De Crash Course 17 & 18

Crash Course 0

Deze crash course gaat over de veranderingen die de maatschappij te wachten staan. Economische, maar ook maatschappelijke. De focus is uit de aard van de herkomst op de USA, maar ook voor West-Europa bevat het nuttige lessen. Komende weken zullen we er met regelmaat een aantal toepasselijke lessen uit (her)publiceren.

NB: de link naar de gesproken tekst zit onder de link waar de duur staat aangegeven!

Crash Course

Engelstalige transcriptie Chapter 17 – Bubbles

OK now that we’ve taken a look at US assets, we need to spend some time understanding what an asset ‘bubble’ is, how to recognize when one is forming, and the consequences of the aftermath once it bursts.

And we are specifically going to examine the housing bubble that popped in 2007 in detail, because up to that point it was the largest bubble in recent history to burst, and it’s still fresh on people’s minds..

Through the long sweep of history, the bursting of asset bubbles has nearly always been traumatic.  Social, political and economic upheavals have a bad habit of following asset bubbles, while wealth destruction is a guaranteed feature.

Bubbles only used to happen once every generation or longer, because it took substantial time for the victims to forget the pain of the damage.

But that’s changed in the new millennium. Less than ten years after the bursting of the dot-com bubble we saw the bursting of the housing bubble.  This is simply astounding and thoroughly unprecedented.

More astonishingly, there are now concurrent equity and bond bubbles raging across the entire financial market structure of the world.

We are in our third bubble period in less than 15 years. This new era of serial bubble-blowing signifies that we are now in new turbulent territory with which we have little historical guidance to draw on.

So how would we know that we’re in an ‘asset bubble’?   What do they look like and what can we expect when one bursts?

The Fed has famously claimed that you can’t spot a bubble until it bursts.  This is flat wrong, and irresponsible to say the least.

Actually, you can and the definition is pretty simple; “A bubble exists when asset price inflation rises beyond what incomes can sustain”.  A bubble represents people abandoning reason and prudence as greed takes over.

Let’s look at one of the more interesting bubbles that occurred in Holland in the 1600’s.  The people of that time famously became infatuated with tulips saw them as a sure-fire path to riches and a financial mania set in.  Yes, we’re talking about the flowers that come from bulbs.

The bubble in tulip prices began when beautiful and unique variants in coloration were developed and bulbs began trading at higher and higher amounts as the speculative frenzy built.

At the height of the bubble, a single bulb of the most highly sought after example, the Semper Augustus seen here, commanded the same selling price as the finest house on the finest canal.

Imagine trading a flower bulb today for a premier flat on Park Ave and you’ve got the idea.

But, eventually people figured out that you actually could grow quite a few tulips if you set your mind to it, and that perhaps bulbs were, after all,  just flowers.

The record shows that the tulip craze ended even more suddenly than it began, collapsing almost in a single day at the start of the new selling season in February of 1637.

On that day, a silent whistle blew that apparently only dogs and buyers could hear, and prices immediately crashed.

This example illustrates two fundamental characteristics of bubbles. First that they are self-reinforcing on the way up, meaning that higher prices become the justification for even higher prices. And second, that once the illusion is lifted, everyone suddenly wants to sell at the same time.

A second example of a bubble comes from the 1700’s and goes by the name The South Sea Bubble. The South Sea Company was an English company which was granted a monopoly to trade with South America under a treaty with Spain.

The fact that the company was rather ordinary in its profits prior to the government monopoly did not deter people from speculating wildly about its potential future value.

So the share price rose dramatically. Nor were investors concerned by the fact that the company was actually billed by its owners as  “A company for carrying out an undertaking of great advantage, but nobody to know what it is”

Sir Isaac Newton, when asked about the continually rising stock price of the south sea company, said that he ‘could not calculate the madness of people’.

He may have been the genius who invented calculus and described universal gravitation, but he also managed to end up losing over 20,000 pounds to the bursting bubble; proving that intelligence is often no match for a public delusion.

