first majestic silver

Negative Q$ Real GDP, Really

January 31, 2006

Certain writers boldly proclaim a single chart being the end all, the one quintessential significant chart which tells the entire story. Well, here is another. It exposes the erroneous GDP statistic, and reveals its extreme massage for a clear overstatement. The "real GDP" is really at least 4% lower than the officially reported figure. The CPI is fully 3% lower than the calculation used before 1992, called the "pre-Clinton" statistic by a shadow group before distortions were introduced and engrained. The GDP Deflator is lower than the heavily massaged and distorted current CPI. The term "real GDP" means adjusted for price inflation. Lately, woefully and embarrassingly little price inflation has been removed, in keeping with a policy of disinformation. Most claimed economic growth is inadequately removed price inflation. Heck, it is good for the bond market, and good for the stock market. However, the GDP is not "real" really. Does the world accept our lies on face value? Not really.

The Q4 economic growth statistic came out last week at a meager 1.1% expansion. This is a lousy number. When you responsibly remove the 4% exaggeration, deception, and false lift for the unexpressed purpose of maintaining foreign investment in the US financial system, you arrive at a clear conclusion. (that is, if honesty is a priority)


This revised view confirms the signal issued by the flat US Treasury yield curve. It has been sounding the alarm for some time. There is no conundrum, except the mystery as to why Greenspan is respected at all, and not hanged in effigy on the Wall Street square. Debt addicts do love their monetary drug dealer, especially since he never denied his customers their fixes.

Finally we saw the impact of 13 consecutive interest rate hikes. Finally we saw the impact of the hurricanes. The unstated objective of the quacks who work as creative accountant statisticians in WashDC is to minimize and suppress the Deflator series so that growth is exaggerated, using many methods often discussed. Not only is the adjustment mechanism horribly low, but also other hedonic multiples are granted to infotech spending so as to credit speed increases to technology products in nonsensical fashion. These are fictitious sales, yet counted as growth. The basic fact is that USGovt quack statisticians simply do not remove price inflation adequately; they don't remove enough. Accountants focus unduly on the urban resident, who can take advantage of Asian imports, great bargains from inventory liquidations, and all those BigBox retail chains with discounts. The USEconomy also consists of farmers whose purchase costs are rising alarmingly, of construction firms whose material costs are rising everywhere, of retirees whose food and prescription drug costs are rising noticeably, of students whose food and tuition and book costs are rising painfully, of most workers whose gasoline commuting and health care costs are rising steadily. When in Germany last November, most people in my path mentioned a near total distrust of US official data. That was encouraging. They openly wondered if we produce honest statistics anywhere at all, from the government or in the corporate world?

Can any reasonable person really accept as legitimate a series which has removed only 9.5% of total accumulative price inflation from 2002, 2003, 2004, and 2005? That is an average of less than 2.5% per year, when all kinds of things rose sharply in price for mere mortals whose real feet stand on United States soil. My view is that price inflation is rising at 6% to 10% annually. This is totally absurd, an insult to my (and your) intelligence, and an outright fraud. My many frequent conversations deal with a cross section of people. Not one among them is familiar with the concept of the Deflator series, although some generally appreciate the need to remove price inflation from the nominal numbers which make up the GDP, the total sales of goods & services. Almost nobody understands how it is removed. Few even care.

Can any reasonable person really accept as legitimate a series which runs 1.6% below the fatally flawed Consumer Price Index? The usage of this horribly flawed Deflator series receives no attention. It is obscure. Given the utter ignorance in the US public about all things financial, and all things statistical, the deception continues easily. Most citizens might, as is claimed by Paul Craig Roberts, be even dumber than our leaders. More distressing is what comes in quotes from Wall Street professionals who know better. They say repeatedly "These are the statistics we must deal with." and also "Official numbers move the market, and receive worldwide attention. We must respect them." which deserves the quick retort "BullShoot."

Two key parts to the Q4 news release are worthy of followup. Inventories added 1.5% to the GDP growth. Vendors expect robust sales in the next few months. They must believe the official statistics claiming strong growth. They must not expect a sluggish housing market to influence the economy. Remove the 1.5% inventory growth, and "FINAL DEMAND" for goods & services within the GDP fell by 0.4% for the fourth quarter. The only ray of hope comes from the upward move in industrial production in December, up 0.6% to show a capital utilization of 80.7%, above that resistance mark after four years of stimulus. It is encouraging that only one in five industrial plants sits idle. What a scream! Also, the durable goods orders rose by 1.3% (and +0.9% ex-transportation). However, orders have fallen following a burst during the hurricane reconstruction. The second key item is that the yawning trade deficit erased 1.18% from GDP growth. Sure, there is growth, but in Asia. Little attention was paid to the 2.4% decline in USGovt spending. It is interesting how a GDP can grow with monstrous government spending, like with war. It is interesting how a GDP can grow with an insane encouraged housing bubble.

