| Double Standards|
I have been watching with interest the ways in which those who govern are protecting and helping the Wall Street crowd from financial failure. And on the other hand, the policies that are being promoted are raping the middle class and poor of their financial stability.
Here is the first article which reveals the double standard. We hear speech after speech about promoting free markets yet they who preach do not do according to what is preached..
Paulson's Credit Push Earns Jeers From Free-Market Adherents
By Brendan Murray and Simon Kennedy
Oct. 16 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's plan to shore up asset-backed commercial paper is drawing criticism from free-market advocates, who say it risks shielding banks from the consequences of poor decisions.
Paulson's team brokered negotiations between the country's biggest banks that led to the creation yesterday of a fund to help revive the asset-backed commercial paper market. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to establish the fund after a month of talks with Treasury aides.
``It is disappointing,'' said William Niskanen, chairman of the Cato Institute in Washington and a former member of President Ronald Reagan's Council of Economic Advisers. ``It does go against the Bush administration's preferences. Like all bailouts, it creates a moral hazard problem. I'm unhappy with situations like these.''
President George W. Bush came into office in 2001, laying out principles of ``free markets, free trade'' and ``limited government'' in his inaugural address. Events since then have softened that line, with the administration aiding industries from airlines to steel when political and economic pressures increased.
Bush's Treasury also helped organize International Monetary Fund bailouts for Argentina, Brazil and Turkey in 2001 and 2002 after faulting similar packages for Asian nations under President Bill Clinton.
The Treasury initiated discussions between the financial institutions at a meeting of Wall Street executives in Washington on Sept. 16, said a person with knowledge of the deliberations. Robert Steel, the department's top domestic finance official, brought the lenders together and prodded the competitors to keep working through the following weeks. Paulson also made calls.
``I've been surprised by the extent to which the administration has been willing to be involved in markets,'' said Allan Meltzer, who Republican lawmakers commissioned in 1998 for a review of the IMF and World Bank. ``Nobody in government is ever as pure as their statements may lead you to believe,'' said Meltzer, a professor at Carnegie Mellon University in Pittsburgh.
The new company will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt, the banks said today in a joint statement. Other finance companies may join, the banks said.
The plan would help SIVs avoid dumping their $320 billion in holdings, further roiling the credit markets and deepening the worst housing slump in 16 years. The banks would instead create a fund to absorb the debt, using the proceeds of new commercial paper sales to finance the purchases.
`Helpful to Economy'
Paulson said yesterday that the accord ``can only be helpful to the economy.'' He defended the Treasury's involvement, telling reporters in Austin, Texas, that it was a ``private-sector initiative.''
Steel stressed in an interview in Washington that no federal money was involved. He described the fund as a temporary solution to help markets recover.
``Nothing in free-market theology says markets always work properly,'' said J.D. Foster, a senior fellow at the Heritage Foundation in Washington and former Bush administration official. ``If there's something that can be done of a temporary nature to help markets, then that seems perfectly appropriate.''
Still, the fund is the latest example of the Bush administration's willingness to meddle with markets, and most of its interventions are unjustified, said Dan Mitchell, a former Republican Senate Finance Committee economist and adviser to the Bush-Quayle transition team in 1988 and 1989.
In March 2002, eight months before congressional elections, Bush imposed levies ranging from 8 percent to 30 percent on steel imports, an effort to protect domestic mills during a global glut of the metal.
``This White House has too often put political concerns above economic principles,'' said Mitchell, who now works at the Cato Institute.
In the early days of the administration, Bush's first Treasury secretary, Paul O'Neill, warned of ``the dangers associated with bailing out the private sector.'' He cautioned in January 2001 against aiding any developing country that ``willfully decides to run itself into the ground.''
The Clinton administration credited aid packages that went to Mexico, Russia, Brazil, South Korea and other Asian countries for protecting the health of the global economy.
By August 2001, the U.S. supported an IMF bailout that included $8 billion in loans to Argentina to try to forestall default, which occurred four months later. In 2002, the U.S. backed $30 billion in IMF aid to Brazil.
| 2007/10/16 1:26||Profile|
| Re: Double Standards|
This is God's economic standard...what was wrong generations ago...is still happening today.
Ezek. 45:9 Thus says the Lord GOD: Enough, O princes of Israel! Remove violence and plundering, execute justice and righteousness, and stop dispossessing My people, says the Lord GOD. 10 You shall have honest scales, an honest ephah, and an honest bath. 11 The ephah and the bath shall be of the same measure, so that the bath contains one-tenth of a homer, and the ephah one-tenth of a homer; their measure shall be according to the homer. 12 The shekel shall be twenty gerahs; twenty shekels, twenty-five shekels, and fifteen shekels shall be your mina.
There is one standard for all. The money changers of that day are the same today.
| 2007/10/16 2:18||Profile|
FOR EVERY $100,000 YOUR HOUSE HAS APPRECIATED YOUR SON OR DAUGHTER IS NOW ANOTHER $100,000 IN DEBT
by Ceri Shepherd
October 16, 2007
Mr. Henry Paulson the Treasury Secretary and ex CEO of Goldman Sachs said the following today, and I quote
"Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," Paulson said in a speech delivered at Georgetown University's law school. "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth." In his most somber assessment of the crisis to date, Paulson said that the housing correction is "not ending as quickly" as it had appeared it would and that "it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet."
Alan Greenspan 2 years ago was extolling the virtue of adjustable rate ARM mortgages to anyone who would listen. These ticking time bombs have now inevitably gone off and the big Wall Street firms are getting hurt including Goldman Sachs. Notice that Citigroup wrote off $3 billion last quarter, a lot of money. Wall Street has no interest in the homeowner, they have ridden the boom and they are now trying to minimize fallout from the bust. As Gary North recently commented anybody who honestly believes that Wall Street has the interests of the lower and middle classes at heart is terminally naïve.
Mr Paulson is clearly stating that American house price inflation is now the dominant force of the American economy. This sounds to me as if the only future for the American economy is perpetual house price rises and perpetual debt to fuel it, what a great future.
He goes on to say "We must help as many able homeowners as possible stay in their homes," Paulson said. "Foreclosures are costly and painful for homeowners." But Paulson also stated, "When investors are relieved of the cost of bad decisions, they are more likely to repeat their mistakes. I have no interest in bailing out lenders or property speculators."
