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Do You Want to Know?
by David Stanowski
03 March 2008


How can federal, state, and local governments make sound economic policy if they choose to ignore economic reality?

How can businesses and individuals make wise financial decisions if they don't know the true condition of the economy?

The answer to both of these questions is, "They can't!"

The federal government has been trying to create the illusion that "the economy is strong", for many years, which means that those of us who look past the press releases, and analyze their own data, on a long-term basis, are labeled as 
“pessimistic” or “negative”, if we find that there is actually little good news to report. 

Recently, one of the bullish "cheerleaders" in the financial media was scolding a fellow writer, who was trying to report the facts, instead of wishful thinking, because this "cheerleader" claimed it was “our fault that people have a negative view of the economic conditions that they currently find themselves in".

My colleague answered, “Yes, we are part of a conspiracy to ruin America by reporting things that are happening!”

Another writer responded, "If you aren't scared; you don't know what is going on!"
 
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Jobs:

Employment data is one of the key statistics that the federal government always "spins", so that it looks better than it really is. This data is delivered in two ways. The "jobs number" reports the number of jobs created each month. This is a largely theoretical number, when it is first released, because it is based on estimates and formulas, rather than actual counts. The federal government likes to give itself "a pat on the back" for "creating jobs" even though the only jobs they actually create are those in the federal government.

Each year begins with estimates of the then-
existing Labor Force, as well as those in that Labor Force who are employed. In 2007, the U.S. had about 1,800,000 additional people enter the Labor Force, but only 
1,140,000 jobs were created, which added 660,000 more workers to the ranks of the unemployed, in addition to all of those who were without jobs as 2007 began.

The government reported this event as, "1.14 million jobs created in 2007!!", as though it was good news! It was certainly better than "100 jobs created", but it was not good enough to keep the ranks of the unemployed from growing.

The total number of jobs created from 2001 to 2007 was an anemic 5,920,000, since the Labor Force increased by about 9,000,000 during that time! The picture is even worse when you realize that only 4,320,000 of those jobs were in the private sector, while government added 1,660,000 new workers.


Unemployment:
The more politically charged statistic is the "unemployment rate". When this number goes up, the government looks bad, so they have developed a method to grossly understate it; the Not-in-Labor-Force adjustment. This means that once the government decides that certain workers can't find a job, they remove them from the Labor Force, so they don't have to be counted as unemployed!!

Currently, the federal government claims an unemployment rate of about 4.5%, but one independent analyst, who used the government data base of NILF workers, to make a more realistic estimate, said that the real unemployment rate is probably closer to 10%!

The unemployment rate also doesn't count the self-
employed who can no longer find work. Over the past six months, 520,000 self-employed individuals have fallen by the wayside (more than were lost in the entire 2001 recession).

Self Employed

There is a lot more to the employment picture than just how many workers have jobs; it also makes a very big difference how much people are earning, at their jobs. For this reason, one of the best ways to see how well the economy is really doing is to look at Median Household Income.


Median Household Income:
Like all statistics, of this sort, that are calculated by the government, there are a lot of estimations involved, and a strong internal bias to produce annual numbers that always go higher, in order to convince the populace that the government is doing a good job of creating ever increasing prosperity!

The following graph displays this rosy picture of ever increasing prosperity, that we are all used to hearing about, during periodic updates. In fact, there are only two minor dips over the entire history!

In 1945, Median Income was $2,379, but by 2006, it had grown to $48,201. In 61 years, Median Income increased by more than 20 to 1!!! This is the story that the government, most of the people on Wall Street, and most in the media have been spreading for years.


However, the government even "admits" that these figures should be reduced "a little bit" due to the "small amount" of inflation that they inject into the system, to grease the wheels of the economy. When they do this, they utilize the very deceptive statistic, that they developed, for this purpose, called the CPI, to reduce these Median Income figures about 2-4% per year. What does this "small reduction" actually amount to?

When the annual Median Income data are divided by the annual CPI, this "inflation-adjusted income" peaks at a level of 236.22, in 1973. Then it works sideways for a quarter of a century until it reaches a new all-time high of 244.99, in 1999. After 26 years, the American people saw their Median Income, after it is adjusted by the CPI, rise a measly 3.7% higher than it was in 1973! The government's official data doesn't look all that good when you see the whole picture!


But, what is the truth?:
In my article, Inflation; the Big Lie, the point was made 
that Dollars are used as the standard unit to measure economic performance, but that presents a very serious problem, because the value of the U.S. Dollar has declined steadily over time.

