The Emperor's New Clothes

October 15, 1998

It is important that what passes for money today be taken seriously. There would be no point in producing it--not that that's difficult or costly--if its true nature were perceived. The tailors who convinced the emperor that their fictitious cloth could be made into beautiful new clothes, perceptible only to those of cultivated and exquisite taste, profited from this ploy until someone--a merest child--pointed out the obvious: the emperor was in his underwear. And if the money is to be taken seriously, despite its non-existence, then economics must be taken seriously. No doubt the king's canny tailors could produce abstruse research papers setting forth the physical properties of their wondrous cloth in highly scientific terms. Except, of course, it was all baloney. Economists also produce abstruse research, in highly scientific terms. The state of our economy, for example, is measured in many ways, but several are usually lumped together as "leading economic indicators." As a non-economist, I find this list interesting, and confusing.

Housing starts, for example, are a leading indicator. What significance is to be given to housing starts? If individuals fear for their economic security, they will not take upon themselves the biggest economic burden of their lives: a home. Is the future of the economy often so clear that the average individual can make this determination, and make it correctly? For this statistic to be relevant, therefore, we must assume a certain degree of financial savvy on the part of the general public. Furthermore, if bank loans are relatively easy to get, and the rate low enough, people may borrow for home building even if they have some doubts about the economy. Additionally, the government has programs to "encourage" home ownership, and these distort the picture.

Perhaps many people form opinions about the health of the economy based upon their ability, or inability, to obtain a "reasonable" interest rate for a home loan. Thus, the number of housing starts, as well as orders for non-durable, or other, goods, may be as dependent upon the actions of banks as upon the financial judgments of the buying public; and banks, it could be argued, have a vested interest in the public's perception of the economy. Remember the emperor's tailors!

The price of five hundred common stocks is another leading indicator. What percentage of Americans own stocks, and of those, what percentage follow the market with any degree of attention or sophistication? How many simply rely upon the advice of their brokers? What influence does computerized buying and selling of stocks have upon stock prices?

The number of hours, per week, spent in manufacturing is another indicator. Is it a good one? Over the past generation, the number of hours spent in manufacturing each week has declined, while productivity has increased. Automation may make increased production possible in less time. Strikes and layoffs may influence this statistic as well.

Prices of intermediate and raw materials are also given significance by economists. Are higher prices good or bad? That depends: are you charging them, or paying them? Are higher prices justified, or lower prices wise?

The money supply is considered, of course. But is that M1, M2, or M3, or yet another M; and if not, why not? More importantly, the money supply is controlled by the banks. Should the Fed sell a few billion dollars worth of government securities, the money supply decreases by that amount. Should it buy a few billion dollars worth, the money supply increases correspondingly. Do these changes reflect economic conditions, or determine them?

Employment figures enter into the Leading Economic Indicators, but how are they calculated? Do I become a statistic the minute I lose my job, or only after a week or two? Do I remain on the unemployed list even though I am offered jobs which I turn down?

It's remarkable that there seems to be no indicator of what is actually being produced. We have indicators that represent charges, or costs, or orders, or delays in shipments, or consumer "expectations," but not what the economy is actually producing. Analysts may tell us that automotive production is surging, or sagging, in terms of income, expressed in numbers ("dollars") signifying absolutely nothing: but we are not told what "record" income means in terms of actual number of vehicles produced. Rather, production is measured in terms of "dollars," although there is no economist--or anyone else--who can tell us what that term means. An undefined unit is a truly pathetic measuring device!

For my own purposes, therefore, I have devised a set of non-leading indicators. These are derived from my own data, informally and unscientifically acquired, and not from financial and government sources which may have their own axes to grind.

How are things at the mall? It is interesting to see how many stores are vacant, or how many stores have gone out of business in the last six months or year. What about sales? As a youngster, I remember my mother shopping at "white sales," which occurred, if I recall, about once a year, and applied to bedding. Today, there are sales all the time, on all manner of goods. Does that indicate a healthy economy?

Personal bankruptcies are at very high levels. What does that say about economic conditions? Does it square with what the government is telling us about the robust state of the economy?

How about all those mergers and acquisitions? Why are large companies being gobbled up by larger ones? Why are Chrysler and Daimler-Benz merging? Is it so difficult to make a profit that you must satisfy every demand at all price levels? Is profit only possible for large businesses utilizing the most high-tech marketing and manufacturing procedures? Does the disappearance of the mom-and-pop store signify an increased level of prosperity?

The "golden handshake" is a new phenomenon, is it not? Does the shucking of older employees in favor of newer ones, willing to work at an "entry level" wage, augur well for the country? Does it indicate something about the economy?

What about those boiler-room operators who call at dinner time to offer me a real deal on a hot stock? Recently, I had such a person come to my front door and introduce himself as a stockbroker with a newly-opened office in the neighborhood. Was I interested in the market? It's interesting that so many stocks are being hustled in this fashion. In a healthy economy, do brokers go from door to door, or call strangers on the phone, to try to sell stocks?

What about the store that has what you want, but not in the right size or color? Will the clerk volunteer to call another branch to see if they have the desired item? Maybe, maybe not. Either he regards the job as too unimportant to do well, or the cost in time and trouble too great for the reward. Will the store deliver small items? It did a generation ago, why not now, if our economy is doing as well as we are told?

Remember when the dry-cleaner made his rounds picking up and dropping off clothes? When milk and cream--plus butter and cottage cheese--were delivered to the door? When mail was brought to the home twice daily? When you could call the grocer (he knew who you were!) and have him send over a loaf of bread, and some sausage? When there were sidewalks and streetlights, even in the poorest neighborhoods? Has the disappearance of these things resulted from increased prosperity? How could a society which, presumably, was not nearly as prosperous as our own, afford to send men to light each streetlight at dusk, and extinguish them at dawn?

The evidence of my own eyes carries more weight with me than statistics provided by people who may have a vested interest in keeping me in the dark about the darkness which is descending upon us. If the Emperor had believed his own eyes, instead of the tales woven by those intent upon deceiving him, he wouldn't have paraded down the street in his shorts!

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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