In 1720 the South Sea mania took off displaying a textbook perfect example of an asset bubble.  Here we see reflected two additional essential features of bubbles: they are roughly symmetrical in both time and price.

That is, however long it took to create the bubble is roughly the amount of time it will take to unwind the bubble, although they tend to deflate a bit faster than they formed, and prices usually get fully retraced, if not a bit more.

Here we can see those features in perfect form.  Keep an eye on this shape; we’ll be seeing it again, and again and again.

And here is a chart of the Dow Jones.  Beginning in 1921 we can see that the stock bubble that preceded the great depression followed the same rough trajectory, requiring about as much time to deflate as it did to inflate and that prices roughly returned to the levels from which they started.

Of course, we were on a gold and silver standard back then, so that helps explain why price levels returned to their starting point.

And here’s the stock price of GM in the blue line between the years 1912 and 1922 and Intel in the red line between 1992 and 2002; periods during which both stocks were swept up in bubbles.

Here we might also note that the price data looks very similar for both stocks despite the fact that they reflect a nascent car company and a mature high tech chip manufacturer separated by a span of 80 years.

The fact that bubbles display the same price behaviors over the centuries and decades tells us that they are not artifacts of particular financial systems or periods in history, but rather are shaped by the human emotions of greed, fear and hope.

Those have not changed through the years and this is why you should hold onto your wallet any time you hear the words ‘this time it’s different’.

Somewhere along the way people started to believe this about houses.  It got to the point that people began to really believe that a house was a path to riches.

And even better, it was a magical path that would transport you to easy street even if you sat on your sofa the whole time drinking beverages.

Now, there’s simply no way for this to be true and we should have known better. But by their nature, bubbles succeed in pulling the wool over the eyes of the masses.

The historical data shows us that – bubbles aside — over the long haul, house prices will be set by whatever it costs to build a new house meaning that inflation will dictate house prices.

This amazing chart of inflation-adjusted house prices, created by Robert Shiller, reveals that between 1890 and 1998 house prices tracked the rate of inflation very closely.

In this, any time the chart line is rising, houses are appreciating in price faster than the rate of inflation; and any time the line is falling they are losing ground compared to inflation.

Over this entire 118 year period house prices averaged 101.2 meaning that inflation-adjusted house prices are roughly comparable across this entire sweep of history.  Real estate prices were stable compared to inflation, then fell before and during the Great Depression, stabilized again, and then rose dramatically after the war.

See this little bump right here?  That was a property bubble that I still remember clearly because it impacted the northeast where I lived at the time and I got to ride my bike though abandoned construction projects in the years afterward.

Notice that this property bubble returned to baseline in a fairly symmetrical fashion as did the  property bubble of 1989.

Well, if those were property bubbles, then what’s this?  This housing bubble that had no historical precedent in the US and was massively out of proportion to anything we had ever experienced before.

There was nothing even remotely close to it in magnitude, leaving us without any history to guide us as to what the impacts were likely to be.

And also note that this bubble did not suddenly begin in 2004. It began in 1998 and had eclipsed the previous two housing price peaks by the year 2000.

You might ask yourself “if the Federal Reserve had access to this data, and knew we had a property bubble on our hands as early as 2000, why did they continue to aggressively lower interest rates to 1% and hold them there for a year between 2003 and 2004?”

That’s a darn good question. Because other people, myself included, were actively sounding the alarm.

Now, the original Crash Course was put out back in 2008. In the years before its publication — in 2005, 6 and 7 — I was openly warning about what, to me, was an obvious housing bubble.

Here’s what I said in 2008:

Based on this chart, where and when might we predict this bubble to finally bottom out?  Well, symmetry suggests   the bottom will be somewhere around 2015 while history suggest that prices will decline by roughly 50% in real terms.

How’s that observation turning out?  Well, it was almost spot on, though the 44% retrace we experienced happened by 2012, not 2015. So it contracted even more viciously than I had feared.

In fact, I expect that there’s more pain to come in this story. The recent uptick in house prices since 2012 is bringing housing prices unsustainably high again in a growing number of markets.