Therefore, in order to get a sense of actual, or "real performance", a method must be used to factor out the decline in the value of the Dollar. There are many possible ways to do this, but rather than use an artificially contrived, and perpetually understated method, such as the CPI, many analysts use the price of gold. This is not absolutely accurate, but a market price gives a much better approximation than a government statistic!

Dividing the Median Income, by the price of gold, at the end of each year, created the data series called Median Income/Gold, shown in the next graph.
Notice how this adjustment accurately captures the economic collapse of the 1970's, and the rebound during the 1980's and 1990's, but makes it clear that the 1980's and 1990's did not enjoy the same level of prosperity as the 1960's! It also reveals that a new leg down in the decline, that began in 1970, started in 2000-2001!

This data shows the rise in Median Income/Gold during the post-war boom from 1945 throughout the 1960's. Median Income/Gold peaked, at the end of this era, in 1970, when the Median Income would buy 240 ounces of gold. From there, the hyper-
inflationary 1970's pushed Median Income/Gold down until it bottomed, in 1980, when the Median Income would only buy 29 ounces of gold!!

After that, Median Income/Gold rose throughout the 1980's and 1990's, and then peaked, in 2001, when the Median Income would buy 155 ounces of gold. At that point, 
a new hyper-inflationary period began, and Median Income/Gold has declined over 50% since then!


What does this mean?:
From a long-term perspective, it clearly shows that the Federal Reserve, and the Federal Government have a long-standing policy to devalue the Dollar for their own political purposes, and financial advantage. This means that even though we are living in a world that has brought us untold riches, advantages, and comforts, through the advances in technology, since the 1960's; when it comes to paying the bills, for the necessities of life, like food, shelter, and energy; it is more difficult today, than it was from 1965 to 1971, when the Median Income would buy about 200 ounces of gold! Even at the most recent peak, in 2001, the Median Income would only buy 155 ounces of gold, and by 2006 it was down to 76 ounces!

The 2007 data is not yet available, but it will continue this downtrend.


Declining economy:
Using the government's own data to construct the  graph of Median Income/CPI shows a picture of a nation with a stagnant economy for the last 33 years! Hardly the story they have been telling! When gold is substituted for the CPI, the graph of Median Income/Gold shows a down, up, down sequence, since 1970, but clearly an economy in serious decline for the last 36 years! The typical American family had a real income, in 2006, that was 69% below the typical income in 1970!

Many who lived and worked through the last 40 years are aware of this decline on some instinctual level, but it has not effected them as profoundly as it will impact today's young people. Most people who worked during this period of time saw their careers improve dramatically, over the years, because they moved from entry-level pay grades to senior pay grades, during this decline, which offset some of the pain. They also had the chance to acquire some assets that can be used to supplement their income, if needed.

However, when comparing a young worker, getting his first job in 2006, 
to a new employee getting his first job in 1970, the more recent member of the Labor Force will receive a real income 69% lower than his peer did 36 years ago! Since today's young people didn't live through the 1960's and 1970's, they don't have the personal experience of "then versus now" to allow them to "feel the difference", but the conditions today force them to live in a whole different world than that of their parents and grandparents; and it is not a world that they are going to like very much! They are well on their way to a life of Serfdom, which will have broad implications both culturally and politically.


What caused this decline?:
The social programs begun by FDR, in the 1930s, were expanded by LBJ's "Great Society", in the 1960's. Since it was clear that it would be impossible to pay for these programs, by just continually raising taxes, it was necessary to implement a strategy of massive government borrowing in conjunction with the destruction of the value of the Dollar. This allowed the government to pay back its debts with less valuable Dollars than it borrowed. Finally, on 15 August 1971, Nixon refused to redeem the Dollar in gold, any longer, and its collapse really began!

Nixon closes the gold window

As the federal government became a debt junkie, state and city governments followed suit, as did businesses, and individuals. Many saw the futility of saving a depreciating Dollar, so they spent all that they earned, borrowed more and more to maintain the standard of living that they desired, and started speculating, to try to get ahead.

Notice how incredibly low GDP growth has been in recent years without the new debt created by mortgage equity withdrawal (MEW); and this is GDP without adjusting fully for the effects of inflation!

GDP versus MEW

From 2001 to 2007 total U.S. debt increased by $10.5 Trillion, but even with all that leverage, GDP was only able to grow by an anemic $4 Trillion! This means that debt is increasing 2 1/2 times faster than GDP growth. The economy is getting so weak that using more and more debt is resulting in less and less growth. This trend can not continue much longer.


