US Government Economic Statistics Are a 'Con Job'

But they just managing our perception of inflation. Its for our own good. Its the least costly most efficient way of fixing all our problems. We can just pretend they do not exist.

'Through clever and constant application of propaganda, people can be made to see paradise as hell, and also the other way round, to consider the most wretched sort of life as paradise.' Adolph Hitler

CNNMoney.com
Economic 'misery' more widespread
Wednesday May 14, 10:37 am ET
By Chris Isidore, CNNMoney.com senior writer

Americans are feeling a lot more economic pain than the government's official statistics would lead you to believe, according to a growing number of experts. They argue that figures for unemployment and inflation are being understated by the government.

Unemployment and inflation are typically added together to come up with a so-called "Misery Index."

The "Misery Index" was often cited during periods of high unemployment and inflation, such as the mid 1970s and late 1970s to early 1980s.

And some fear the economy may be approaching those levels again.

The official numbers produce a current Misery Index of only 8.9 - inflation of 3.9% plus unemployment of 5%. That's not far from the Misery Index's low of 6.1 seen in 1998.

But using the estimates on CPI and unemployment from economists skeptical of the government numbers, the Misery Index is actually in the teens. Some worry it could even approach the post-World War II record of 20.6 in 1980.

"We're looking at government numbers that are really out of whack," said Kevin Phillips, author of the book "Bad Money."

No inflation if you don't eat or drive

According to the government's most recent Consumer Price Index, a key inflation reading, consumer prices rose 3.9% in the 12 months ending in April, down slightly from the 4% annual inflation rate in March despite record gasoline prices.

But Phillips argues that consumer prices are probably up at least 5% and perhaps more than 10%.

Part of the disconnect may be due to the fact that nondurable goods, such as food and gasoline, makes up only 12% of CPI.

In addition, food and energy prices are eliminated from the so-called core CPI, which many economists tend to focus more closely on because they claim food and gas prices are volatile.

But food and energy costs are a very important part of household budgets. And those prices have been skyrocketing: Gas prices were up about 21% over the 12 months ending in April. However, due to seasonal adjustments in the CPI, the government reported that gas prices were down 2% in April, even though on a non-adjusted basis, gas prices rose 5.6% from March.

And even that number may be too low. Measures of gasoline prices by AAA and the Department of Energy suggested prices rose as much as 10% in April.

Meanwhile, food prices rose 5.1% over the last 12 months, according to the report. The nearly 1% one-month jump in food prices in April was the biggest spike in 18 years.

To that end, nearly half of the respondents of a recent CNN/Opinion Research Corp. poll said inflation was the biggest problem they face.

CPI missed the housing bubble...and bust

Another problem with the CPI figures, according to skeptics, is that it doesn't accurately reflect what's going on in the housing market. That's significant because the cost of buying a home has twice the impact on CPI as does the prices of all nondurable goods combined.

The CPI showed only an 11% rise in home ownership costs from 2002 through 2006, a time that the National Association of Realtors reported that existing home prices soared 34%.

The reason for the low CPI reading is because the CPI looks at equivalent rents, rather than home prices. So inflation was understated during this period, according to Phillips. He argues this may have helped feed the housing boom since it kept mortgage rates lower than they should have been.

Now that the housing boom has gone bust, the CPI appears to be missing the declines in home prices as well; it estimates that the cost of owning a home posted a 12-month increase of 2.6% in April.

But because the CPI figure was so far behind tracking the increase in home values, the housing component of CPI still is leading to a lower inflation reading than what it should be, Phillips said.

The inflation 'con job'

The unusual way that housing prices are estimated isn't the only peculiarity of the CPI report. Over the past ten years, there have been other changes in the calculations, particularly for big ticket items.

Cuts to estimated prices for items like electronics and cars that are thought to have improvements in quality year-after-year have lowered the overall CPI. In addition, changes in the way certain products, such as food, are tracked by the government, have also contributed to lower readings than otherwise expected.

Bill Gross, the manager of Pimco Total Return, the nation's largest bond fund, refers to the CPI as a "con job" that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low.

In a report about the CPI, he noted that some of the adjustments don't accurately reflect how much consumers pay for goods. Pimco estimates that the changes have shaved more than a percentage point off the CPI.

"Did your new model computer come with a 25% discount from last year's price?" Gross wrote. "Probably not. What is likely is that you paid about the same price for memory improvements you'll never use."