In a free market Mr Paulson when you make a mistake, when you get it wrong the market punishes you. The Borrowers SHOULD LOSE THEIR HOUSES and the banks should LOSE MONEY thats the discipline; any bailout simply provides MORAL HAZARD. The biggest speculators of all were Wall Street including Goldman Sachs your old firm Mr Paulson, nobody said anything when the big fat fees were rolling in, now Wall Street is acting like the very best Soviet Ministries and demanding state handouts for the homeowners how very touching. By definition if you are going to help the homeowners many of who were acting like speculators you are also by default helping the lenders THE REAL MOTIVATION. Questions should be asked Mr Paulson of Goldman Sachs you were the CEO throughout much of this period, and the other Wall Street banks as to how this situation has developed that now presents a significant current risk to our economy .
The greatest Stock market speculator of all time Jesse Livermore stated
There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!
Speculation is a hard and trying business, and a speculator must be on the job all the time or hell soon have no job to be on.
The game taught me the game. And it didnt spare the rod while teaching.
What about the young people Mr. Paulson? I am a late baby boomer, wonderfully easy for me like all boomers, property was very cheap in my time and good paying jobs with real opportunities were everywhere I COULD EASILY AFFORD A BASIC HUMAN RIGHT A HOME, These were before the days that banks such as Goldman Sachs had come up with all these ingenious devices to ram credit into the market, which has now driven property prices into the stratosphere all in the name of good old fashioned greed and profit.
Not so easy for my two sons who have been trying to save a deposit to afford even the most basic accommodation, as the prices have risen over the last few years at a faster pace than they can save a deposit. Why should they now suffer? The dreaded deflation or FALLING PRICES is only a dread to the bankers who are worried that the value of the collateral they hold will suddenly become lower than the outstanding debt. To Speculators deflation is a dread because it means a margin call! Deflation is no dread to my two sons Mr. Paulson, or anyone else who wants a home at a fair and reasonable price.
The market is correcting as it should do. Now Wall Street are desperately trying to stop this natural process. Wall Street are very Laissez Faire during the boom and real socialist during the bust. "Foreclosures are costly and painful for homeowners." AND BANKERS, all you want Mr Paulson is prices not to stagnate or fall to save Wall Street and people who have either made huge windfall profits in housing or should never have bought a house in the first place, and were only able to do so because of all the creative financing used by companies such as Goldman Sachs. Anybody taking a mortgage should look at the affordability of the payments and not what the house is worth or is going to be worth. If you do look at this value, or if this value influenced your decision then you are a speculator pure and simple as your speculation is hopefully a rising house price.
I am a believer in real conservative values Small Government, Free Markets, Sound Money, Balanced Budgets, & Freedom Of the Individual. We need some form of standard, whether it is the Gold Standard or any other standard. The alternative is that we allow bankers like Mr Paulson to create as much credit as they like. Which leads to asset bubble after asset bubble, or asset inflation as more credit is produced than available assets to absorb all this credit, so the price inevitably spirals upwards. The process then feeds on itself until we get the inevitable bust, at this point the Bankers try and pass the baby back to the American taxpayers via the Government in yet another Wall Street bailout, they milk the boom but pass on the bust. This crisis is simply the S&L scandal all over again but this time on steroids.
For example the 80,s stock market Boom and Bust, the early 90,s property boom and bust, the late 90,s stock market boom and bust, and now the 00,s property boom and bust.
These bubbles destroy real business and real entrepreneurship, and it rewards speculators. It does not happen in markets such as automobiles because as fast as new credit is being produced, cars are also being produced to meet the demand which is largely fuelled by credit. We have an equilibrium of price. Sometimes we see price inflation when a very popular and hyped new model is introduced premiums are often paid, because the demand fuelled by available credit is then greater than the supply.
What the bankers of Wall Street have actually created is a form of Debt Feudalism, you may work hard but you give most of it back by way of tribute to the bank, you simply siphon money from the real economy direct to the bankers it is nothing but USURY with NO CONTROLS. You pay a huge mortgage or Mort = Death Gage= Loan for your vastly overpriced house, which is only so overpriced because of limited housing supply meeting unlimited credit supply. I have a simple solution Mr Paulson run this past your Wall Street Buddies.
Mortgages only provided on 3 times SINGLE salary with tax receipts the only proof of income. No exotic mortgages allowed only simple fixed repayment mortgages. $1milllion Dollar statutory fine for each and every case of predatory lending.
It would have stopped any boom in its tracks and the homeowners that Mr Paulson is so worried about would now easily be able to afford their homes, it would give young people a fair chance, and women true independence. Houses would once again become homes and not another speculation. No bailouts would ever be required. True entrepreneurs and the real economy would be rewarded for the risk and effort involved FOR PERFORMING REAL WORK, speculators would face extremely lean times. My proposal simply balances credit against the available housing stock. It stops predatory lending and property speculation. We have to break this mindset that somehow if you buy a house you are entitled to it going up every year at a minimum of 10%+ a year, it is your right. You did not work for that money or the gain, it was not produced through real effort or production and please remember that for every $100,000 your house has appreciated over the last few years, is another $100,000 that your son or daughter is further in debt to be able to afford the same house. Most of my generation the boomers act like a bunch of freeloaders, we want quick and easy, risk free profits WITHOUT WORK.
My proposal would also divert money from mortgage or USURY payments to the bankers back into the real economy this would create more real jobs and growth and eventually lower taxation as the real economy expands.
The dirty little secret that Wall Street wishes to keep quiet is that the incessant inflation since 1971 when Nixon abandoned any form of economic responsibility with the closure of the Gold window has resulted in the outsourcing of America to less inflated economies, Wall Street has alone provided this inflation and all in the name of short term profit and greed, THEY HAVE destroyed America. The only game left in town is house price inflation which is why The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."
end of article....
Inflation is created by lending money without regards to risk. The U.S. taxpayer has long been the source for bailing out those who speculate, those who are the money changers. We are told that our nations economic system is based on free market principles, however, these principles are only applied to the middle class and poor. The sons of the kings pay no tax. The risk of investment by the sons of the kings is always socialized. That means that the taxpayer pays for the bailout when the sons of the kings make a mistake based on greed. So we have the double standard. Part of the nation is under free market capitalism. The other part is under Socialism.
| 2007/10/17 2:46||Profile|
Here is another example of double standards...The Government states a Consumer Price Index that is around 3 percent. But this is not the truth...current inflation is running above 8 percent. And the stated deficit is much much larger...why do they lie?
The numbers behind the lies
Economist John Williams says real unemployment and inflation numbers -- figured the old-fashioned way -- may be two or three times what the government admits. Heres why, and what it means for Social Security.
By Bill Fleckenstein
Fun with numbers.
Corporate America likes to play that game, the better to boost stock prices. Folks might be surprised to learn that "Governmental" America also plays the game in its compilation of macroeconomic data. Beneath the surface are undesirable, sobering consequences for us all.
