Reading time: 2,500 words, 6 to 10 minutes
John Williams developed a chart that graphically demonstrates how the mightiest economy in the world is collapsing. I’ve mentioned several times that the so-called GDP growth of the U.S. does not take into account the effect of inflation. America, the world’s largest economy, is collapsing and taking the rest of the world down with it.
In fact, China, India and Brazil’s central banks have recently cut their interest rates in a desperate attempt to soften the blow from THEIR slowing economies. Everyone was hoping they would continue growing to compensate for America’s slowdown. It’s NOT happening. Europe’s economies are also slowing down and the countries on Europe’s southern fringe; Spain, Portugal and Italy are in recession. Greece is already in a major depression.
And on April 25 the Financial Times headlines read “Britain slides back into recession”. The article reported that “Michael Saunders, economist at Citi, said Britain was experiencing the deepest recession and weakest recovery for 100 years as the country slid into recession for the second time in three years.”
America’s economy is far more worrisome. First, it’s necessary to see the difference between the government’s phony official inflation and REAL inflation. The last time the U.S. Consumer Price Index (CPI) reflected reality was in the 1980s. Since then the U.S. government has increasingly manipulated the CPI to fudge the numbers lower than the real inflation rate.
They manipulate the CPI for many reasons. First, it hides the Federal Reserve’s utter failure controlling inflation. Second it covers up the incredible loss of the dollar’s purchasing power. Since the Federal Reserve was spawned in 1913, the U.S. dollar has lost between 95% and 98% of its purchasing power. In 1913, a cup of coffee was 3¢ to 5¢. Today it’s well over $1.00. Do the math.
Another reason for fudging the CPI is to cover up the fact that the government is repaying its debt in devaluing dollars. As well, the official CPI rate is used as a basis for increased in salaries, wages and Social Security payments. Manipulating the CPI lower than the real rate of inflation explains why people’s incomes keep shrinking (In terms of purchasing power) and retirees are starving.
A variety of techniques are used to artificially lower the CPI. One of these is “substitution”. If the price of beef steaks goes up and threatens to raise the official CPI, they’ll substitute steak with hamburger. Their rationale is that shoppers can no longer afford steak and will buy hamburger instead. They also use the “hedonic” technique which incorporates quality changes into price. For example, if the price of a laptop this year is the same as last year but the laptop’s power has doubled, then hedonically the price of laptops has fallen 50% because the same price will buy twice the power. They use a “core” inflation calculation that does NOT include groceries or gas, ostensibly because they are volatile. How long can you survive without groceries and gas? These types of manipulation grossly understate the real rate of inflation. See the chart below
The red line in the chart is the government’s manipulated official CPI (sometimes called the headline rate). It shows the current official CPI at about 2.5%. John Williams’ Shadow Government Statistics website calculates the REAL inflation rate (the blue line) using the same techniques the government used in the early 1980s. You can see how during the early 80s both red and blue lines were the same but started to diverge about 1983 as the government began manipulating their calculations. In the chart above, the real inflation rate (blue line) shows that today’s U.S. inflation rate is over 10%.
Click on Shadow Stats website if you want to follow the real inflation rate as it changes. Williams shows two charts: one using 1980 and the other using 1990 techniques.
This is more than a mere academic discussion. Regular readers will recall I’ve warned repeatedly that the government’s so-called GDP “growth” numbers are very misleading because they do not include the REAL inflation rate. Here are some headlines showing GDP growth as falling but still supposedly in positive territory. Notice that The New York Times, one of the elites main cheerleaders, uses comforting words like “sustainable” to describe the so-called recovery.
Breaking News Alert
The New York Times
Friday, April 27, 2012 — 8:45 AM EDT
U.S. Economic Growth Slows to 2.2% Rate, Report Says
The economic output of the United States grew at an annualized rate of 2.2 percent in the first quarter of the year, easing from the prior quarter’s growth rate of 3 percent, as expected, but maintaining what many economists have started to call a “sustainable” pace of recovery.
US economic growth slows to 2.2%
The US economy grew at a slower pace of 2.2 per cent in the first quarter after recording 3 per cent growth in the fourth quarter. Economists surveyed by Bloomberg had expected growth of 2.5 per cent.