Another flaw with the CPI numbers is that the government now assumes that higher prices for one item will lead consumers to buy more of a substitution item. That may be true. But if people buy fewer steaks and more hamburgers, for example, it's unrealistic to say that inflation isn't a problem, skeptics maintain.

"The government can claim there's no inflation but all they're measuring is a reduced standard of living," argues Peter Schiff, president of Euro Pacific Capital, an investment firm specializing in overseas investments.

With all this in mind, California economist John Williams argues that CPI is understating inflation by at least 3 percentage points and perhaps as much as 7 percentage points. So instead of an annual inflation rate of 4%, the true number could be between 7% and 11%.

Unemployed, but not counted

Finally, there's the unemployment rate. It was at a relatively low 5% in April. But according to Williams' Web site, ShadowStats.com, the actual rate may be between 8% and 12% if you use a more accurate reading of those out of work.

Even the government's own numbers show there are many unemployed people not showing up in the unemployment rate. The official reading does not include 4.8 million people who want to work but haven't found a job, for example.

Many of these people are dropped from the official calculation because they have become so discouraged from looking without success that they haven't looked in the previous four weeks. Simply adding those people to the number of unemployed takes the current unemployment rate to 7.8%.

The Bureau of Labor Statistics, which produces both the CPI and unemployment readings, says changes in both measures were made to more accurately reflect the real world. The BLS also says the changes have resulted in changes of less than 1% for each measure.

Still, the Labor Department's own broadest measure of unemployment, which includes as jobless those working part-time jobs because they can't find full-time positions as well as some discouraged job seekers, puts the unemployment rate at 9.2% in April, the highest level for that reading in more than three years.

So if you take that number and add that to the 7% that Williams thinks is a more likely annual inflation rate, you're looking at a "Misery Index" of 16.2, much worse than the 8.9 you get from the official numbers.

And while that may seem a bit high, it's probably a more accurate gauge of how bad the economy is for many Americans.

We Can't Handle the Truth?

Paul Volcker was providing testimony to Congress this morning, and it was being covered by Bloomberg television.

Volcker started to 'tell it like it is' and basically laid out the US economic situation in plain and simple terms. We wish we had recorded it. It was 'scathing' to say the least.

To paraphrase, the mathematicians took over with opaque and complex models. The regulators failed. No one likes regulators when times are good, and when times go bad they get all the blame. We had a system fueled by outrageously high compensation, and so the Wall Street firms did not care what they created as long as they could sell it to someone else.

It was starting to get interesting, and then... Bloomberg television cut away so that Betty Liu could tell us how well the stock market was doing, and they never came back.

CNBC was not covering Volcker's testimony. Neither were the C-Spans. CNN? Forget about it.

A friend who was traveling in Europe the past two weeks emailed with the news that 'things are much worse over there and talk of the financial crisis is all over the front pages and people are talking about it." We are in much better shape because no one is talking about it here.

If we had a financial crash and everyone pretended not to notice would it still have happened? We think there are some central planners in the States that would give a resounding 'No.'

So now that Volcker has spoken out, expect the corporate shills and stooges to make snide remarks, and attempt to smear him. This is what they do.

The Consumer Price Index number this morning was a complete fabrication, a farce.

Its time to start noticing, time to stop going with the flow. The flow is heading into madness.

Bloomberg TV cut away just before minute 6 of this excerpt so a clearly disapproving Betty Liu could tell us that the stock market was rallying Mr. Volcker and thank you very much. They never came back or mentioned it again.

Someone sent us a copy of the formal speech which Volcker leafs through on the video. It reads like it was written by staffers and carefully vetted. Very politically correct.

Do yourself a favor and watch the video excerpt. Its only eight minutes long or thereabouts, and its a classic.

The Fed's Balance Sheet - Pulp Fiction

Janet Yellen has been kind enough to put together a very nice chart of the Fed's Balance Sheet showing its degradation in support of the Wall Street banking bailouts. Thanks to CalculatedRisk for spotting it. We were working on a version of this but once again the principle of procrastination has served us well and delivered more time to play Halo 3 with the youngsters.

The Fed has consumed about half its reserves to prevent a domino crash in the financial system, and a probable stock market crash. It would have been rather messy. Before we pin hero medals on the Fed for avoiding it, let's remember who was a central actor in creating the situation we face today, which is only deferred, not cured.

So, 1400 on the SP 500 is what you can buy for 400 billion these days, plus a few hundred billion if you toss in the efforts of Treasury and their friends.

