The Numbers Game

November 14, 2013

Thank the stars for mathematics, the language of science. Every known aspect of the universe from the movement of the planets and the formation of stars and galaxies, to the propagation of light and radio waves, right down to the intricate darting of subatomic particles is described perfectly by mathematics. In efficient market theory, the price of any marketable good can be described precisely by the law of supply and demand. That is, as Adam Smith instructs us, the price of a good is set by self-interested parties that mutually agree to the terms of the transaction without outside influence or coercion. That is the essence of our free market economy and the basis for the securities markets.

The essential input for scientific proof is empirical data. Without observable data, scientific hypotheses cannot be disproved. Inaccurate data corrupts scientific proof, which relies on repeatable experimentation and peer review of published data. Science has no central authority. Faulty or fraudulent methods are soon discovered, and the source of the errors is discredited.

Economics, known for centuries as the dismal science, can also be described mathematically, which allows practitioners to make predictions. But unlike hard science which relies on the laws of physics, the laws of economic transactions are less widely accepted, even if known. There are also contradictory economic themes and philosophies. Nevertheless, like science, economics requires accurate data. And there is the rub.

Our present government is managing the economy poorly and at the expense of growth and general prosperity because it believes in the outdated and unworkable economic principles of John Maynard Keynes.  Keynesian economics had been largely discredited since the 1940’s, but is seeing a revival in practice in the Obama administration. It is clear that the administration’s economic policies over the last five years have failed.

What’s worse is this same administration controls the economic data that outside economists and analysts use to model and to make economic and market predictions. But this corrupt administration reports false and misleading economic data. It treats economic data as campaign rhetoric, and massages it to fit its political narrative. For example, the Department of Labor’s Bureau of Labor Statistics (BLS) underreports the unemployment rate by half. It does so by not reporting in the 7.3% rate those in the labor force that are underemployed or have quit looking for work, the so called “marginally attached” available workers. The BLS measure that depicts the true unemployment rate is the U-6 measure which is 13.8% for October 2103. We can also see a disturbing trend in the reported monthly unemployment data. Initial unemployment reports are revised upward, and weekly jobless claims numbers are revised upward. It was no coincidence that the BLS reported a drop in the unemployment rate to below 8.0% a month before the November elections in 2012. The U-6 rate did not change that month.

Publishing false and misleading data is not limited to the unemployment rate. This administration also fudges the GDP numbers. In August the Bureau of Economic Analysis changed the way it calculates GDP. The BEA now treats corporate R&D as a capital investment rather than a business expense. The effect was an immediate 3% hike in the Gross Domestic Product. Just in time, too. GDP has been hovering just above stall speed and could dip into recessionary territory with any unforeseen economic shock.

If you think the administration limits its manipulation of economic data for political gain to the unemployment rate and GDP number, think again. The Obamacare tab is larger than advertised, and as we shall soon see, a hoax that would make Charles Ponzi look like a piker. Not only does Obamacare tax affect every citizen, it is crushing job growth.

Another fairytale is the administration’s claim that it has reduced the deficit by half. Well, that does not account for first adding $17 Trillion in new debt since 2008. The current regime has taken no steps to achieve a balanced budget anytime in the future. The president ignored his own Bowles-Simpson commission report, failed to negotiate a grand bargain in 2011, and has not revisited the issue since.

Likewise, the BLS publishes false inflation rate data every month. The BLS vastly understates the Consumer Price Index (CPI), its measure of inflation, by stripping out changes in the price of food and fuel. It also reduces the actual rate with subtle reductions in the cost of housing particularly rents.

The Federal Reserve should know better, but it is acting as a political tool as well. It spreads false economic information very effectively since it also passes out free cash to constituent banks and politically favored industries. When the Fed speaks, people listen. But the Fed is also caught in its own “liquidity trap”, that dark and eerie place in which no additional reduction in interest rate contributes to marginal output (interest rates are at the zero boundary).