A prudent practice is to put all major USEconomic statistics through a filter to remove the B.S. much like one would the laundry for an infant soiling diapers through a washing machine. The GDP is a lie with a built-in 4% or 5% false lift. The productivity statistic uses the same lie with hedonics from the 10x to 14x multiple imposed for infotech sector spending. Additionally, lies are spread on what it means. A rising productivity figure does not mean a rising US standard of living; rather, it means a rising Asian standard of living. Anyone with a pulse and some basic common sense needs only to follow where the jobs are going. See outsourcing. The jobless rate is a lie by excluding those who no longer receive state unemployment insurance benefits. Simply divide the claimed jobless rate (now 4.9%) by the "participation rate" of 65% to get 7.5% as the true jobless rate. Lastly, the savings rate is not minus 0.2% or minus 0.5%, which is bad to begin with, but rather $1100 billion less nationally. Please remove the self-paid rent B.S. that homeowners never get to spend, and the self-paid bank check services which are usually paid. Sadly, institutional dishonesty is the backbone of the US financial system. Keep that foreign money coming, over $2 billion per day. We need it, and sure hope Asia and the rest of the world keep working hard, sending us their hard-earned profits, as well as their cheaply produced finished products from toil & sweat. Jeez!

The Enron case moves forward finally, after more than four full years. The gears of justice might turn deliberately, but one must ask whether the objective was to permit loss of memory, loss of documents, and loss of interest in the case. Good luck impaneling a jury which understands the fraud. Will offshore documents be secured from those infamous special purpose entities (SPE) critical to the fraud? Don't expect it, since they were shredded long ago in Caribbean banks. Look for the "stupid" defense to be put forward, whereby the accused claim such profound ignorance in their own job performance, that they could not be party to criminal misdeeds. The pathetic irony is that Enron accounting is rampant in the USGovt, Wall Street, and management of the USTreasury gold vault. In fact, Enron accountants might have learned tricks from widely practiced USGovt accounting methods. Recall that the entire war costs from Iraq and Afghanistan are considered "off budget" not to count in official federal budget deficit final figures. Ditto for hurricane relief efforts. Ditto for illegal borrowing against the Social Security Administration Fund. The real USGovt budget deficit for 2005 is actually over $900 billion, as delineated in a recent Hat Trick Letter issue.

In the effluent gas from the last FOMC meeting, a policy directive was made clear, that our US Politburo gang of central economic planners will respond to concurrent statistics. Let's be very clear. First, these guys and gals have little experience running a business. Give them a break, in that they are not octogenarians like their Soviet counterparts (read: over 80 yrs old). Second, any economist with even a shred of competence should rely upon forward indicators, not concurrent indicators. Worse still, looking at available statistics is a keen snapshot at past performance data. The entire econometric field is all about statistical forecasting of the future climate.

My claim all along has been that the USFed is loaded with heresy, due to perceptions and preaching about what inflation is, how it is measured, how it is reflected in asset bubbles, how an economy depends upon it, how it is exported, how it results in Asian USTBond accumulation, how it undermines national sovereignty, how it builds up our next adversary (see China), how it caused the Asian Meltdown, how its recycle is the foundation of the so-called bond conundrum. Add incompetence to the list. Apparently the USFed and its band of governors want to see the USEconomy slow down or go negative in growth before they alter their highly destructive policy of rate hikes, which follows their highly destructive policy in 2003 and 2004 of leaving the interest rate at 1% for 18 consecutive months. These guys hit the upper guard and lower guard rail on interest rates with alternating regularity. Their track record is pathetic and reactive, not proactive.

US Economy, seen as humming through rose colored glasses

It is not totally clear whether the USFed Board will be responding to an actual slowdown or to a perceived stall. We will see. The huge risk in my view is tightening in the face of grossly over-stated economic growth, now a stall. For months on end, my claim has been that we are soon to see the first economic recession falsely called mild growth. Recall that the USFed continued twice to raise interest rates in early 2000 even after the Nasdaq Composite crashed. Expect more rate hikes from these hacks. They require and demand concurrent slowdown evidence. In a recent Conference Board report on leading economic indicators, a mix is offered. The December LEI rose only 0.2%, but some warnings were made. Among the negative contributors were new orders for non-defense capital goods (lack of fixed investment), building permits (housing), and average weekly factory hours (mfg pain). Most positives in the LEI related to sentiment (soft), stock prices (soft), consumer goods (destructive anyway), money supply (inflation from debt), and new jobless claims (declining, good news).

