Posted on 11/01/2007 7:01:20 PM PDT by Travis McGee
Yesterday, as the dollar fell to new record lows and oil and gold prices surged to new highs, Wall Street remained fixated on wholly meaningless government data that managed to report the lowest inflation in the last half century. These bizarre numbers were integral in allowing the Commerce Department to report 3.9% annualized GDP growth in the third quarter, which was heralded by the bulls as evidence that a resilient U.S. economy had shrugged off the problems in the housing and mortgage markets. However, the government’s ability to make “economic growth” magically appear is based purely on statistical finesse.
To arrive at this rate, the government had to assume that inflation during the quarter ran at an annualized rate of .8% (that’s less than 1%). That is the lowest rate of inflation used to calculate U.S. GDP since the Eisenhower administration. With oil priced at almost $100 per barrel, gold futures trading over $800 per ounce, the dollar hitting record lows, and the Fed printing money like it is going out of style, the government has the nerve to claim that current inflation is the lowest it has been in half a century. Unbelievable!
Just in case there is some confusion, the government adjusts nominal GDP gains using the GDP deflator, which represents the inflation rate during the time period being measured. This is done to strip inflation out of the GDP calculation so that only real growth gets counted: not nominal gains that result purely from inflation.
The consensus estimate for 3rd quarter GDP growth was 3.4%. The reason we beat that number was that the government adjusted the nominal 4.7% gain by a mere .8%. Had the government assumed a higher rate of inflation, say 2.6% (identical to the rate used to deflate second quarter GDP,) the 3rd quarter gain would have been only 2.1%, well shy of the consensus forecast. My guess is that inflation is actually running at an annualized rate closer to 10%. Therefore using a more honest deflator, the U.S. economy is actually contracting, which would explain the recent anecdotal evidence provided by various economic polls, voter dissatisfaction and consumer sentiment numbers. In fact, if one simply measures U.S. GDP using gold or any other currency, it is clear that we are already in a recession.
Similar illusions are created in other numbers, such as retail sales, corporate earnings, and stock prices, which are all rising merely as a result of actual inflation being higher than the official reports. For example, higher retail sales reflect consumers paying higher prices for the products that they buy. They may in fact be buying less stuff, but are paying more for it. Further, part of the gains result from tourists using their appreciated foreign currencies to buy products cheaper here than they can in the own countries. I have heard about Canadians checking into U.S. hotels with empty suitcases, crossing the border to indulge in weekend shopping sprees.
Corporate earnings, particularly those of multi-nationals, are padded as their foreign currency denominated earnings translate into more dollars when those earnings are repatriated. However, such gains are illusions, as companies merely earn more dollars of diminished value for the goods they sell. The actual volume of exports does not necessarily improve much, as evidenced by weak industrial production and manufacturing employment. When those additional debased dollars are paid out as dividends, they confer no real increase in global purchasing power to shareholders.
Similarly, just as inflation causes prices to rise for goods and services it causes stock prices to rise as well. Though such gains may be less than the actual increase in the cost of living, as long as the government gets away with using bogus CPI numbers which fail to fully reflect inflation, Wall Street takes credit for nominal gains as if they were real.
However, as ridiculous as the phony GDP number was, yesterday’s biggest joke was a report on global competitiveness put out by the World Economic Forum in Davos, Switzerland, which ranked the U.S. economy as the world’s most competitive. To arrive at this conclusion, the forum has obliterated the obvious under a mountain of theory. In determining country rankings, the WEF weighed strengths in their "12 Pillars of Competitiveness", including: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation. Completely ignored however are the measurable results of competitiveness, notably a trade surplus and a strong currency.
It is as if the WEF decided to judge a weight loss contest without using a scale, by instead focusing only on mental attitude, dedication, perseverance, and nutritional education! As a result the prize is awarded to the fattest contestant. Based on the empirical evidence of a gargantuan trade deficit, staggering global indebtedness, and a declining currency, the United States is clearly not the most competitive economy in the world.
Bears repeating. Good post.
Thank you for your injections of logic and common sense.
You’re using a minuscule statistical world based on Shreddiess to draw large conclusions.