Last weekend, the always-terrific Kate Welling published an interview with an economist named John Williams. It will be available on the free portion of her "pay" site via this link starting March 11. This article is the first one that I have seen in which all the flaws in the government data, pertaining to the Consumer Price Index, unemployment, Gross Domestic Product, etc., are disclosed in one piece by someone who's been following the data for a long time.
I have been aware of nearly all the statistical tricks used by the government since they were implemented. Nonetheless, seeing them collectively described in one article is incredibly sobering. Having said that, there is a bit more "black helicopter" insinuation and fewer data points than I would like to see in an article such as this. However, the main points are the math that most folks need to know, but likely do not.
Once you read it, think about it and understand it, you will see why so many thoughtful people -- like Jim Grant, Warren Buffett, Marc Faber, Bill Gross, Fred Hickey and Paul Volcker -- have grave concerns about the future of the dollar (due to the macro imbalances that exist today).
In fact, reading this article, you will conclude that there's no way out, short of running the printing presses. The problem with that end game: At some point, foreigners will revolt. One can only hope that, somehow, there will be a way out. But without an understanding of the issues, folks will have no way to react as events unfold, and adjust their assets as we get more clues as to how all this will play out.
Thus, I would encourage everyone to print out the article and read it as many times as necessary, in order to gain a full understanding of the issues. Since we don't know at what rate some of these problems will start to impact the markets, all we can do is be prepared -- by having our insurance policies (in the form of the metals and foreign currencies), and then being alert to signs that the beginning of a chain reaction may be under way. Meanwhile, to pique folks' interest in the article, I'm going to take the time to provide some "Cliffs Notes" here.
Jobs data don't count the down-and-out
Williams starts by discussing the headline economic data: "Real unemployment right now -- figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression -- is running about 12%. Real CPI right now is running at about 8%. And the real GDP probably is in contraction." (By "real," he means calculating the data the way they used to be calculated, not as inflation-adjusted.)
He then explains how the employment data are compiled, noting that 5 million chronically unemployed people are not included in the statistics. In fact, there are seven or eight different employment statistics. One called U-3 is the official one. The broadest one, U-6, currently shows unemployment as running around 8.4%. As he explains, the one that's the most historically consistent is running around 12%.
On the Potomac: Reverence for reverse-engineering
Williams differentiates between two data-manipulation practices. One is "systemic manipulations, where methodologies are changed." That's done in order to align the government's view of the world with the world, i.e., make things look better than they are. The second practice is out-and-out fudging of the data to produce whatever result is desired. Williams describes instances where various administrations have literally reverse-engineered the data to achieve that result (though politics is not the main purpose of the article).
For those not familiar with "substitution," he explains the practice's evolution in the CPI calculations. The concept of substitution was a concoction of Alan Greenspan and Michael Boskin, who basically argued that if one item were too expensive, consumers would substitute that with a cheaper one. Williams' response: "The problem is that if you allow substitutions, you aren't measuring a constant standard of living. You're measuring the cost of survival. You can keep substituting down and have people buy dog food instead of hamburger. It happens. But that's not the original concept behind the CPI."
That ticking sound? Social Security
Williams says that the government's motive in all of this, if there is a motive (of the government collectively; don't picture a group of men cooking up something in a back room), is its desire to put a favorable spin on all the data.
Another motive? Transfer payments like Social Security are indexed to the CPI, and they would be far higher if the CPI were accurate. In fact, says Williams, if the "same CPI were used today as was used when Jimmy Carter was president, Social Security checks would be 70% higher." That's seven-zero.
Though Williams doesn't get much into hedonics, he does talk about the inflation-understating impact of geometric weighting versus arithmetic weighting in the CPI statistics: "Geometric weighting ... has the 'benefit' that if something goes up in price, it automatically gets a lower weight, and if it goes down in price, it automatically gets a higher weight."
Then for the ticking time bomb: Social Security. The proceeds from withholding do not go into a lockbox or trust fund. They are spent, thereby reducing the size of the stated deficit. More importantly, he notes that the government's accounting for the deficit doesn't include any accruals for Social Security or Medicare liability.
In fact, if that were done and the government used GAAP accounting, the deficits for 2003, 2004, and 2005 would each have been around $3.5 trillion. That's a trillion, not billion. In 2004 alone, the deficit on an accrual basis would have been $11.1 trillion, due to a huge one-time spike for setting up the Medicare drug benefits. In essence, as he points out, we're piling up additional liabilities in an amount roughly equivalent to our total GDP every three years.
Lots of these imbalances have existed for some time, and they haven't mattered. Such macro problems only matter when they matter. Once that point in time is reached, events have a way of swiftly getting completely out of control -- which is why one has to understand the nuances and be alert for potential signs of chain reaction, as I mentioned earlier.
Charge that Maybach to my imputed income
Returning to the subject of GDP, Williams illuminates a wrinkle that I had not known about, called "imputations": They are "an outgrowth of the theoretical structure of the national income accounts. Any benefit a person receives has an imputed income component. If you're a homeowner, the government assumes that you pay yourself rent on your house, so that's rental income. ... Imputed interest income, for instance, accounted for 21% of all personal interest income in 2002, and was growing at an annual rate of over 8%. Meanwhile, fully 62% of total rental income that year was the imputed variety."
He goes on to point out that folks really aren't doing that well, which is why their incomes aren't growing, which is why they've borrowed money. And that's why understanding the housing ATM is so important -- because as that sputters to a halt, folks will be stuck in the same place they were before (which precipitated the borrowing, i.e., not enough income growth). Only now, they're going to be stuck with incremental debt of their own creation.
What festers underneath the data
Next, he strings together the stock-market and housing bubble, for a summation of where we are: "When that (stock) bubble burst (in 2000), without a foundation of strong income growth, or a financially sound consumer, it triggered a recession that was a lot longer and deeper than the government would have you believe.
"In fact, I contend that what we are in now is a protracted structural change that goes back to the beginning of that 2000 recession, which eventually may be recognized as a double-dip downturn. We did have some recovery in 2003, but in 2005, you started to see signs of a downturn in a variety of leading indicators that I use."
That's not so far off from what I believe. In other words, if you really looked at the data and understood them, you'd see that what appears in the headline numbers is nowhere near what the real supporting data show. Our financial condition is a ticking time bomb. What none of us knows is when it implodes.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money.
end of article...
| 2007/10/17 6:37||Profile|
This is a more detailed explaination of the false reporting of the Consumer Price Index...
A caller into a Washington D.C. talk show asked a very pertinent question regarding the business of living. Have they changed the way they measure the rate of inflation? The CPI report in May was zero percent, excluding food and energy. If you take those things out, that is what is primarily driving up everything. What would be the real inflation rate, if you add back everything they take out?" The host of the show turned to his guest, a financial reporter from The New York Times. The host of the show and the Times reporter were caught flatfooted. The Times reporter couldnt answer the question. The host then went on to say, "The inflation rate as it is reported has been quite low over the last few years. Next caller."