Outsourcing:
It didn't take long before major manufacturing corporations saw that they were going to have a very difficult time surviving in these economic conditions, if they had to keep raising wages as much as the prices of their raw materials were going up; so they began outsourcing jobs to low-wage countries. This forced the economy to grow primarily in the service sector, but it didn't take long before some service businesses started hiring illegal aliens to keep their employment costs down, too.

There is nothing inherently bad with the service sector, but many of the jobs do not "add enough value to the service" to pay very high wages. As members of the service sector, doctors, lawyers, and investment bankers don't have a problem with low wages, but waitresses, retail clerks, bartenders, and fast-food workers generally do.

Outsourcing continues to "hollow out" the economy at an ever alarming rate. In 2000, there were 17,200,000 U.S. manufacturing jobs, but by 2007 the number had fallen to 13,920,000; a loss of 3,280,000 jobs, or 19.1%! There are now fewer manufacturing jobs than in July 1942. This has lead to massive current account deficits as more money is spent on  imports, manufactured in other countries, than is earned on exports.

Current Account 

The Solution:
Any realistic attempt to change things must begin by recognizing that the economy has been in decline for decades, and must be rebuilt; and that paying off debt is a top priority.

With all of the accumulated debt, the entire world currently faces a credit crisis that many describe as worse than anything since 1929! How it will unwind depends, in large part, on how much the government meddles in the recovery process. If government intervention is widespread, like in the 1930's, the results are likely to be just as disastrous. If the meddling is more restrained, the recession may be similar to the 1970's. Neither scenario is very cheery, but in the short run, there is little that can be done, except getting prepared to ride it out. The long term solutions are political as well as financial.

This country simply needs to stop doing what it has been doing since the 1930's!

Basically, the creation of any more social programs must be halted, and the rolling back, and dismantling of the ones that are already in place must begin. The Dollar needs to regain its gold backing, and the Federal Reserve must be recognized as a perverse institution that should be shut down. The U.S. manufacturing base must be rebuilt, and governments, businesses, and individuals must start paying down their debts.

In other words, America must begin the process of producing more than it consumes! It needs to build things, and save more. The U.S. must become a modern manufacturing economy like Germany's. 

Of course, it should come as no surprise that "the solution", to this crisis, offered by the federal government, is to borrow more money to hand out to taxpayers, so that people can continue to spend more than they earn. The only thing that they know how to do is more of the same thing that got us into this mess!

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Methodology:

Can the solution outlined above be implemented through the political process? Not without a revolt by those most dramatically effected. Too many people have a vested interest and/or belief in the current system, and the rest do not really know what is going on.

Ron Paul is the only Presidential candidate who is advocating the measures that will work. He probably has the support of about 80% of the independent financial analysts and writers, because we have been looking at this mess for years, and understand what happened. Unfortunately, his support is not very wide spread.

In contrast, Barack Obama wants to do more of the same thing, but on a much grander scale, which he calls "change"; of course, he means "change" in the finest tradition of Orwellian Doublespeak! Since most people do not understand how we got to this point, it is not surprising that Obama has vastly more support than Paul.

The 18-25 year old voters are the modern day Serfs who began their working lives earning a Real Median Household Income 69% below their peers, in 1970, because they have to pay for the existing social programs. This is why they are the ones with the most incentive to demand a change to the current status quo.

But, what are they doing? Supporting the man who promises to give them socialized medicine
, and dozens of new social programs, so that they can pay for even more of their parent's, and grandparent's medical bills and other expenses! 

In the 1960's, young people wanted change, but they didn't have a clue which changes would be improvements, and which changes would make things worse, so their demands helped to create the mess we are in today. The current group of young voters needs to read The Road to Serfdom by Friedrich August von Hayek, and stop drinking the Obama Kool Aid, or everyone will be paying a very high price for the "changes" he will give us!


Conclusion:
There is little hope that the required changes will be made unless younger people understand what is happening, and demand the actions outlined above; which is opposite to their current inclinations. Short of that, the only possibility is that a financial collapse will force the political reforms that voters are unwilling to accept, at this time.

In the meantime, all we can do is to vote against any "more of the same policies" that our governments present to us. We also need to prepare our business and personal affairs to weather the coming financial storm.

It is not the time to give up in despair, it is time to become more productive, cut costs, start saving, and quit spending so much. This will require a reorientation of our sense of values.

Businesses need to consider how to change their product and service mix to offer consumers what they are going to want in a new age of frugality.


Feedback:
What is your verdict?

Can you make better decisions knowing the "bad news", or is it better not to know, or to ignore it?

Let me know what you think.  


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