U.S. economic expansion slows more than anticipated in first quarter
04/27/2012 08:35:07 AM
By Greg Robb
WASHINGTON (MarketWatch) — The U.S. economy downshifted in the first quarter as business and defense spending fell, raising fears the expansion could lose traction in coming months.
In its first estimate Friday, the Commerce Department said gross domestic product rose at a 2.2% annual rate between January and March, slower than the 3.0% pace in the prior three months. Economists polled by MarketWatch had expected a 2.7% growth rate
Now let’s look at two widely disparate charts of U.S. GDP. The top red line is the “official” GDP that is NOT adjusted for REAL inflation. The bottom chart shows GDP adjusted for real inflation. That’s a HUGE difference! If there were a “Chart of the Year” award, these two charts would be the “Charts of the Decade”.
If the real inflation rate is over 10% and GDP is growing at only 2.2% then the GDP is NOT growing. It is shrinking. Simple math: 2 minus 10 = negative 8. The U.S. economy is collapsing at 8% a year. The ass media trumpets consumer spending increased 2.9%. Simple math: 3 minus 10 = negative 7 so consumer spending is not up; it’s down more than 7%. Notice too, the bottom blue line shows, other than a few squiggles, the U.S. GDP has not recovered anywhere near where it was between 2000 and 2007. What the U.S. economy is doing is called “bottom-bouncing”.
The danger of bottom-bouncing is it establishes a base. Chartists call this a ‘level of support’. Anyone familiar with technical analysis knows that support become resistance once support is broken to the downside. Anyone familiar with current economic history knows that western economies go into recessions about every 4 years. The last U.S. recession began in December of ’07. Under pressure from the government, the Bureau of Economic Research declared the recession ended in the summer of ’09. Many (myself included) believe the U.S. never came out of recession. However, if the U.S. officially came out of recession in ’09, then it’s due for another one next year. And, the chart’s support line becomes resistance making the U.S. economy unlikely to ever recover anywhere near it once was.
John Williams says, “The recent reporting of some economic gains largely has been an illusion, tied to the effects of underestimated inflation.
“As previously noted, the U.S. consumer does not have the ability to sustain growth in personal consumption expenditures (71% of GDP), due to structural problems with household income and debt. Accordingly, there is no recovery underway or likely in the near future.
“Underlying economic reality does not have positive implications for the system. Ongoing economic stagnation and renewed contraction will mean much-worse-than-anticipated federal budget deficits, U.S. Treasury funding needs and banking-system solvency issues.”
So, is there any good news? Short answer: NO.
Long answer: it’s worse than you think and it’ll get a it’ll get a lot worse before it gets better and that won’t be for a long time; maybe not in some of our lifetimes.
Friday, April 27, the Globe and Mail headlined “Feds tighten reins on CMHC”
Canada has just turned a page but as is often the case with government idiots; it’s too little, too late. They should have tightened the screws years ago and PREVENTED the housing bubble. So now they puncture it. The Americans certainly provided a tremendous lesson. Refusing to learn from the mistakes of others must be another form of insanity. Insanity is zero down, 40 year mortgages and tightening CMHC years later.
The instant gratification of $400,000 starter homes is also insanity. It leaves the Canadian taxpayer with about $1 trillion in liability, about half of which is at risk. Canada had its own bank bailout when the CMHC’s removed mortgages from bank balance sheets and now the chickens are coming home to roost. Of course most of the ASS MEDIA reported nothing at the time. How much pain would you like with your insanity, sir? How about a sprinkling of incompetence and stupidity while we’re at it?
It reminds me of watching the traffic in Miami Lakes in late 2008; bright shiny new Mercedes, BMWs, Corvettes, Hummers, etc. I turned to my American colleague and said, “There must be a lot of money here.” He said, “No, they’re all owned by the bank.” Well we know what happened to the U.S. housing bubble and what it did to their banking system. We’ve seen this movie. Now watch the sequel, Canada!
Oh, by the way, the Governor of the Bank of Canada has already hinted that interest rates are going up. Whee! Let’s really burst that bubble.