The caller to the show reflected the growing disconnect between Main Street, Washington and Wall Street. Each month consumers see their living costs go upwhether at the grocery store, the gas station, or at the end of the month when bills are paid. Personal income has stagnated, failing to keep pace with the rise in the cost of living. In the meantime the media keeps spinning any increasewhether it is booming real estate prices, rising gasoline prices, grocery bills, doctor and dentists bills or movie ticketsas nonevents. Prices keep going up. Wages keep falling further behind. It is a repeat of the staginflationary 70s taxes and inflation. Inflation is on the rise and so are taxes. Property taxes go up each year, making it difficult for homeowners to hang on. The social security base rises each year making more of a worker's income subject to the tax. States are raising sales tax and auxiliary fees, while some states have raised income tax rates. Like many of the items of the CPI index, rising taxes never get counted.
In effect, what this caller was asking was how and when did they change the way they measure the rate of inflation? On a first hand basis he was experiencing inflation in his personal life with rising food and energy costs. There was a major disconnect between what he experienced in real life on a day-to-day basis and what he was told in published inflation reports. The host of the show and the financial reporter from the Times had no answers.
Washington, We Have A Problem
The caller was smart enough to know something changed and he was right. In the early 90s the government realized it had a problem with rising entitlement costs for Social Security, Medicare, and government pensions. These entitlement payments were indexed by the inflation rate each year. With inflation on the rise it meant these costs were rising faster, thus making government deficits much worse. In order to bring the government deficits under control, it would be necessary to bring rising entitlement costs down.
One way to lower entitlements would be to bring the inflation rates down, which would translate into lower Cost of Living Adjustments (COLA). The way to do this was to bring down the rate of inflation. However, this was not done by natural means, but artificially through statistical manipulation. The supply of money and credit began to go parabolic in the 1990s as shown in the graph of M3. The rise in money and credit would mean higher inflation rates. Higher inflation rates would mean higher COLA adjustments, which would lead to bigger deficits.
The solution was to change the way inflation is measured. Media reports began to surface on how CPI was overstated. The real inflation rate was actually much lower according to government and Federal Reserve officials. The Senate Finance Committee appointed the Boskin Commission to study the problem and find a solution. The Boskin Commission published its final report Toward a More Accurate Measure of the Cost of Living, and submitted its findings to the Senate on December 4, 1996. The Boskin report recommended downward adjustments in the CPI of 1.1%. The CPI, which is used as the basis for COLAs to Social Security and government pensions, if lowered as recommended by the commission, would reduce future entitlement payments as well as impact other government programs. The CBO estimated that by overstating CPI by 1.1% it added $691 billion to the national debt by 2006. By then the annual deficit would rise anywhere from $148 billion to $200 billion annually by overstating the inflation rate. In effect the government was overpaying because the actual inflation rate was much lower.
The Boskin Commission recommended several changes to the CPI index which included:
develop and publish two indexes
abandon the fixed-weight formula for CPI goods
change the weight of items in the index from arithmetic weighting to geometric weighting
introduce substitutions in the index
seasonal adjustments to account for price increases that occur on a seasonal basis, which would smooth out the fluctuations
Reduce prices by quality improvements
The result of their implemented suggestions is the mish mash we have today, which bears no resemblance to reality. The Commissions recommendations had widespread support in the Clinton Administration, a Republican Congress and from financial luminaries such as Alan Greenspan, who was expanding the money supply at a very rapid rate as shown in the graph above.
Up until the Boskin/Greenspan initiative surfaced the CPI was computed each month using a fixed basket of goods. That changed after the Boskin Commission. The Bureau of Labor Statistics (BLS) began using substitutions in their monthly computations of the CPI. If beef prices rose, it was assumed that people substituted chicken. If chicken prices rose, then consumers would switch to fish. If all these prices rose, well consumers would become vegetarians or maybe start eating Alpo.
In addition to changing items in the index through the substitution principal the BLS also changed the weights of items in the index. Instead of straight arithmetic weightings the BLS began to use geometric weighting. The benefit of geometric weighting is that it automatically gave a lower weighting to those items in the CPI that were rising in price and higher weightings to items in the index that were falling in price.
As an example of how geometric weighting can produce lower values, a recent example from the 90s bull market will illustrate the point through two Value Line Indexes. The indexes are essentially the same. They are made up of 1650 stocks. One index is arithmetically weighted and the other is geometrically weighted. Between January 1990 and December 2000, both indexeswhich include the same stocksproduced totally different outcomes and returns. The geometric index peaked in April 1998. The arithmetic index did not reach its first peak until May 2001. The return from January 1990 to December 2000 was 52% versus over 300% for the arithmetic index. The geometric index peaked in 1998, while the arithmetic index did not reach its first peak until 2001. Since 2001 the arithmetic index has gone on to reach new a new high on 6/17/05, while the geometric index has never recovered from its peak in 1998. This is just one example how geometric weighting can produce lower outcomes not only in stock market indexes but also in inflation rates.
The manipulation didnt stop there. The bureau also began to adjust prices for quality. This practice became known as hedonics. Hedonics adjusts the prices of goods as a result of the increased pleasure a consumer derives from a product. A few examples will illustrate how removed the index has moved away from reality. Tim LaFleur is a commodity specialist for televisions at the BLS. In December last year he adjusted the price of a 27-inch television set for quality improvements. The 27-inch television set had a retail cost of $329.99. However, he decided the new model, which still sold for $329.99, had a better screen. After putting this improvement through the governments complex hedonic adjustment model he determined the improvement in the picture was worth at least $135! Taking in this improvement he adjusted the price of the TV by $135, concluding that the price of the TV had actually fallen by 29%!  The price reflected in the CPI was not the actual retail store cost of $329.99, but $194.99. The only problem for we consumers is that if we went to Best Buy or Circuit City to buy that TV, we would still pay $329.99.
Another example of hedonics at work is the way the BLS treats rising automobile prices. Mr. Reese, a specialist for autos, took a 2005 model car, which went from $17,890 in 2004 to $18,490 in 2005. After adjusting for quality items and making antilock disc brakes standard, the bureau adjusted the actual $600 price increase down by $225. The problem for we consumers is that the price of the car in dealer showrooms was still $18,490.