These rising prices mainly reflect the dangerous reflationary policy of the Fed, which is costing about $1 trillion freshly printed dollars each year to sustain.

So perhaps the full 50% retrace will happen by 2015, right on schedule.

So again, where was the Fed during the blowing of the housing bubble?  They were busy writing “research” papers convincing themselves that there was no bubble to worry about, as seen in this 2004 Fed study entitled “Are Home Prices the Next Bubble?”

The main summary of the study started off on a good note stating:  “Home prices have been rising strongly since the mid-1990s, prompting concerns that a bubble exists in this asset class and that home prices are vulnerable to a collapse that could harm the U.S. economy”.

But then main conclusion of the paper veered sharply off into a ditch reading:

“A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.”

“Essentially moved in line with increases in family income?” What? One of the most widely known facts of our time is that family incomes did not move up at all on an inflation-adjusted basis during the housing boom and is one of the principal economic failures of the first decade of the millennium.

This just goes to show that the Federal Reserve is either stocked with inept or biased researchers. And, of the two options, I am not sure which makes me feel worse about our chances of safely navigating through this mess.

But the Fed’s researchers were simply doing what millions of people were also doing at the time; namely falling prey to believing that somehow  “this time is different”.

But that’s just how bubbles are.  People take leave of their senses, use all manner of rationales to justify their positions but then, suddenly, one day, the illusion lifts and what seemed to be unassailably true no longer makes any sense at all.

Once that day happens, the fate of the bubble is reduced to measuring the speed of its collapse.

While it’s tempting to feel a sense of outrage over the excesses that created the housing bubble, it’s important to remember that the dramatic rise in house prices was itself just a symptom of a larger credit bubble run amok.

Total credit at the end of 2000, when the tech stock bubble was bursting, stood at $27 trillion dollars.  By the end of 2008 it stood at an astounding $52 trillion dollars.

This $25 trillion increase in borrowing was 5 times larger than the increase in US GDP over the same period of time.  Any attempt to understand the housing bubble has to be viewed against the backdrop of this massive increase in debt.

But as we noted in an earlier chapter, this credit bubble has been going on for three decades. Unwinding a multi-generational debt-binge is going to require some enormous changes in attitudes and habits, and quite a bit of austerity.

And that’s if we do it on our own terms.  If we don’t facing up to what we’re doing and change our behavior, the adjustment will happen via market forces — financial accidents and massive losses in stocks and bonds that will wipe out the excessive claims on the markets’ own terms.

As of this writing at the beginning of 2014, the stock and bond market are both at their most expensive levels ever, or very, very close to them.

Recall, bubbles exist when asset prices rise beyond what incomes can sustain.  Collectively, the facts of having the most debt ever on record, the priciest bonds on record, and the US and several European stock markets at all time highs are a bet that the future will be much larger than the present.

After all, it will be future income that will either sustain the very high asset prices or pay back the principal and interest components.

And it’s worth repeating that the prices of various assets such as stocks and bonds have been climbing much faster than underlying organic economic growth.

That is, the debt is climbing faster than incomes AND that debt is now priced at its all time highs.  And not all of it is “good” debt, either. There is now more junk debt circulating than ever, too.

So just as certain as I was that there was a very obvious housing bubble before that reality became obvious to everyone, I think history is repeating itself — the signs are all there to indicate that we’re in the midst of another set of gigantic bubbles in the financial markets, only these are larger, and more global than any before.

One important reason that any bubble is so destructive is because so many bad investments are made along the way as it grows.

Too many houses are built, too many poor loans are made to individuals and companies with poor prospects for paying them back, and too much money is placed into stocks with absurd and astonishingly high price to earnings ratios.

Sorry to say, but all those trillions of dollars of mal-investments are simply wasted – those dollars are gone.  And, worse, their wastage steals opportunities from the things that needed that money more.

The Austrian school of economics has a very crisp and historically accurate definition of how a credit bubble ends. According to Ludwig Von Mises:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion.

