Sunday, March 24, 2013

Lies, Damned Lies and Government Statistics

As a boy, George Washington is famed for chopping down his father’s cherry tree, then confessing the crime, saying, “I cannot tell a lie.”
Decades later, after a lifetime of service to his country, the name “Washington” became the very synonym for honesty and integrity.
But these days, the exact opposite is true: It is clear that Washington cannot tell the truth.
We see evidence of this every day as members of both major political parties lie, fib, hedge, evade, mislead, dissemble, deceive, equivocate and prevaricate in hundreds of ways.
The process is visible to all who would observe:
  1. Politician or bureaucrat lies with a straight face.

  2. Accomplices in the media swear to the lie.

  3. Gullible taxpayers, voters and investors accept the lie at face value.

  4. Guilty politician gets re-elected, tells more lies; the cycle continues.
The list of lies our leaders have told us in the 21st Century would simply be too long to include even in ... well ... even in the massive Library of Congress.
Members of both political parties lie about the things the other side is doing ... about the things each new piece of legislation they pass will do and will not do ... and even about life-and-death issues like war and peace.
But many of the most callous lies Congress people and presidents tell are about their management of the economy.
You see, Washington has become populated by people who are too simple, too corrupt and too incompetent to balance the national checkbook ...
But who, in their arrogance, think they are perfectly qualified — and indeed, duty-bound — to manage the U.S. economy.
And as they tinker with our debt, money supply and interest rates, they determine how — and how well — your family will live.
In a blatant attempt to hide its own incompetence from voters’ eyes — to perpetuate the myth that it is qualified to manage what was intended to be a free-market economy — the government of the United States shamelessly lies to each and every one of us every day.
Fortunately, one famous economist, Mr. John Williams continues to report on the economy the way Washington USED to — before it began cooking the books to make itself look better to voters.
And what he has found is alarming, to say the least.

The first lie is that the U.S. economy is growing. In truth, it is shrinking.
Consider this chart tracking the growth of the U.S. economy.
Using its new way of calculating GDP growth (red line), the economy is growing — if somewhat slowly — at nearly 2% per year.
But when you use the same equations Washington USED to tell us we could count on, the blue line shows that the U.S. economy is actually SHRINKING at the rate of more than 2% per year.

The second deadly economic lie is that unemployment is far lower than it actually is.
Next, let’s take a look at employment. The red line on this chart represents the official unemployment rate that the government reports and that the media dutifully reports as being accurate.
According to these official figures, unemployment is now running about 7.7%.
But once again, you can see the lie Washington’s telling us right on the chart.
The blue line represents unemployment the way Washington used to measure it — the way Washington USED to say was 100% accurate. And as you can see, by that measure, the true unemployment rate is really 23%.

The third deadly lie is that inflation is low.
Washington swears on a stack of Bibles that the inflation rate is around 2%. That’s the red line on this graph.
Our leaders want you to believe that the price you pay for everything you by is rising at the average rate of 2% per year.
But here’s what they won’t tell you: Back in the 1970s, voters got so angry at Washington for destroying the buying power of our money, our leaders changed the way they measure inflation ...
NOT to more accurately report changes in the Consumer Price Index ... but to make themselves look more competent to voters!
So as you can see from the blue line on the chart, when measured the way it was before the Washington cooked the books, inflation is now running at 9.7% — nearly five times higher than Washington claims.
At that rate, everything you buy today will cost you two and one-half times more within ten years.
Unfortunately, given today’s endless money-printing at the Fed, chances are the true inflation rate will soar even higher:
After the Fed printed money in the 1970s, inflation hit 14% ... and in the past six years, it has printed 25 times more money than that!

Quantitative Easing and Inflation

On November 25, 2008, the Federal Reserve announced that it would purchase up to $600 billion in agency mortgage-backed securities (MBS) and agency debt.
In December the FED cut interest rates to near Zero. 
In March 2009, the FED announced that it would purchase another $750 Billion in junk mortgages (Mortgage Backed Securities) and $300 Billion in Treasury Securities primarily because the rate of inflation was still heading down.
Often there is a lag in the effects of money creation but as QE1 ends the inflation rate once again begins dropping, spending much of 2010 at just over 1%.
So the FED decides QE2 is necessary and it purchases another $600 Billion of Longer Term Treasury Notes. This increases the inflation rate to almost 4% but when it stops the inflation rate begins falling again. Personally, I would love to see the inflation rate stay between 1 and 2% or better yet between 0% and 1%. In the long run low inflation rates benefit everyone as people can accurately judge their future costs and make sound business decisions. But the government prefers a higher inflation rate so it can repay its debts with "cheaper dollars." Inflation also erodes savings and causes consumers to act imprudently and spend more than they would if they had sound (unchanging) money.
On September 21, 2011 the Federal Open Market Committee announced Operation Twist.
On September 13, 2012 the FED announced QE3 which was $40 Billion a month in purchases and on December 12, 2012 they announced an additional $45 Billion per month with no definite end in sight.
We've added QE1, QE2, Operation Twist and QE infinity to the chart so that you can see the effects in the inflation rate. These "Quantitative Easings" were not your typical FED money printing schemes. In QE1, which lasted from November 25th 2008 - March 31, 2010 the FED started by purchasing $500 Billion in Mortgage backed securities. Most of these securities were virtually worthless at this point. But just a few months earlier they were considered part of the larger money supply. So in effect the FED bailed out the owners of this junk debt and pumped up the money supply at the same time by converting worthless junk into "valuable" greenbacks.


The economy: Why an increase in inflation is coming



Consumer Price Index

http://www.bls.gov/cpi/ 

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