The Substitution Effect
Substitution also plays a role in reducing the CPI. From 2001-2003 the CPI index fell by 1.6% reaching a low of 1.1%. Wall Street and the Fed were talking about the risk of deflation. Deflation was predicted everywhere in the press. The financial world became fixated over the risk of deflation even though the monetary presses were working overtime, credit was mushrooming, and asset bubbles were inflating in the mortgage, bond, and real estate markets. The reason for the decline was the substitution effect. Instead of using new car prices, which were going up each year, the BLS substituted used car prices, which were falling. In place of exploding real estate prices, the Bureau gave more weight to the price of rents, which were falling as more households bought homes. Rents were given more weight even though 69% of households own a home versus the 31% that rent.
What makes this look even more ridiculous is that in April the National Association of Realtors reported a year-over-year price increase in homes nationally of 15%.
One has to wonder as what kind of creativity will be used now that rents are starting to rise as apartment owners remove lease incentives. Perhaps the hedonic models will begin adjusting rising rents downward due to changes in the quality of amenities such as swimming pools, running water, magnificent views of the freeways, or the artistic effects of polluted air in creating colored sunsets.
Many homeowners may not be aware that as a homeowner they receive a fictional income referred to as Owners Equivalent Rent (OER). Essentially the BLS samples the price of rents in residential housing to come up with what a homeowner would receive hypothetically if they were to rent their own home. That sounds idiotic to me, since most homeowners would agree the family castle is in many cases a money pit and not a source of income. Unless the home is owned free and clear, most homeowners have cash outgo each month due to mortgage payments, property taxes, utilities, and repairs. As absurd as this concept appears, OER gets the largest weighting in the CPI index of 23% versus actual rent, which gets only a 6% weighting. OER is purely fictional, yet it carries the greatest weight within the CPI index.
Hedonics helps the BLS keep rising prices for goods in the CPI from ever showing up as rising prices. Even though the cost of housing, energy, food, medical bills, prescription drugs, tuition, and entertainment have soared, the government keeps reporting moderate inflation. Hedonics is partially responsible. It has become a convenient and subjective way of removing prices increases from the CPI. The combination of substitution, changing the weight of goods rising in price, hedonics and seasonal adjustments is one reason why the CPI and reported inflation has remained as subdued as it is reported each month. The problem is that these numbers are all fictional and bare no resemblance to what households face each month with their actual budgets.
As if these distortions werent enough, there are the seasonal adjustments that remove the price increases that occur during certain times of the year, i.e. gasoline prices during the summer driving season or heating oil during the winter. Seasonal adjustments are nothing more than intervention. They are designed to remove or scale down volatility or price spikes. The only problem is that price spikes never show up in the CPI. Only price drops get recorded. Price spikes are statistically smoothed away so they never show up. Sharp spikes in oil, gasoline, heating oil, or food get statistically adjusted. This keeps the CPI low. It is why the caller at the beginning of this article was puzzled. What consumers see everyday in real life is so different than what the government reports and the markets accept each month. It is unreality TV.
Another way of understating the CPI is the core rate," which is a nonsensical phrase that is commonly used in the financial world. Whenever the CPI rises, they back out food and energy to give us the core rate, which is much lower. Whenever the CPI rate goes lower, they refer to the CPI rate and not the core rate as they did this month. The CPI fell 0.1% in May from April. It was the first decline in 10 months. The drop was due to falling energy prices. Oil prices started out the month of May at $53.56 a barrel. They fell to $49.65 mid-month before rising back to $52.75 at the end of the month. Did the drop of $.81 really account for a drop in the CPI of 0.10%? If the CPI is as moderate as the Fed claims, then why are they raising interest rates? Could it be inflating asset bubbles, such as real estate, mortgages, and consumption, the imbalances in our trade deficit or expanding annual credit of $2.7 trillion? They havent really told us.
Finally, lets clear up the other nonsensical notion of excluding energy. Energy is essential to industrial economies. It takes energy to extract raw materials from the earth. It then takes energy to manufacture the things we use and consume. It also takes energy to transport the goods we produce. Even the energy we consume takes energy to produce whether it is oil, natural gas, or electricity. Petroleum products contribute about 40% of the energy we use in the United States each year to other products that we never think about.
Transportation accounts for an estimated 67% of all petroleum use in this country. The rest is accounted for by nonfuel products and petrochemical and feedstocks. The list below from the EIA/DOE is not exhaustive, but is illustrative of the many uses of petroleum.
Nonfuel use of petroleum is small compared with fuel use, but petroleum products account for about 89 percent of the Nation's total energy consumption for nonfuel uses. There are many nonfuel uses for petroleum, including various specialized products for use in the textile, metallurgical, electrical, and other industries. A partial list of nonfuel uses for petroleum includes:
Solvents such as those used in paints, lacquers, and printing inks
Lubricating oils and greases for automobile engines and other machinery
Petroleum (or paraffin) wax used in candy making, packaging, candles, matches, and polishes
Petrolatum (petroleum jelly) sometimes blended with paraffin wax in medical products and toiletries
Asphalt used to pave roads and airfields, to surface canals and reservoirs, and to make roofing materials and floor coverings
Petroleum coke used as a raw material for many carbon and graphite products, including furnace electrodes and liners, and the anodes used in the production of aluminum.
Petroleum Feedstocks used as chemical feedstock derived from petroleum principally for the manufacture of chemicals, synthetic rubber, and a variety of plastics.
Petroleum feedstocks have been used in the commercial production of petrochemicals since the 1920's. Petrochemical feedstocks are converted to basic chemical building blocks and intermediates used to produce plastics, synthetic rubber, synthetic fibers, drugs, and detergents. Naphtha, one of the basic feedstocks, is a liquid obtained from the refining of crude oil.
Petrochemical feedstocks also include products recovered from natural gas, and refinery gases (ethane, propane, and butane). Still other feedstocks include ethylene, propylene, normal- and iso-butylenes, butadiene, and aromatics such as benzene, toluene, and xylene. These feedstocks are produced by processing products such as ethane (separated from natural gas), distillates, naphthas, and heavier oils.
Industry data show that the chemical industry uses nearly 1.5 million barrels per day of natural gas liquids and liquefied refinery gases as petrochemical feedstocks and plant fuel. 10 Demand for textiles, explosives, elastomers, plastics, drugs, and synthetic rubber during World War II increased the petrochemical use of refinery gases. Gas byproducts from the production of gasoline are an important source of many feedstocks.
As shown above from the government's own energy information sheets, the use of petroleum is critical to our modern industrial way of life. Does it really make financial sense to remove it from an inflation gauge that is used to assess the cost of living? Think of what life may become without energy. We may soon find out, if peak oil is really here. With the price of energy at $60 a barrel, excluding its rise from the cost of living is as impractical as it is disingenuous.
The core rate is a fictional concept designed to sooth the financial markets and distract them from the reality of rising inflation. The core rate does not exist anywhere in our economy. It is a fictional concept designed to obfuscate inflation.