The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

This is a view I happen to ascribe to and explains my strong preference for placing my wealth out of the path of a potential financial accident or currency collapse.

As a nation, we’ve undertaken desperate measures to avoid abandoning the continuation of our credit expansion – a delusionary course that leaves a final catastrophe of the currency as our most likely outcome.

As for the timing?  It could hardly be worse.  Dealing with a set of nested bubbles is hardly the sort of challenge we need at this particular moment in history, but, here we are.

The stewardship and vision displayed by the Federal Reserve and Washington DC in bringing this all about has been breathtakingly shortsighted.

So, what can we expect from a collapsing credit bubble?  Simply put, everything that fed upon and grew as a consequence of too much easy credit will collapse.  I am especially leery of   financial stocks, low-grade bonds and of course, real estate.

There are entirely too many financial institutions and financialized companies to exist together in a future without rapid credit growth. So we would expect the number of those firms to be drastically cut back to a more appropriate size at some point in the future.

I see very few conventional ways to protect ones wealth and so I invite you to begin asking yourself and, if you have one, your financial advisor some very hard questions about the safety of your holdings.  You’ll be glad you did.

Remember, this time is very likely NOT different.

The recent years of money printing by the Fed has NOT ushered in a “permanent plateau of prosperity”. And, as with all bubbles, symmetry indicates the downslope after the bursting will be steep, swift and likely quite scary.

Duur: 16:39

Publicatie 4 juli 2014

Crash Course

Engelstalige transcriptie Chapter 18 – Fuzzy Numbers

What if it’s true, as author Kevin Phillips said: “Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured.”

What if it turned out that our individual, corporate and government decision-making was based on misleading, if not provably false, data?

That’s what we’re going to take a look at here by examining the ways that inflation and Gross Domestic Product, or GDP, are measured.

As you now know inflation is a matter of active policy.  Too little, and our current banking system risks failure.  Too much, and the majority of people noticeably lose the value of their savings, which makes them politically restive.  So keeping inflation at a goldilocks temperature – not too hot and not too cold – is the name of the game.

The Fed currently has an explicit inflation target of 2%, which means, using our handy rule of 72, that the Fed thinks your money should lose one-half of its value every 36 years.

Of course, that’s only if we actually experience just 2% inflation, as the Fed hopes.

Inflation has two components; the first is the simple pressure on prices due to too much money floating around.

The second component lies with people’s expectations of future inflation. If expectations are that inflation will be tame, they are said to be well anchored.

If people expect prices to rise in the future, they tend to spend their money now, while the getting is still good, and this serves to fuel further inflation in a self-reinforcing manner.

The faster people spend, the faster inflation rises.  Zimbabwe is a perfect modern example of this dynamic in play.

Accordingly, official inflation policy has two components; the first is regulating the money supply and the second is anchoring your expectations.

And how exactly is this anchoring accomplished?  Over time this has evolved into little more than telling the public that inflation is lower, or even a LOT lower, than it actually is.

That is, if you are told over and over again that inflation is really, really low, perhaps even worryingly low, then that helps to set your expectations. In this example, you might be willing to think a little extra inflation might be a good thing.

The details of how this is done are somewhat complicated but worthy of your attention.

Let me be clear, the tricks and subversions we will examine did not arise with any particular administration or any political party.  Rather, they arose incrementally during every administration over the past 40 years.

Under Kennedy, who disliked high unemployment numbers, a new classification was developed that removed so-called  ‘discouraged workers’ from the headline data.

This caused the unemployment number to drop, something any politician likes to see – even if it’s only a result of fudging the numbers.

How many ‘discouraged workers do we have today?  Lots, and remember, they don’t count towards the unemployment rate that everyone talks about and tracks.

Johnson then created the “unified Budget”, which is still in use today. It rolls surplus Social Security funds into the general budget where they are spent, but not reported as part of the deficit – making it appear lower than it actually is.

Richard Nixon bequeathed us the so-called “core inflation” measure which strips out food and fuel which as Barry Ritholtz says is like reporting inflation ex-inflation.

