Lies, Damned Lies and Government Statistics

They say that numbers don't lie. While this may be partly true, give these same numbers to politicians and crunch them through some econometric models and what pops out the other end could be nothing but a bunch of meaningless nonsense. But, correctly packaged and tastefully delivered, this nonsense could be enough to alter people's thought patterns.

This is a nutshell is what economist John Williams and his organization www.shaodowstats.com is all about.

Take for example the Consumer Price Index. After WW 2, CPI was devised to provide a measure of a fixed basket of goods so that contracts and wage increases with unionized auto workers could be hammered out. But in the late 1980's the Maestro – Alan Greenspan – suggested a "few changes" with the help from folks at the Council of Economic Indicators. He reckoned that if the price of steak went up, people would substitute hamburger instead. Hence by purchasing hamburger, one's cost of living would go down. The notion did not fly at the time, but during the Clinton administration, the idea of geometric weighting was introduced. So, if something went up in value, it was given a lower weighting based on the presumption that people would buy less of it. Thanks to this mathematical chicanery, Social Security payments today are quite a bit less than what they would have been if the constant basket of goods method had been maintained.

Clinton must have been a mathematics major at college, for he applied his wizardry to the unemployment data too. Thanks to his changes, if a person was a discouraged worker for more than 1 year, that person was dropped from the math. Had these changes not been implemented, the unemployment rate in America today would be around 13%.

Now, here's something wild. How about "hedonics"? Let's suppose the publisher of a textbook revises the book and the new edition has color pictures in it and the book now sells for $5 more than the old editions with their black and white pictures. To the student buying the book, he/she could care less about the pictures. They have to buy the book to make it through their college class. Is this $5 price increase counted in inflation stats? If you guessed no, you would be bang on!! Likewise with computers. If I buy a new, expensive computer that has twice the processing speed of other models available, is this factored into inflation. No, of course not because the more expensive model is "more efficient".

M3 money supply remains a hotly debated issue. The Government no longer publishes M3 as it is a well accepted, broad measure of inflation. John Williams reckons that today's M3 ( or today's inflation rate) is close to 16%. I happen to agree with him and I arrived at my conclusion by a slightly different method. I looked at the Saudi Arabian money supply data ( the Rihyal is pegged to the greenback) and the data clearly shows that M3 is near 15%.

John Williams goes on to say that he expects the Government will have trouble keeping the lid on everything and he expects markets to start behaving as if inflation numbers are at 16%. In other words, the truth is going to come out real soon. The toothpaste is going to be squeezed from the tube. He figures we are headed for a period of hyperinflationary depression. Sobering thoughts to be sure.

To read more about John Williams, pick up the July 2008 edition of FUTURES magazine at your favorite book store today. If you are having trouble sleeping after you read this, print off a copy of your recent portfolio statement showing all those gold and silver stocks you own and put the statement under your pillow and rest easy……