The next time you go to the grocery store and experience shock and awe as the checker rings up your shopping cart, ask him or her for the core rate. See what kind of look you get. For that matter, when it comes time to make your monthly mortgage payment, instead of making the payment, send a bill to your lender for owners equivalent rent. And the next time you pay your taxes in any form, whether income or property, hedonically adjust the bill for the lower quality of government service. If your tax bill went up, just use hedonics to adjust the bill downward. Ah, you might say, "This is impractical. Nobody can ever get away with that." You would be right, but perhaps it is a question we must now ask of government. Somebody should start questioning the reported inflation numbers as our caller did at the beginning of this article. Problems can only be solved when they are acknowledged first. Washington, we have a problem: it is inflation, not deflation.
What needs to be monitored next as the US economy falls into recession and perhaps depression is what happens to money and credit and the price of the dollar. If credit expands and if the Fed or foreign central banks print money to buy our bonds, where will the next asset bubble occur? As long as we live in a world of fiat currencies with no backing to any of the worlds currencies central banks are free to print as much money as they want. There is nothing to stop them from doing so. What we have seen in this new fiat world is that when money and credit expands rapidly there are always sectors that will inflate and others that will deflate. As the technology bubble deflated, three bubbles in bonds, mortgages and real estate took its place. During this time, while new assets bubbles were in the process of inflating as one asset bubble deflated, the CPI fell and was cut in half, giving sway to the argument of deflation. In reality, the only deflation that was taking place was at the BLS in its substitution and hedonic statistical models.
The deflationists argument that inflation only takes place during times of war and expanding government budgets isnt necessarily true. War or expanding budgets arent necessary for inflation to occur. Prime examples are Latin America, more recently Argentina, Brazil, Turkey and Russia, as is the Weimar Republic. If deflation takes hold in the US, it wont be as the deflationists now see it. It will be as result of the currency falling faster than the rise in nominal prices as it occurred in Weimar Germany.
Given the size of mortgage debt and the amount of leverage in our economy and financial system the Fed will not tighten rates in a significant way. The table listed below, taken from the current bond market and John Williams' real CPI, shows just how far behind current interest rates are from real inflation rates.
As the US debt burden increases with each passing month, the Fed has only one option, which will be to print money. Up until now foreign central banks have relieved the Fed of most of that burden. Foreign central banks have been doing most of the money printing in an effort to sterilize capital inflows into their countries and keep their currencies from appreciating.
This issue has become more serious than is commonly recognized. According to the latest Q1 2005 Z.1 Flow of Funds report first quarter non-financial debt expanded a record $2.411 trillion. As Doug Noland reports in his June 10th Credit Bubble Bulletin, during the decade of the nineties non-financial debt expanded on average $700 billion annually. Blow-off credit creation is now more than three times the pace. 
Consider these facts from Doug Gillespie Research:
During 2004, foreign investors absorbed an extraordinary 98.5% of all Treasury issuance, a net of $357.2 billion acquired, versus a net of $363.5 issued.
Foreigners absorbed almost as large a proportion of the issuance of US agency securities, 93.7%, a net of $129.6 billion acquired, versus net issuance of $138.3 billion.
Thus, combined foreign purchases of Treasuries and agencies equaled a stunning 97.2% of total issuance, $486.8 billion, versus $500.8 billion.
As to the purchase of corporate bonds, foreign investors took down a net of $265.5 billion, 44.7% of total issuance of $594.3 billion.
In addition to the huge proportion of foreign Treasury acquisitions last year, the Federal Reserve added $51.2 billion to its own Treasury portfolio. This means that during 2004, the Fed and foreign investors absorbed $408.4 billion or about 112.7% of the total issuance of $362.5 billion. Obviously, this had a highly favorable influence, on balance, on Treasury yields during 2004, although an influence hugely lacking in traditional open-market characteristics. [Author's notethis explains the Greenspan conundrum as to why long-term yields fell, while the Fed raised short-term rates]
As of 3/31/05, foreign investors held a total of $9.723 trillion of US financial assets, up almost $400 billion from revised holdings of $9.326 trillion as of 12/31/04. From 3/31/04, the increase was approximately $1.11 trillion.
As of 3/31/05, foreign financial liabilities totaled $4.634 trillion, resulting in a net foreign claim against the US of $5.089 trillion.
For all of 2004, foreign investors acquired a record net $1.255 trillion of US financial assets. During 2005s first quarter, this figure fell to an annual rate of $1.170 trillion, not materially below last years record level.
During this years first quarter, a very high 73.6% of US financial-asset acquisition by foreign investors was in highly marketable (therefore, highly liquid or exposed) asset classes. This was up from 66.0% for all of 2004, and equal to the same 73.6% level achieved in 2003. 
The following table taken from the same Gillespie report shows just how much of our debt has been acquired by foreigners in the last decade. The Fed has had little need to monetize debt. Foreigners are doing the Feds dirty work.
In effect, the US is exporting its inflation and it will ultimately result in deflation in the rest of the world, which is heavily laden with overcapacity and hyperinflation in the US when foreigners no longer finance our deficits. That is when the end game of hyperinflating our way out of our debt bubble really begins. Unlike the gold standard, there are no self-correcting mechanisms in the global monetary system. The dollar or any other currency for that matter has no intrinsic value. All currencies are fiat and have no limit to the amount of its supply. There can be no dollar short position as some imply, because by its very nature the supply of dollars is unlimited as the above statistics illustrate.
The real risk is what happens when confidence in the dollar wanes as it must. Like the Weimar Republic, which had its currency accepted as a means of payment during the initial stages of inflation, the gig was up once foreigners realized the full extent of the marks depreciation. That is when they began disposing the mark and the hyperinflationary stage was set to unfold.
What we can say now is that the US is experiencing real inflation in the economy that is much higher than what is reported (6-8%). In addition to real inflation in the economy, the US has experienced hyperinflation in the financial economyfirst in the stock market (the tech bubble between 1995-2000) and then in the mortgage, bond and real estate markets since 2000. If inflation continues to increase as I suspect in the real economy, I can guarantee you it will never show up in the CPI and PPI. Real inflation will be removed statistically through the magic of hedonics, geometric weighting, substitution, and seasonal adjustments.
This whole process of purposefully understating the real inflation rate also keeps real inflation artificially subdued. Think of all of the aspects of our economy that are tied to the CPI. Listed below are just a few examples:
Labor contract negotiations begin with CPI adjustments. Annual raises at companies are based on CPI changes. Think of how many workers fall further behind in their pay because of an understated CPI. How many landlords are cheated out of their just rents by understated inflation rates? How many retirees are robbed of real increases to their pensions as a result of underreported inflation? What would be the real rate of interest, if bond investors figured out that the real inflation rate was 6% and not 3% as reported by the BLS.