Bill Clinton then left us with the current tangled statistical morass that is now our official method of inflation measurement.

At every turn, a new way of measuring and reporting was derived that invariably served to make things seem a bit rosier than the previous measure did.

Unfortunately, the cumulative impact of all this data manipulation is that our measurements no longer match reality.

We have been, in effect, telling ourselves a series of small lies that have really begun to add up to big ones. And these fibs serve to distort our decisions and thereby jeopardize our economic future.

Let’s begin with inflation, which is reported by the Bureau of Labor Statistics, or BLS, in the form of the Consumer Price Index or CPI.

Now, if you were asked to measure inflation, you’d probably track the cost of a basket of goods from one year to the next, subtract the two, and measure the difference. And your method would in fact be the way inflation was officially measured right on up through the early 1980s.

But In 1996 the Clinton administration implemented the Boskin Commission findings which now have us measuring inflation using three oddities: Substitution, Weighting, and Hedonics.

To begin, we no longer simply measure the cost of goods and services from one year to the next because of something called the Substitution effect.

Thanks to the Boskin Commission it is now assumed that when the price of something rises people will switch to something cheaper.

So any time, say, that the price of salmon goes up too much it is removed from the basket of goods and substituted with something cheaper, like catfish, but only if catfish is actually cheaper than Salmon at the moment.

By this methodology the BLS says that food costs rose 4.1% from 2007 to 2008.

However according to the farm bureau, which does not do this and simply tracks the exact same shopping basket of 30 goods from one year to the next, food prices rose 9.2 % over that year compared to the BLS which says the only rose 4.1%.

That’s a huge difference.  In my household, our experience is better matched by the farm bureau.

One impact of using substitution is that our measure of inflation no longer measures the cost of living, but the cost of survival.

Next, anything that rises too quickly in price is now subjected to so-called  “geometric weighting” in which goods and services that are rising most rapidly in price get a lower weighting in the CPI basket under the assumption that people will use less of those things.

But that’s just silly when it comes to things like the cost of college or healthcare because you can’t just consume a little less college when it becomes pricier and you don’t get 85% of a surgery because it costs more.

Using the governments own statistics from two different sources, we find that health care is about 17% of our total economy, but it is weighted as only 6% of the CPI basket.

Because healthcare costs are rising extremely rapidly, the impact of including a much smaller healthcare weighting is that the reported rate of inflation is held down.

By simply reinstating the actual level of healthcare spending our reported CPI would be several percent higher.

But the most outlandish adjustment of them all goes by the name “hedonics”, the Greek root of which means  “for the pleasure of.”

This adjustment is supposed to adjust for quality improvements, especially those that lead to greater enjoyment or utility of the product, but it has been badly overused.


Here’s an example, Tim LaFleur is a commodity specialist for televisions at the Bureau of Labor statistics where the CPI is calculated. I’m guessing he works in a place that looks like this.

In 2004 he noted that a 27-inch television selling for $329.99 was selling for the same price as the year before but was now equipped with a better screen.

After taking this subjective improvement into account he adjusted the price of the TV downwards by $135, concluding that the screen improvement was the same as if the price of the TV had fallen by 29%.

The price reflected in the CPI was not the actual retail store cost of $329.99, which is what it would cost you to buy, but $195.   Bingo!  At the BLS TVs cost less and inflation is heading down.  At the store they’re still selling for $329.99.

Hedonics are a one-way trip.  If I get a new phone this year and it has some new buttons the BLS will say the price has dropped.

But if it only lasts 8 months instead of 30 years like my old phone no adjustment will be made for that loss.  In short, hedonics rests on the improbable assumption that new features are always beneficial and are synonymous with falling prices.

Over the years, the BLS has expanded the use of hedonic adjustments and now applies these adjustments to everything from smartphones, automobiles, washers, dryers, refrigerators, healthcare and even to college textbooks.

Hedonics are now used to adjust as much as 46% of the total CPI.