Next step will be to start playing with commercial bank balances if the Fed can start paying interest on them, and of course the direct monetization of debt if they can work out the right working relationship with the Treasury on this that only bends existing statutes which are sufficiently vague to allow for the creation of a pure money machine if bent under duress.

As we have observed on several occasions, the limiting factor on the Federal Reserve will be the value of the dollar and the acceptability of US sovereign debt by enough foreign trading partners to make it meaningful. That spells O-I-L.


FRB H.41 - Factors Affecting Reserve Balances

Moody's Warns on Credit Ratings of MBIA and AMBAC

3:30 ET (Bloomberg) MBIA Bond Default Risks Widen on Warning from Moody's.

Moody's: second lien RMBS woes may dent bond insurer ratings
3:36 PM EDT May 13, 2008

SAN FRANCISCO (MarketWatch) -- Poor performance of second lien residential mortgage-backed securities (RMBS) could impact the credit ratings of bond insurers, Moody's Investors Service said on Tuesday. Bond insurers have significant exposure to second lien RMBS, mainly through guaranties on the securities and, to a lesser extent, through exposure to collateralized debt obligations backed by such assets, the rating agency noted. "Moody's loss expectations for this asset class are higher than previously anticipated, owing to worse-than-expected performance trends," the agency explained. "This could have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk." MBIA shares fell 5% to $9.36 during afternoon trading, while Ambac Financial dropped 7% to $4.03.

Remember how the other day we laughed when MBIA rallied on its tremendous loss and noted the spin being put on the stock by the Wall Street pundits?

A cursory examination of the financials and their context indicates the company is functionally bankrupt, and has to be rescued to remain in business. That is not out of the question of course, but the rally that took it up yesterday was a joke in a dull market.

Well today the wheel turns, and MBIA is being sold off hard on a caution at 3 PM from Moody's about the future of their credit rating, essential to their continued business, and analyst downgrades from this morning.

Under the benign neglect of the Bush Administration in particular Wall Street has become the heart of deception as a way of life, a shame and corrupting influence on the Republic.

May 13, 2008, 4:24 pm
Ratings questions return at MBIA, Ambac
Fortune Magazine

The triple-A ratings at bond insurers MBIA (MBI) and Ambac (ABK) could soon be under scrutiny again. Moody’s said Tuesday that rising losses on bonds backed by second mortgages could hit ratings at insurers that have guaranteed second-lien residential mortgage-backed securities.

“Moody’s now expects 2005 vintage subprime second lien pools to lose 17% on average, 2006 vintage pools to lose 42% on average, and 2007 pools to lose 45% on average,” Moody’s said. “Moody’s loss expectations for this asset class are higher than previously anticipated, owing to worse-than-expected performance trends. This could have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk.”

The comments come a day after MBIA posted a $2.4 billion first-quarter loss but spent much of a two-and-half-hour conference call explaining why it doesn’t believe it will need to come to market to raise more capital. CEO Jay Brown told investors he believes the company can make up a $1.7 billion shortfall relative to Moody’s triple-A capital targets over the next two quarters, through he conceded he doesn’t expect the company to get a stable outlook until house prices bottom out, which he said probably won’t happen till at least next year. The improved outlook may be even further off now, given Moody’s comments Tuesday. “Moody’s intends, in the short term, to assess whether worsening performance in this sector is likely to be material for exposed financial guarantors, and will update the market as appropriate,” the rating agency said.

AP
Ahead of the Bell: MBIA
Tuesday May 13, 9:13 am ET

MBIA edges up in premarket trading, but analyst lowers estimates after 1st-quarter loss

NEW YORK (AP) -- A Friedman Billings Ramsey analyst is cutting his estimates on bond insurer MBIA Inc., pointing to the company's large first-quarter loss and difficult competition.

Steve Stelmach said MBIA's reserves may not be enough to cover deteriorating credit and write-downs, as its losses in the first quarter were larger than expected. He now expects the company to lose $1.89 per share this year. Previously he expected a profit of $2.05 per share. Stelmach now predicts a smaller profit in 2009.

He cut his price target to $13 per share from $16 and kept a "Market Perform" rating on the stock.

The analyst added that competitors like Berkshire Hathaway and Assured Guaranty have not suffered from mortgage and debt issues the way MBIA has.

MBIA said Monday that it swung to a first-quarter loss, but shares rose 4.5 percent. In premarket electronic trading, they gained another 13 cents, to $9.98 from $9.85.