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America's Economic Future full of Hubris?

"There are three kinds of lies: Lies, damned lies and statistics." - Mark Twain

There is really only one source of raw data and information about the U.S. economy and the GDP: the government. Every month, reports issue like a river of paper from the Congressional Budget Office, the Bureau of Economic Analysis and the Bureau of Labor Statistics, just to name a few...

But because these statistics are so overwhelming in scope, few bother to even review them, much less question them. A few folks out there wade through this massive pile and summarize the salient points of these reports, and then everyone else (through the miracle of the Internet) analyzes, hypothesizes and proselytizes based on these summaries.

Even seasoned analysts and hard-boiled financial journalists seem to blindly accept and report these figures, editorializing vehemently on what they mean (or what they think these figures mean) without questioning their fundamental validity in the least.

STATISTICAL DECEPTION #1: THE ANNUAL AMPLIFICATION

Instead of reporting profits, GDP, productivity and other rates of growth quarter by quarter and quarter over quarter like corporations do, the government "annualizes" these numbers. That means that instead of announcing growth (or lack of growth) as a ratio of one fiscal quarter relative to the previous quarter - or relative to the same quarter from the previous year - the Fed reports an extrapolation of every quarter's growth as though it were to inevitably continue at that same rate for a whole calendar year.

The United States is the ONLY country that reports its growth in this deceptive manner.

STATISTICAL DECEPTION #2: THE PRODUCTIVITY PREVARICATION

A recent Federal Reserve press release began by trumpeting our economy's "robust underlying growth in productivity." But there are many ways in which numbers can paint a picture of healthy growth - or obscure evidence of a lack of growth. And the popular misunderstanding of the nebulous concept of "productivity" is vital to the Fed's ability to misrepresent our economy to us.

Here's one example: By using a trick of accounting called hedonic pricing, the U.S. government has for years been able to report stellar growth in the hard-to-quantify "productivity" realm. It's a complex concept, but it goes a little like this: The value of any given thing is more a measure of its theoretical capabilities than its actual cost.

Computers are a great example of this. Say a company bought a computer in 1995 for $1,000. Then in 1998, it replaced it with a new computer with twice the memory for only $800. Based on the hedonic method, that computer with twice the capabilities as the one the company paid $1,000 for is twice as valuable - so they calculate its value to the nation's bottom line at $2,000, instead of the $800 actually paid for it.

Neat trick, huh? With one button push on a calculator, the Fed has added $1,200 to the GDP - even though no one paid it and no one received it.

All told, the United States has invested in the mechanisms of real productivity growth at a dismal rate of just over 0.3% per year over the last eight years. Yet according to the latest Fed estimates (April 28), the U.S. GDP is rising nearly 3.8% per year!

In other words, the true numbers say productivity shouldn't be rising, but the government says it is. Something's rotten in Greenspanland...

STATISTICAL DECEPTION #3: THE PROFIT PERJURY

Profit is a simple thing to understand - it's the revenue that's left over for companies after all business-related expenses are paid. Theoretically, anyway. But the calculating of these profits by our federal government is by no means as simple a task as it would seem. The reason is that one of the most important sources of profit in the U.S. economy is net capital investment: investments made by businesses out of their own profits, without incurring any meaningful expenses.

This is measured as pure profit and trumpeted by the Fed as growth - without regard to the eventual depreciation on those investments, which begins to accrue much later. In other words, the Fed knows that the "profit" of net capital investment by businesses does not come without eventual expense (depreciation), yet it record its as pure profit to help keep GDP estimates as high as possible.

STATISTICAL DECEPTION #4: THE LABOR LIE

The Fed (along with most of the bit-in-mouth mainstream media) has been trumpeting the relatively low unemployment numbers for some time now. However, the picture isn't as rosy as the numbers make it seem. Here's what I mean: Not too long ago, there were only two classifications of workers - employed and unemployed. A simple ratio of these two numbers yielded the "unemployment rate." But that's not the case today...

Nowadays, there's a third classification called "discouraged worker" (it should be called "disinterested worker"). What this refers to is any unemployed worker who isn't seeking a job. And with today's aggressive welfare and entitlement programs footing the bills and creating millions of career recipients, that's a huge and ever-increasing number of people. That's right: Even though they aren't working, millions of "discouraged workers" aren't counted as unemployed.

Beyond this, the Fed also uses a statistical model based on jobs it assumes aren't being counted. The theory is that hundreds of new businesses are started each day - businesses whose employees are too new to have been added to the official employment figures. To "fix" this, the Fed calculates a number of theoretical jobs it figures MUST have been created. What drives this figure? In large part, it's the estimated GDP, which, as I've just explained, is hugely skewed toward nonexistent growth.

Consider: Of 274,000 jobs the government claimed were created in April 2005, a full 257,000 came from this formula for estimating theoretical jobs. In other words,94% of reported new jobs may not even exist.

As of last year, Americans were holding onto $37 trillion in debt - more than $123,000 for every man, woman and child in the United States. This amount of debt is more than three times the total number of dollars in existence anywhere - in home and business equity, checking and savings accounts, stock markets and even those held by foreign investors (66% of all dollars are held by foreign investors, by the way). If all of this debt comes due, there literally isn't enough money on Earth to pay it.

According to statistics from mortgage behemoth Freddie Mac, the total
volume of home equity cash-outs, including second mortgages
and home equity lines of credit, has gone from
approximately $22 billion in 1995 to an estimated $200
billion this year... a better than 800% increase. Behind
the scenes, the amount of credit derivatives traded amongst
banks and hedge fund players has gone well into the
trillions, with no one certain how these exotic new
products will perform under stress.

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