What would happen if you were to strip out all the fuzzy statistical manipulations and calculate inflation like we used to do it?

Luckily, John Williams of has done exactly that, painstakingly following each statistical modification over time and reversing their effects.


If inflation were calculated today the exact same way it was in the early 1990’s, Mr. Williams finds that it would be running at closer to 3% hotter than is typically reported.

This stunning 3% difference explains much of what we see around us.

It explains why people have had to borrow more and save less – their real income was actually a lot lower than reported.

A higher rate of inflation is consistent with weak labor markets and growing levels of debt.  It fits the monetary growth data better.  So many things that were difficult to explain under a low-inflation reading suddenly make sense.

The social cost to this self-deception is enormous.  For starters, if inflation were calculated like it used to be, Social Security payments, whose increases are based on the CPI, would be  70% higher today than they actually are.

Because Medicare increases are also tied to the CPI hospitals are increasingly unable to balance their budgets forcing many communities to lose services.  These are examples of the real impacts that result from small lies.

But besides paying out less in entitlement checks, by understating inflation politicians and Wall Street financiers gain in another very important way.

Gross domestic product, or GDP, is how we tell ourselves that our economy is either doing well or doing poorly.

In theory the GDP is the sum total of all value-added transactions within our country in any given year.

Here’s an example, though, of how far from reality GDP has strayed.

The reported number for 2003 was a GDP of 11 trillion dollars implying that $11 trillion of money-based, value-added economic transactions had occurred.

However, nothing of the sort happened.

First, that 11 trillion included  $1.6 trillion of Imputations, where it was assumed – or imputed – that economic value had been created but no actual transactions took place.

The largest of these imputations was the “value” that the owner of a house receives by not having to pay themselves rent.  Get that?

If you own your house free and clear the government adds how much they think you should be paying yourself rent to live there and adds that amount to the GDP.

Another is the benefit you receive from the  “free checking” provided by your bank which is imputed to have a value because if it weren’t free, then you’d have to pay for it.

So that value is guesstimated and added to the GDP as well.  Together just these two imputations add up to over a trillion dollars of our reported GDP.

Next, the GDP has many elements that are hedonically adjusted.  For instance computers are hedonically adjusted to account for the idea that because they are faster and more feature rich than in past years they must be more additive to our economic output.

So if a thousand dollar computer were sold it would be recorded as contributing more than a thousand dollars to the GDP.  Of course that extra money is fictitious in the sense that it never traded hands and doesn’t exist..

What’s interesting is that for the purposes of inflation measurements hedonic adjustments are used to reduce the apparent price of computers but for GDP calculations hedonic adjustments are used to  boost their apparent price which adds to GDP.

Hedonics, therefore, are used to maneuver prices higher or lower, depending on which outcome makes thing look more favorable.

So what were the total hedonic adjustments in 2003?  An additional, whopping  $2.3 trillion dollars. Taken together these mean that  $3.9 trillion dollars — or fully 35% of our reported GDP — was NOT BASED on transactions that you could witness, record, or touch.

They were guessed at, modeled, or imputed but they did not show up in any bank accounts because no cash ever changed hands.

And, just to keep this trend rolling along, in 2013 the Bureau of Economic Analysis made even more huge, structural changes to GDP that – you guessed it! – served to boost GDP to even higher levels.

What the BEA did was to begin counting research and development as well as artistic intangibles as GDP positive.  This means that the R&D necessary to develop iPhones is now counted as well as the iPhones themselves.

It also means that the intangible value of motion pictures, TV programs, and books are  counted up too, even though they do not have a cash value that can be easily measured.  They have to be guessed at, or imputed.

The change was not small either.  This data shift added a full 3% to GDP just like that, and in states where there’s a lot of military R&D – which has a very questionable value add to society – GDP will rise sharply.

But what will have actually changed?  Nothing, just the way we are counting.

As an aside, when you hear people say things like “our debt to GDP is still quite low” or   “income taxes and total government spending as a percentage of GDP are historically low” it’s important to remember that because GDP is  artificially high any ratio where GDP is the denominator  will be artificially low.