An understated CPI also overstates GDP by not removing the full inflationary impact of pricing from nominal numbers. It also overstates productivity by overstating the numerator part of the equation.
Any debate over deflation or inflation must begin with the truth. By habitually pointing to an understated CPI as proof that inflationary forces remain moderate is disingenuous at best and fraudulent at its worst. The truth is that we are experiencing real inflation rates of 6% in the real economy and hyperinflationary rates in the financial economy in bonds, mortgages, and real estate. When the next downturn comes, it will most assuredly alert investors to keep a sharp eye out for the next asset bubble to hyperinflate. Will it be stocks as occurred in the Weimar Republic, Japan and the US? Will it be hard assets such as gold, silver, and other hard commodities as has occurred throughout all of history when governments inflate?
What we have now is inflation. Forget the CPI, PPI, and the core rate. These are all fraudulent inflation gauges designed to confuse and obfuscate the real inflation issue. There is no such thing as the core rate. The core rate doesnt exist in the real world. Next time you see an increase at the grocery store, the gasoline station, your utility or cable bill, your children's tuition, your property taxes or your dentist's or doctor's bill, ask for the core rate. That is when you will be confronted by the reality of its fiction.
P.S. The inflation/deflation debate will be showcased on the FSN network with both sides making their case. Bob Prechter was the first guest, Dr. Marc Faber, and John Williams will be next in line.
P.P.S. A lengthy piece on hyperinflation will be written making its case after my summer sabbatical in August. Part II of "The Great Inflation coming sometime in late September early October. The piece will be lengthily and may be published in four parts due to the length of its contents. Ive got Mary worried, because its beginning to look like War & Peace.
P.P.P.S. As many are fond of making bold predictions, Ill make a few here.
TEN REASONS FOR HYPERINFLATION
Global oil production will peak between 2005-2008. Economic growth ceases to exist as global economies and markets are thrown into chaos and turmoil.
The War on Terror escalates into a resource war over oil pitting the great powers the US, China, and Russia in a replay of The Great Game.
Debt creation and monetization hyperinflates as the governments deficit spirals out of control with a war and a depression.
Foreigners begin to bail out of the dollar setting off a dollar crash.
The US puts in place capital controls to corral US and domestic money. The War on Terror will be given as the reason.
The government takes over GSEs owning most American mortgages.
A national mortgage bailout bill is passed lengthening mortgage payments in an effort to forestall debt defaults. A new restructuring agency will be set up to repurchase impaired mortgages from the banking system and renegotiate terms of the debt to avoid default. The 100-year mortgage is born.
A national retirement security act is passed forcing private pensions to buy long-dated zero-coupon government bonds that will be inflated away. The reason given will be for plan protection against bear markets.
As the US economy goes into a hyperinflationary depression the rest of the worlds economies follow suit. Money printing on a grand scale occurs in western and Asian economies as governments wrestle and try to satisfy the demands of a social welfare state and an angry, aging populace.
As governments hyperinflate and debase their currencies, gold will take on its true role as money rising in value against all currencies. The world will move towards a global currency backed by gold.
I have a few more, but these first ten should do for now.
MY ARGUMENTS FOR DEFLATION:
Elimination of the Federal Reserve
Gold backing of the U.S. dollar
Honesty returns as a virtue in Washington
Need I say more?
end of article...
This was written in 2005
| 2007/10/18 5:12||Profile|
The next double standard comes in the way government reports deficit spending...
Federal Deficit Reality - Sep. 7, 2004
"GOVERNMENT ECONOMIC REPORTS: THINGS YOU'VE
SUSPECTED BUT WERE AFRAID TO ASK!"
A Series Authored by Walter J. "John" Williams
"Federal Deficit Reality"
(Part Three in a Series of Five)
September 7, 2004
U.S. Treasury Shows Actual 2003 Federal Deficit at $3.7 Trillion
Deficit Moves Beyond Any Possible Tax Remedy
Could U.S. Treasuries Face a Rating Downgrade?
The U.S. government's fiscal ills have spun wildly out of control and no longer are containable within the existing system. As detailed in this article, the actual annual shortfall in U.S. government operations for fiscal year 2003 (September 30) was $3.7 trillion. Put in perspective, that means if the U.S. Treasury had seized all wages and salaries in 2003 with a 100% income tax, there still would have been a deficit! The outlook for fiscal 2004 numbers is even worse.
Considering that the popularly reported 2003 budget deficit was $374 billion, one-tenth the number cited above, this installment on government reporting concentrates on where the incredulous $3.7 trillion number comes from, how and why the Treasury is reporting it, and why the financial press and federal politicians are ignoring it.
Nonetheless, some implications of the current circumstance are touched upon briefly, here, conditioned by the promise of a full and separate analysis at a future date.
As brief background, the $3.7 trillion number is from government financial statements prepared using generally accepted accounting principles (GAAP), and a large portion of the expanded deficit is from the annual increase in the net present value of unfunded Social Security and Medicare obligations.
The impossibility of this circumstance working out happily is why lame-duck Federal Reserve Chairman Alan Greenspan suddenly has urged politicians in Washington to come clean on not being able to deliver promised Social Security and Medicare benefits already under obligation. He suggests, correctly, that there is no chance of economic or productivity growth resolving the matter. The funding shortfall projections already encompass optimistic economic assumptions.
Even if the Administration and Congress heeded Greenspan's advice, the unfolding fiscal disaster faces one of only two very unpleasant general solutions:
· The first solution is draconian spending cuts, particularly in Social Security and Medicare, even if accompanied by massive tax increases. This appears to be a political impossibility, at present.
· In the absence of political action, the second solution is the U.S. government facing some form of insolvency within the next decade or so. Shy of Uncle Sam defaulting on debt, the most likely outcome is the Fed eventually having to monetize U.S. debt heavily, triggering a hyperinflation. U.S. obligations eventually would be paid off in a significantly debased and devalued dollar.
Implications for the United States' sovereign credit rating is discussed more fully in a later section, but the unfolding fiscal crisis also opens the possibility of a credit downgrade for U.S. Treasury securities. This could happen before either of the two broad solutions discussed above comes into play.
to be continued...
| 2007/10/19 1:49||Profile|
I just read this article...
Social Security Peg Is a Fix Boomers Can Embrace: Amity Shlaes
By Amity Shlaes
Oct. 18 (Bloomberg) -- High tide is a mystical moment for a lot of us. We actually stand on the beach hoping to capture that second when the foam reaches farthest up on the sand.
Another kind of high tide is sweeping the country these days. It is the high tide of Social Security money.
