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Wednesday, December 16, 2009

Misrepresenting Economic and Financial Data

I am happy to get back to my monetary post series starting with What is Money, Creating Money and Credit, Economic and Monetary Inflation and Deflation.

Next up is misrepresenting economic and financial data.

As described in the series, Money, in an ideal state would have the same worth for work today, for work tomorrow. But because of various monetary policies, the value of money may vary significantly over time. Most people believe that it is inherent in paper currencies that they devalue over time. For example, in 1939, a gallon of gas may have cost 10 cents, now it costs 4 bucks.

But currencies do NOT have to devalue over time. This is a result of the fiat currency, fractional reserve lending, and the Federal Reserve bank. All of which America did NOT have until 1913, when the Federal Reserve Bank was created. Before this event, a person could take a US dollar bill, bury it, and 100 years later it would have the same purchasing power. As a matter of fact, if you bury 100 dollars in 1800, in 1900 it would have MORE purchasing power! (Click here, try 100 bucks from 1800 to 1900, then try 1800 to 1922, and continue into the future)
The old monetary system also had issues, specifically it was linked to gold directly, which resulted in periods of uncontrollable deflation. But the net result over time was a stable currency value system across generations.

Think about that for a second, "A dollar saved is a dollar earned" actually would be true. Now flash forward to today. $100 us dollars in 1808 saved would have purchasing power of $157.39 in 1908, and purchasing power of $7.16 in 2008!!!

What people don't realize is this hidden inflation changes, or secretly alters, the view of all economics. When people look at stock charts for example, typically it is viewed from an absolute view, when in reality, all stock charts should be adjusted for inflation. This is why I quote the S&P 500 valued in terms of Gold, to help give a different perspective on US stock market valuation in more absolute terms. Gold is an object that has value across all world currencies and other physical assets in a more neutral view than US dollars. By no way is this the perfect way to compute value, but it is more accurate than US dollars over the last 10 years.

In summary, inflation allows to skew, or mis-represent data in terms of money over time.

Next is skewing economic data measurements.
After the last Great Depression, some of the reforms that came out of that period was to have the US government act as a neutral party to present data on the economy so all investors could make decisions on a more level playing field.

There are 100's of metrics that grew out of the government for measuring the economy including unemployment, monetary base, Gross Domestic Product (GDP), import/exports, inflation, etc.

All of these metrics where semi-straight forward when created. For example, if you where once employed, and you became unemployed, you where counted as....unemployed. But now there are dozens of sub-categorization of what is unemployed. For example, if you are unemployed for a long duration, you are re-categorized as no longer in the work force. If you are receiving unemployment checks beyond the normal duration, but are in the "emergency extended benefits" category, you are no longer considered receiving unemployment benefits.

I can go on and on. But there is something very nefarious about changing what it means to be unemployed. The history books showing the percent of Americans unemployed in 1982, or 1935, are NOT adjusted using the latest metrics. The result is you will have people look at the history of unemployment numbers and make statements like "US is at 10% unemployment, not seen since 1982".
When in reality, if in 1982 the same methodology used today was used in 1982, perhaps unemployment then would be 8%, not 10%, and therefore you may need to go back to 1930 with the adjusted methodology to find a time matching today's experiences.

Changing of metrics, without retro-changing the history of previously published data, is a severe distortion of reality. This is yet another way to mis-represent the reality of the economy to put the individual investor at a disadvantage.

This is an issue on all levels of critical metrics the US government publishes. One particularly disturbing skewing of reality is on measuring inflation. By mis-measuring inflation, all inflation adjusted metrics are also skewed, distorting even trying to determine what 1 US dollar is worth today as compared to 10 years ago. This has deep distortion effects across all measurements of value and wealth over time.

And when a metric cannot be skewed, or distorted, the solution has been to eliminate the measurement. For example, the Federal Reserve Bank on 10 November 2005 announced that as of 23 March 2006, it would cease publication of a money supply metric called M3. (ShadowStats continues to try to estimate M3) This was deemed as no longer needed metric. If you click on the shadow stats link, notice M3 exploded right after reporting it stopped. I am sure that is just a coincidence.

Bloggers have pieced together true inflation together with M3 from other data to yield reported inflation from true inflation. Currently as of 12/15/09, inflation reported is about 2%, when real inflation is about 7%. So if your savings is not yielding over 7%, your savings is in effect losing value in terms of US dollar. And this DOESN'T include the fact the US dollar plunged from 90 to 74 in 2009, a 17% drop in terms of world valuation. (US dollar currently rising, back to 77ish)

Inflation not being reflected in economic data, changing of economic metrics without retro changing past data, dropping reported data such as M3 monetary policy, currency devaluation, all have the effect of misrepresenting reality and putting the common investor at a disadvantage.

Please keep in mind, this was not a significant problem 40 years ago, all of this has been a continual morphing of the US government to skewing data to hide the reality of the economic data. In effect each political administration contributes to the distortion so on their watch, the claim can be made that the economy is better than the reality. I am not a conspiracy nut, there is no world order behind this distortion. What is at hand here is human nature, easier to "cheat" by changing the grade on a report card, than buckle down and study harder.

Unfortunately, the decades of accumulation of these changes has yielded much of the reported data so skewed, its hard to judge where the economy, and value of savings, stands.

In Summary
  • Fiat Currencies as they change in value over time, are not reflected in most economic historical data, like stock charts. Not auto-adjusting all economic data based on inflation distorts economic information.
  • Inflation itself is distorted, which in effect makes it even harder to actually compare financial and economic data over time in more absolute terms.
  • All other metrics of economic data are also changed over time, without retro-changing past values to put proper perspective on data.
  • All of these distortions create an environment where stored wealth is near impossible to assess if keeping up with devaluation over time, and a view of economic health to make informed decisions on money allocation.
  • These distortions are not a reflection of a world conspiracy, but a reflection on human nature to change the test, rather than work harder to have a better grade.

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