Apologists for the Fed claim its massive intervention prevented depression in 2009; this is a weak counterfactual argument. ­­The Fed’s intervention in the credit market actually extended the recession and together with untethered fiscal spending, repressive taxes and regulatory costs, Fed policy continues to inhibit rather than promote economic growth.  But reality shows the Fed’s monetary gymnastics have failed.  The Fed’s own Kevin Warsh warned against using Quantitative Easing as an economic tool. In his 2010 Wall Street Journal editorial he described QE as “an untested incomplete experiment”, which would result in “significant capital misallocation and malinvestment.”  When Janet Yellen takes her place at the head of the Fed, she is likely to continue the ultra-easy monetary policies of her predecessor and mentor, Ben Bernanke. The Princess Dove may even increase the monthly bond-buying rate!

The simple truth is the Fed is not equipped to solve the nation’s economic malaise. There is no cause and effect relationship between unemployment rate and the inflation rate, contrary to what Bernanke and his Keynesian colleagues believe. The Phillips Curve does not work, as anyone who lived through the 1970’s stagflation can attest.

Citizens are feeling the effects of Washington’s diabolical use of false economic data. General prices are climbing and purchasing power of the Dollar and real wages are declining. Bond yields are negative. Unemployment remains high. Taxes are high and headed higher. Obamacare is increasing the cost of health care for everyone and causing businesses to cut back workweek hours for many employees.  

Despite what the Washington spin machine says, the economy as measured by GDP has not emerged from recession. We can see that real annual GDP growth, that is, GDP growth taking inflation into account, has been negative since 2004.

Some point to record stock prices as proof the economy is recovering. But the stock market is not the economy. Stocks are high because the Fed has distorted the yield curve, forcing investors into dividend stocks in the search for yield.  We are already seeing just how sensitive the markets are to QE tapering. Stocks will sell off sharply just before the Fed slows down its bond buying.

The deluge of false and misleading economic data makes it difficult to see the real state of the economy. Investors should not expect the current regime to admit their economic policies have failed. This regime is more likely to double down on its deceitful message campaign. As we know from Hayek, “To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.”

There is a refuge against the corrosive effects of Fed induced malinvestment: Gold. Owning gold protects citizens against the actual inflation created by the deceitful federal government. The price of gold reflects the real inflation rate and the willful debasement of the currency. The price of gold today is telling us to expect the economy to remain sluggish for a long time to come. Gold is performing well as a diversifying balance to stock portfolios. For example, our Model Conservative Portfolio, a mix of gold and silver futures contracts, gold and silver stocks and selected sector stocks has returned 83% year-to-date. In comparison, the Dow has returned 20.10% year-to-date, and the S&P 500 has returned 24.14% year-to-date.

We can see that gold is trading at strong support, even when the major stock indices are hitting all-time highs. Gold is likely to climb to the 1480 level on its way to resistance at 1639. While much of the impetus for the strength in gold comes from the added liquidity pouring out of the central banks, investors are becoming increasingly nervous about a major correction in stock prices. Today’s gold price is a bargain for any investor seeking diversification.

One number that the Washington central planners cannot fiddle with is the price of gold.  It reflects global market sentiment, without the spin from Inside-the-Beltway. The prudent investor will not trust economic data as reported for the federal government and remain skeptical of federal largess however it is advertised. The prudent investor will rely on his own research, judgment and experience to protect his wealth from inflation, economic uncertainty and political corruption. 


The question for you to consider is how are you going to protect yourself from the vagaries of the fiat money and economic uncertainty?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over the last several years. Follow @TheGoldSpec   Subscribe at our web site  with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

Scott Silva is Managing Director of The Gold Speculator, an investment newsletter based on Austrian theory focused on gold and gold stocks. Mr. Silva holds a Bachelor of Science and MBA, and was a licensed Investment Advisor for top tier Wall Street firms before founding a private investment advisory firm.  Visit his website at

China is the world’s biggest gold producer with more than 355 tons annually. Australia is second.