: 

http://www.nytimes.com/2010/08/03/us/03unemployed.html

The Golden Ratio Revisited – Part II


“We will not have any more crashes in our time.”
-John Maynard Keynes, 1927

It appears that the USA is subject to the trauma of the greatest spendthrift in history since the Roman Emperor Nero or the American Emperor GW Bush. What started as a large bailout of failed bankers under the Bush administration has escalated into a gargantuan bailout of any number of financially defunct institutions. A few billion here, a trillion there, and voila, everything is going to be all right! If that were the case, then why is the USA still hemorrhaging jobs after so many years of economic downturn? Why are the American states clamoring for more federal bailouts? Why does the US Government fear halting the economic stimulus efforts? Even the IMF warns that debt problems loom for the USA if the country remains on its present path.

US Labor Department figures showed initial claims for benefits decreased by twenty-one thousand in the week ended July 3 to four-hundred and fifty-four thousand. Wow! That would be great except for one thing. These ‘initial’ claims for unemployment benefits are yet more jobs just newly lost! Even if ‘initial’ weekly jobless claims were to drop below four-hundred thousand via faking some statistics, these are still newly lost jobs; and few actual new jobs, aside from the military, are being created by the great ‘planner’ Obama. The Obama “Solution” appears to be one of ‘printing’ some more money and throwing it at the myriad of problems that just will not fade. Such a policy has punished savers with low interest rates while greatly magnifying government debt levels. Savers lose while the banks cruise. However, should the USA heed IMF warnings, it is foreseeable that US interest rates will climb in the medium to long-term thus temporarily strengthening the US dollar in a bizarre twist of official currency manipulation that could arrest a hyper-inflationary spiral a la Paul Volcker style. Yet, such an interest rate move may stifle economic recovery. Higher interest rates also increase the servicing costs of the US debt load. The USA is in a difficult situation.

On another note, it is amusing that the US Chamber of Commerce tells Ireland that the same US corporations that have been discharging around a half-million Americans per week for some years will now ‘create’ around two-thousand jobs in Ireland. However, will all of these alleged ‘jobs’ go to actual Irish people? Doubtful. Given the current state of affairs in Ireland, foreigners may receive many of these alleged ‘jobs’ if they ever are created. Additionally, the US Chamber of Commerce has not exactly produced extraordinary employment creation back home in their beleaguered USA. That is, unless you count the growth in military recruitment, which has actually been counted in US employment statistics since the Reagan era.

On a similar note, profits shipped out of Ireland by foreign multinational corporations are included in Irish GDP figures but do not help the actual Irish economy. Why? Increases in insurance premiums, and so forth, can actually boost GDP. Profits ‘shipped out’ of Ireland are not recycled into the Irish economy. This is similar to what happened during the Great Famine. More specifically, ample harvests of grains, and so forth, exported to England during the famine yielded no benefit to starving Irish. This Government-sanctioned ‘absentee landlord’ mindset still prevails in Ireland.

Meanwhile, over in the core of the EU, the European Central Bank (ECB) was dramatically buying up
loads of junky government bonds in order to prop up the faltering euro zone. This process has eased a bit recently. How may we read this situation? Let us consider the possibility of a decrease in demand from the United States should the economic recovery in the USA falter. Asia, and elsewhere, may help a little; but like it or not, the USA is still the well-established ‘dumping ground’ for the goods of the world. Add to that the fact that if the millions of Americans who are now termed “99 weekers” (i.e., their 99 weeks of unemployment payments have terminated) no longer receive their unemployment benefit payments, there will be a larger drop-off in demand than many mainstream economists have considered. Suddenly, many millions of angry people will have no money to spend. Small wonder Obama is frantically trying to gain another extension in benefits as such a sudden drop could open the floodgate to a double-dip recession.

Please hearken back a few years to the vain words of various EU leaders who assured their respective nations that the recession contagion from the USA would not spread to the EU. Those so-called leaders were either total idiots or complete liars. In an era of globalization, all contagions spread! Be they viral, bacterial, terror or economic.

A decrease in demand for EU goods and services beyond what is now the ‘new normal’ could very well lead to a much slower recovery in the EU than economists predict. Americans, and many others, will opt to buy less expensive non-European goods as the euro exchange rate quashes a vigorous EU recovery. This translates into continuing unemployment and debt questions.

Although some EU debt concerns have abated for the time being, many of the issues that started the sovereign debt ball rolling are still lurking around. Hence, Germany is attempting to formulate mechanisms to avert a potential 21st Century Weimar Republic scenario. Perhaps efficient German planning will increase control upon fiscally irresponsible euro zone states by bringing them under the watchful eye (or heel) of both the EU and Germany?  Debtors beware.

“The man of wealth has rule over the poor, and he who gets into debt is a servant to his creditor.”
-Proverbs 22:7

P.S. Next time – a quick look at the manipulation of economic reality.

References:

Recession Continues to Batter State Budgets; State Responses Could Slow Recovery

http://www.cbpp.org/cms/?fa=view&id=711

No Jobs Yet: CFOs Say Hiring May Not Revive Until 2011 or 2012

http://www.dailyfinance.com/story/credit/no-jobs-cfos-hiring-2011-2012/19552718/

US Department of Labor

http://www.dol.gov/opa/media/press/eta/ui/eta20100936.htm