These guys simply don't get it. Here is a summary of quotes from Jack Guynn, a voting member of the USFed. Can you detect any reference to forward economic indicators showing signs of distress? Me neither! When he does turn to forward indicators, Greenspan and his gang focus on the wrong indicators, like the lunatic real Fed Funds rate (Fed Funds target minus the CPI).

"We're in fact in a period now where I like to think that we've got policy recalibrated about right and we will adjust as we watch things unfold over the coming months… We've got the accommodation, the huge accommodation, we put in place several years ago out of the system and we're back to some more balanced kind of a policy, where hopefully growth will remain at a steady, sustainable pace, where inflation won't rear its head. We're going to be watching [to see] what the data brings and what's around the next corner."

You gotta sign up to the Hat Trick Letter for that. My subscribers must be protected. The topics of energy, gold, trade gap, federal deficit, and monetary policy response will be covered. Watch the bankruptcy level, a reversal of rate hikes within several months, emphasis on carry trade (yen vs US$), and certain expansion to the federal budget deficit. Anyone who expects a pullback in money supply growth or credit supply growth is crazy, and knows nothing about US banking policy. Our credit dependence (nay, desperation) is colossal. Our interest rate sensitivity is outsized, even greater than realized. Ben Bernanke, as new USFed Chairman, will surely keep the spigot open full bore. The main objective is continuity, a policy desired for to keep the confidence intact in the institution during transition.

Perversely, a slowdown in the USEconomy might go hand in hand with a gradual reduction in the trade gap. The so-called recovery since 2001 was built upon grand importation of both finished products from Asia, and exportation of jobs to Asia. No legitimate recovery can base itself on external dependence. No legitimate financial health can be claimed when such grand importation of credit capital is required. A day of reckoning approaches, since continued USEconomic recovery and expansion go hand in hand with ever greater imbalances, measured by the twin towers, the trade gap and federal deficit. As the USFed continues to push on a string, the commodity sector will continue to benefit from the chronic and continued monetary inflation. Only a disastrous trade war will change the labor market wage structure inside the United States.

Ironically, the USFed will likely continue to inflate until they detect wages rising, which would lead them to sound the alarm. However, until that happens, commodities will be the principal beneficiaries. My personal belief is that the USFed, after a "baptism" for Bernanke, will increase the money supply and accelerate it. The effect on crude oil and gold prices will be even more magnificent than what has been seen since last July 2005. That month should be marked down as the turning point. China delinked its yuan currency from the USDollar, and King Fadh of Saudi Arabia died.

Evidence of interference in the bond market is easy. The Treasury yield curve has remained flat, with a slight droop in the belly at the 5-year term yield. The fact that the yield curve has maintained its shape for two months is important. It has not gone inverted. The US Treasury yield curve has been "Japanized" if you will. Instead of a zero yield, you have a zero spread, managed and maintained, not to go inverted since that would send a dire signal. The degree of monetization for the 10-yr yield TNX is the controlling mechanism. Look for a more clear inversion, with the 10-yr yield below the 2-yr yield, if the USFed persists its moronic tightening policy. Their hidden agenda is to protect the USDollar.

Few seem to attribute much importance to Greenspan's blind trust. His personal investments have been locked up during his 18-year tenure in Treasury instruments. Since when are bonds considered a neutral, unbiased, and disinterested investment? Hokum! Nobody seems to accuse this inflation advocate as working to earn capital gains in his Treasury portfolio. Asset bubbles inflate and bust, which benefit bonds and his portfolio.

The Greenspan Legacy will be written about for years. Expect it to be either high on lofty praise or deep in harsh criticism, nothing in between. It is a legacy of inflation maintained by confusion, of economic heresy adopted by mythology, and of extreme wealth dependence upon inflation's offspring known as asset bubbles. In no way should people attribute to Greenspan any brilliance or success in his banking policy due to the confusion and lack of comprehension of his language. Obfuscation cannot be mistaken for brilliance. The USEconomy has horrendous imbalances, which the good chairman euphemistically called "flexibility." Much will be written about the colossal debts, colossal trade deficit, colossal federal deficit, colossal household debt, and colossal dependence on credit with tiny interest rate charges.

The primary statistic in my focus is how the amount of relative credit expansion has doubled under his long tenure. When he began, it took under $2 of new credit to generate $1 in new GDP. Nowadays $4.1 in new credit is required to generate $1 in new GDP. This is an embarrassment to his record and legacy. The huge looming problem is the stalled housing boom, properly called evidence of credit inflation, wholly depended upon by the economy for equity extraction to enable continued spending. Can we move on? It is tiresome to observe the eulogies, the boot licking, the celebration of all things inflationary, the complete blindness to the death of the US mfg sector. He was a great monetary drug dealer, the best ever. He threw caution to the wind, after identifying the wind and its direction. He set the standard for inflation, its obfuscated teachings, its false measurement, its justification, and its false forward indicators. In medieval times, he would be burned at the stake in violation of central banker historical norms of prudence.