90% Ground beast $1.99
Chicken breasts $1.99 lb
Whole chicken $1.30 lb
Rump Roast $2.59 lb
Bananas $.40 lb
Bread $1.99
Tuna $.40
Cheddar cheese $3.00 lb
E&J Brandy 750ml $7.99
Flour $1.80 5 lb
Cake mix $1.09
Potatoes $1.75 5 lbs
Jacks frozen Pizza, $2.00
Green coffee beans, Columbian&Tanzanian averaging $5.00 lb
Eggs are higher and I might add up to spending $8 more dollars a year.
Milk is higher and I might end up spending $35 more dollars a year.
I’ll believe we’re doomed when I see people stop driving 75 mph in their hulking 2 ton vehicles. I’ll believe we’re doomed when people stop paying monthly fees to exercise in a gym.
The free market will astound you. See what happens if we have sustained $5.00 a gallon gas.
Exactly.
Heard a guy on a financial talk show put it something like, “If you torture the data enough, you can get it to confess to anything.”
The point is to identify and fix the problems early, not wait until they are inflicting pain.
I concur.
Carolyn
The fed needs to print so much money so they can keep buying bonds to depress the interest rate. It also doesn’t help that the government spends and spends and spends far beyond what it takes in.
No one cares what it costs to print a dollar. It’s only a few cents (same for a $100 bill) and most of the money the fed creates is never made into physical currency anyway.
It’s time to start beating up Democrats over their refusal to allow us to produce and refine more of our own oil and also build nuke plants. This should be a huge campaign issue for Republicans. Get on it!!
Neither.
I bought a 1 liter bottle of Club Soda for $1.50. My husband found it at another store at 2 liters for $.88. How do you measure it?
A lot of the really low priced items are more effected by fuel increases. Hostess pies that probably didn’t increase for 5-7 years and then went up. A lot of those retail items work that way. I bet you dont claim we have 0 inflation when you dont see those prices rise at all for several years in a row.
“The point is to identify and fix the problems early, not wait until they are inflicting pain.”
By taking the advice of noted Free Republic economists or Peter Schiff?
I am convinced more than ever that the Democrats and the media are freaking out about their loss in destroying the war effort. If they can’t whine about that, their whino brigade will start attacking the administration on domestic issues to crash the economy.
For the Democrats to win, the MUST crush the current administration and stomp to bits any hint of good news or progress.
Lots of strings and hidden hands pulling them.
My next business idea is to sell gloom colored glasses as they will sell right well on Free Republic. Of course I can’t sell them here, but maybe I can give them away to drive home my point.
So, everything is just fine? Is that your opinion?
We are the most spoiled nation in history. We have a god given right to $1.00 a gallon gas, food prices that never fluctuate and government, by god had better keep it that way or we’re going to be pissed.
Others realize that a static economy is a dying economy and they take steps to adapt to changes.
If I had listened to the sky is falling chicken littles, I would be considerably poorer today. Chicken littles word’s in my mind are now balanced with pounds of skepticism. They have been wrong so often and for so long. Maybe I will pay for this someday and wish I had listened. It hasn’t happened yet.
Maybe there are people that bought houses they shouldn’t have and maybe there are people that bought more house than they should have. If the government spends my tax dollars or puts forth herculean efforts to keep these people in those houses, it is a much better use of tax dollars IMO than giving the money to farmers to not produce crops or giving the money to an able bodied citizens to continue to sit on their butts.
Is everything fine? I can’t see the future. Some people are prospering and some people are hurting. You can always find the negative when that is all that you are looking for.
I agree with you on that. I know many people today who have never had it better. However, please note that this is a conservative forum. Posters generally have no agenda in spouting off negatively about the economy more or less under Republican stewardship. In fact, with the election coming up, they have every reason to talk up the economy. But that’s not what I’m seeing day after day on these threads, which leads me to believe something’s seriously wrong.
Secondly, I personally think the deficit and debt chickens are coming home to roost. I don’t believe they’re here yet, but definitely on the horizon.
All of them are true...until they aren't. ;)
There are some posters that continually post nothing but negative articles on FR. They have done so for years. I see it day after day, so it is hard to tell if something is seriously wrong or not.
I have no shortage of negative news available. CNN, MSNBC, CBS, ABC, NBC, PBS, NYT have it covered quite well.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.