Now let’s tie in inflation to the GDP story.  The GDP you read about is always inflation adjusted and reported after inflation is subtracted out.

This is called the real GDP, while the pre-inflation adjusted number is called nominal GDP.  This is an important thing to do because GDP is supposed to measure real output, not the impact of inflation.



For example, if our entire economy consisted of producing lava lamps and we produced one of them in one year and one of them the next year, we’d want to record our GDP growth rate as zero because our output is exactly the same.

So if we sold a lava lamp for $100 one year but  $110 the next, we’d accidentally record 10% GDP growth if we didn’t back out the price increase.

So in this example, the real lava lamp economy has a value of $100 while the nominal lava lamp economy is $110.  But all we care about is the real economy because we’re trying to measure what we actually produced.

Ah!  Now we can begin to understand the second powerful reason that DC loves a low inflation reading.  It’s because GDP is expressed in real terms.

So the smaller the amount subtracted from the nominal GDP number, the higher the reported GDP and the happier politicians are. They have incentive to fudge inflation in order to keep reported real rates as high as possible.

Here’s an example: In the 3rd Q of 2007 it was reported that we experienced a very surprising and strong 4.9% rate of GDP growth.

At the time there were many proud officials declaring that certain tax cuts were responsible for this excellent news and so forth.  Less well reported was the fact that nominal GDP was 5.9% from which was deducted the jaw-droppingly low inflation reading of 1% giving us the final result of 4.9%.

In order to believe the 4.9% figure you have to first believe that our nation was experiencing a 1% rate of inflation during the same period that oil was approaching $100/barrel and inflation was obviously and irrefutably exploding all over the globe.

Lest you think I’ve cherry picked an accidental, one-time embarrassing statistical moment here’s a chart of the so-called GDP deflator which is the specific measure of inflation that is subtracted from the nominal GDP to yield the reported real GDP.

As you can see, in the ten years between 2003 and 2013 the Bureau of Economic Analysis has been serenely and systematically subtracting lower and lower amounts of inflation.

Remember, each percent that inflation is understated equals a full percent that GDP is overstated.

If we compare the deflator used by the BEA by subtracting it from the improbably too-low CPI, we should find, that over the same ten-year period, everything averages out to zero.

But that’s assuming the methods line up and are equivalent.  However, by setting the initial 2003 value to and arbitrary value of 100, we can easily see that over time the deflator has been substantially below even the CPI and compared to CPI has recorded a full 21% less inflation between 2003 and 2013.

The cumulative effect of all this statistical sleight of hand serves only to make things seem rosier than they actually are.

If this is not lying to ourselves, then “deluding ourselves” is the next best term.

I invite you to keep this deception in mind when you next read about how “our robust economy is still expanding”.

If, instead, we make our own assumptions about inflation, or use those of John Williams, then we find that economic growth has been less than advertised, a finding that fits rather well with stubbornly high unemployment, growing food stamp usage, and other indicators of anemic economic growth.

The same sort of statistical wizardry that we’ve explored here is performed on income, unemployment figures, house prices, budget deficits and virtually every other government supplied economic statistic you can think of.

Each is laced with a long series of lopsided imperfections that inevitably paint a rosier picture than is warranted.

We are now in the midst of a worldwide debt orgy, dangerous asset bubbles, the beginning waves of boomer retirements  – and solid, credible information is what we need as a beacon to find our way out.

To close with Kevin Phillips again;  “…our nation may truly regret losing sight of history, risk and common sense.”

And that’s why you should care about something as yawn-inducing as how the inflation and GDP numbers are calculated.

That’s it for the Economic section of the Crash Course.

The summary is this; as long as our credit and money systems, and by extension our economy, can grow exponentially forever, it’s a perfectly sustainable system.

However, if there are any reasons, such as physical planetary limits, that might prevent such endless growth, then – Houston – we have a problem.

Duur: 20:26

Publicatie 4 juli 2014

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