We as citizens need to be vigilant, not for the onset of inflation, but for what inflation is. Amidst all the confusion, false education, and deception, numerous crises have his fingerprints on the misdeeds. He made crisis management a household word, mainly because his policies led to crises. He is the clever little pyromaniac working with the firemen. "Greenspan was quick to inject liquidity in response to crises" is the commonly stated praise of the good chairman. How many realize that liquidity is actually inflation which helps to push up the price of everything we must buy. Tragically, in the inflation game, the present is dealt with, while the future is sacrificed. A profound change has occurred under his tenure, a momentous celebration of inflation as legitimate wealth. We have conveniently relabeled certain types of inflation as booms, and dread the consumer price inflation which we evade through Asian import.Our exported monetary inflation (financed debts) returns from Asia in the form of ever cheaper imported products, a marvelous transformation of inflation itself.

Giving credit to Greenspan for price stability is shallow at best, psychotic at worst. When the US exports inflation and imports deflation, both to and from Asia, the entire price structure has changed. The credit for price stability is all focused upon consumer prices, while ignoring asset prices. Once again, inflation in asset prices is labeled a boom, while inflation in consumer prices sounds the alarms. Let us not forget that Greenspan is the first central banker in history to label housing inflation as "wealth creation" in pure heretic tones. This man is a monetary drug dealer, no more, no less. Furthermore, why is credit given to Greenspan for never presiding over an economic recession? Well, be honest. Any actual recession was avoided on the statistical side of the unreal world. The 2001 recession was real, but was not recognized as prolonged, primarily because of the 4% false exaggeration, which cures many statistical ills.

When business costs rise to a certain threshold, the jobs tend to be discharged to Asia. As a result of outsourcing of jobs to Asia, US wages have not kept pace with rising costs for business, nor the rising cost of living for Americans. Greenspan is the key person responsible for the middle class squeeze. From the 1960 decade to today, the average wage has fallen by 30% in real terms. Greenspan presided over half of that decline. In the last three years, inflation adjusted wages have been running negative, and the adjustment has been too little. So "real wages" are heavily in decline. Workers bring home less each successive year. Such is the legacy of the good chairman, our Secretary of Inflation.

A closing note comes to mind, something uttered by me a the Vancouver Gold Show on the final panel. Some members of the audience were concerned about the goony notion of an imminent worldwide depression. Too many people have been adopting and embracing the Kondratiev Winter story, integrating it with their stock portfolios. The results have been disastrous. Newsletter writers who embrace this scenario are several years premature, and entirely unaware of the necessity for the world's many central banks to carry on the presses where money is printed. Darwinian forces will cull them from our ranks. They are ignorant of an important historical sequence.

My summary from the conference is simply stated in two statements and one final question.

1) Depression leads to War, not the other way around. 2) War leads to inflation, not to deflation. 3) Does anyone believe we are in not war mode now?

The Iranian conflict will not go away all year long in 2006. We might enjoy some calming events, some brief agreements. The authentic problem is that Iran represents the focal point of the Central Asian energy production region. The USA does not control it, does not control the critical oil pipelines in the region, and does not control the new Iranian Oil Exchange due to open in mid-March. The severe risk is that Russia and China (UN Security Council members) each support and defend Iran and are willing to stand up to the United States in a challenge. These are the problems, not nuclear proliferation, not anymore than weapons of mass destruction were a problem in Iraq. The largely uneducated American public, together with the unfortunate throngs of bubbas, gobble up the disinformation. Watch in horror as Iranian leaders threaten to shut the oil spigot even a little. The crude oil price would skyrocket, as would the gold price. This is the year for geopolitical events, all year long!!!

CNN occupies far too much program time on the criminal trial of the month, or the missing person of the month, even broken borders at the Mexican line, and not enough about financial foundation shifts worldwide. CNN used to be a topnotch intrepid news organization. Heck, the US public would not understand anything about the Petro-Dollar or Kazakhstan anyway. The great majority of Americans could not identify two former Soviet republics. Few Americans could identify more than three Canadian provinces. Did even 50% of Americans take more than two years of mathematics in high school? Can even 10% of Americans even speak a foreign language? Je parle un peu de français, bien sur, mais c'est très difficile pour comprendre leurs mots vites. Habla muy poco español, bastante abordar las jovencitas.

I apologize for the rants here. To be honest, I am disgusted by unwise national priorities, current event disinformation, and the endless bootlicking of Greenspan. May the man walk off into the sunset, whose path is littered by war and debt. May he enjoy his $100 thousand speaking engagements, to compensate for years of low paid public service. May he sit on numerous corporate boards, this man who fails to comprehend either technology or productivity. May we repair our national perception of what inflation is. Not a chance!!!


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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