Also on Friday, Garth Turner’s “Greater Fool” site says, “the average Canadian house is selling for less today ($369,677) than it did a year ago ($371,591). Factoring inflation, houses in Calgary are 25% cheaper now than they were in 2007. The Okanagan and SW Ontario are property wastelands. Muskoka and the rest of GTA’s cottage country are having one of the worst Spring markets in memory. And prime maritime spreads in the Annapolis Valley or along Nova Scotia’s bucolic South Shore can now take two years to sell.” There’s even a website Vancouver Price Drop that tracks Van’s housing price melt-down.
Goodness, me! Who could have seen that crash coming? You mean bubbles burst? Ok, enough sarcasm. I just hate being right. And, I wouldn’t mind being right if more people had listened. I’ll be the guy standing there with his mouth shut and blood dribbling down my chin from biting my tongue to avoid saying, “I told you so.”
The consequences are global and painful. The consequences are part of the global economic collapse I’ve been warning about since 2007 when I called it a “slow-motion train wreck.” Here’s just one example.
Doug Saunders, writing in Saturday, April 28th Globe and Mail “A housing crisis of global proportions” says, “It used to be easy for a young couple to find a place to live. But this new generation is coming of age without access to decent housing. Even if they get a good job, they’re priced out of the market, forced to live as adults with their parents, or settle with cramped living conditions.”
“Does that sound familiar? It should. In recent weeks, I’ve heard people utter almost exactly these sentences about their neighbourhoods in Washington, in Beijing, in Nairobi, in London, in Mumbai and in Toronto.
“If there is a global problem, this is it: There is not enough housing, to rent or to buy, at a price that people with decent but ordinary employment can afford.”
The repercussions will be astounding. As boomers bail out of their houses thinking they can retire on the proceeds, there’ll be far fewer buyers capable of paying the asking prices. Lots of sellers and few buyers will drive prices even lower. This will be part of the downward spiral I’ve mentioned previously. Once price “deflation” sets in there’ll be still fewer buyers as potential buyers sit on the sidelines waiting for better prices. This is one reason why central bankers are terrified of deflation.
Fewer homeowners able to sell means fewer people able to move to where the jobs are. Lower house prices will drive property revaluations which will lead to reduced property tax revenue for cash-strapped cities and municipalities which will be pressured but will try to resist cutting services. Higher interest rates increase mortgage payments for homeowners whose income already can’t keep up with the REAL rate of inflation so there’ll be even less discretionary income for consumer goods which will further dampen the economy.
Then cash strapped governments will raise taxes because they’re run by spineless imbeciles afraid of their own over-paid unions and you wouldn’t expect the socialists to cut back on government spending do you? That’s something Steven Harper and the evil Conservatives would do. Higher taxes means even less discretionary consumer spending which further dampens the collapsing economy. This is the economic death spiral I’ve also mentioned previously.
Canadian real estate has different rules than American. Canadians cannot throw the house keys over the bank counter (“jingle mail”) and walk away from their homes. They’re stuck for the entire bill. Expect an increase in bankruptcies, divorces and suicides. I told you the news was bad, didn’t I?
And, on and on it goes. It will be a long and painful lesson when we finally realize housing is a roof over our heads, a life-style choice, not an investment.
Oh, by the way. Mark Carney, the head of the Bank of Canada is a Goldman Sachs alumni. Remember Goldman Sachs? They’re the behemoth U.S. investment banksters that Rolling Stones’ Matt Taibbi called “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” The Goldman vampire squid sucked America dry and is now working on Europe. Canada is next. I hope the British know what’s coming because rumor has it Carney has been tapped to head up the Bank of England.
Is this a conspiracy? Long time readers know I don’t believe in conspiracies. Given a choice between explaining something as either a conspiracy or incompetence, the correct answer is usually incredible stupidity. The unquenchable greed of the sociopathic financial oligarchs who rule the world is a case of stupidity bordering on insanity. How else do you explain spoiling your own nest? Our world is ruled by the insane.
Look out America! It ain’t over yet.
Look out Canada! The carnage is about to begin.
Stay tuned. It’s gonna get a lot worse.
April 28, 2012
Your comments are WELCOME!
If you like what you’ve read (or not) please “Rate This” below.
Lengthy comments may time-out before you’re finished so consider doing them in a word doc first then copy and paste to “Leave a Reply” below.