On Oct. 15 the first baby boomer demonstrated she's ready for more beach-time by applying for a Social Security pension. Kathleen Casey-Kirschling, born on Jan. 1, 1946, leads millions like her. As the boomers head for the beach, the revenue flowing to the government will begin to recede.
Many Americans believe that shift is important -- catastrophic even. They also think that there's nothing they can do but watch.
This is wrong. Fixing Social Security is doable. The task isn't as pointless as trying to stop the movement of tides. It's the equivalent of putting a new drain in a swimming pool.
Though you might have missed it, the best method for such a fix was offered by Fred Thompson this month in the Republican presidential candidates' debate. In Michigan, Thompson said that ``one of the things that could be done would be to index benefits to inflation. Index benefits to inflation for future retirees.''
Thompson's phrasing wasn't clear, but his idea is. Under the current system, seniors' base pension, the number that they start with when they are at the point of Casey-Kirschling, is calculated to reflect not only inflation but also real increases in the average wage over their careers. Real wages in the U.S. tend to rise over time -- dramatically, lately. Growing productivity gives workers this reward.
The wage increases mean that newer beneficiaries get a bigger pension than their predecessors, even after adjusting for inflation. Thompson was suggesting that we base the formula upon inflation alone. Then every pensioner gets what his big brother or sister did, adjusted for inflation. But not more.
Some call such an adjustment ``a cut.'' But the change is only a cut against what is on the theoretical Social Security books. Given that most young people neither know what is on those books nor believe any money will be left when they get to retirement, the change could better be described as ``a reduction in growth.'' Inflation indexing would reduce the Social Security shortfall of trillions of dollars by more than two-thirds.
How did we ever get the wage peg in the first place? Back in the 1970s, when the current formula was written, officials were more concerned about short-term fixes. As for wages, it wasn't clear that they would always move up in real terms. In fact, real wages in the 1970s averaged negative 0.5 percent.
So the wage peg wasn't a focus. In the early 1980s, Alan Greenspan headed his legendary Social Security reform commission. But that commission focused more on raising revenue. The results were the higher payroll-tax rates and later retirement ages that we know today, but no peg adjustment.
For the past 10 years or so, various lawmakers and Washington officials have sporadically tried to change the peg. Back in 2001, President George W. Bush appointed another Social Security commission.
As it happened, that commission pushed for a serious reform of the wage peg. But the commission released its report in December of the same year and the findings got lost in the post-Sept. 11 haze. Lawmakers were thinking about Afghanistan, not pension formulas.
A few years later, Senator Orrin Hatch of Utah, a Republican, tried again with a plan called progressive indexation. Under that plan lower earners who retired would get to keep the older, higher, wage-indexed benefits, whereas higher earners would see their benefits adjusted only for inflation. This format did less to narrow future shortfalls, but did more to placate Democrats.
Democrats are supposed to love redistributive plans like this. But again, no dice.
So why do plans like Thompson's get so little traction?
As Thompson demonstrated, the Keynesian lexicon over indexing is a problem. These days we don't really know what we are saying when we talk about inflation. ``Wage inflation'' in this context happens to include a real increase in wages.
The larger constraint is political. Both the American Left and Right care about other things more than the pension formula. And both parties are making Social Security hostage to their own greater aims. They're holding off until there is a genuine Social Security crisis. The Right can use a crisis as an opportunity to push through privatization. The Left can use it to redistribute income on a scale grander than Hatch's little compromise.
There's a role here for the non-profit world, which is itself awash in cash. How about a $100 million ad campaign to demystify Thompson's peg proposal? The baby boomers are a remarkably unselfish crowd, in spite of their reputation.
Thanks to Greenspan's commission, boomers spent a good share of their careers paying extra taxes in the name of supporting crabby Depression-era parents. If a clear explanation of this problem actually penetrated the boomer consciousness, they might be willing to trim growth in benefits. That after all would be better than seeing the pension tide pull their own children under water.
end of article...
By understanding these two facts, one, the CPI is a false index. Two, government has stolen all of the SS surpluses to artificially reduce the actuall budget deficit.
Is this person ignorant of the truth or has this person accepted the mark of the beast?
| 2007/10/19 2:28||Profile|
continued from 2 posts ago...
Accounting Gimmicks Mask Underlying Reality for Decades
Misleading accounting used by the U.S. government, both in financial and economic reporting, far exceeds the scope of corporate accounting wrongdoing that has received partial credit for recent stock market turbulence. The bad boys of Corporate America, though, still were subject to significant regulatory oversights and the application of GAAP accounting to their books. In contrast, the government's operations and economic reporting have been subject to oversight solely by Congress, America's only "distinctly native criminal class."
Nearly four decades ago, President Lyndon Johnson's political sensitivities led him and the Congress to slough off some of the costs of an escalating Vietnam War through the use of accounting gimmicks. To mask the rapid growth in the federal government's budget deficit, revenues from the surplus being generated by Social Security taxes were added into the general cash fund, without making any accounting allowance for the accompanying and increasing Social Security liabilities. This accounting-gimmicked reporting was dubbed "unified" budget accounting.
The government's accounting then, as it is now, was on a cash basis, reflecting cash revenues versus cash expenditures. There were no accruals made for monies owed by or due to the government at some time in the future.
The bogus accounting understated the actual deficit for decades and even allowed for claims of budget surpluses in the years 1998 to 2001. While there were extensive self-congratulatory comments between the President, Congress and the Fed Chairman, at the time, all involved knew there never were any actual budget surpluses. There hasn't been an actual balanced budget, let alone a surplus, since before Johnson and his cronies cooked the bookkeeping.
The doctored fiscal reporting complemented the short-term political interests of both major political parties. Additionally, the ignorance and/or complicity of Pollyannaish analysts on Wall Street and in the financial media-eager to discourage negative market activity-helped to keep the fiscal crisis from arousing significant concern among a dumbed-down U.S. populace.
article to be continued...
| 2007/10/22 2:44||Profile|
U.S. Treasury Owns Up to a Financial Nightmare
In the mid-1970s, the then "Big Ten" accounting firms proposed setting up for the federal government an accrual accounting and reporting system similar to that used in the business community. Purchases of capital equipment, weapons and buildings would be booked as assets and depreciated, taxes receivable and accounts payable would better reflect near term cash needs. Accrued liabilities, such as Social Security payments due in the future, would reflect longer-term cash-flow needs.
As the project progressed, GAAP accounting was applied to the government's operations and prototype annual statements were published beginning in 1974. The appropriate accounting for Social Security liabilities, however, was discarded during the Reagan administration as being politically untenable.
Under the eventual mandate of Congress, the accounting project culminated in the U.S. Treasury publishing its first formal Financial Report of the United States Government for fiscal year 2000, consistent with GAAP, except for Social Security and similar accounts such as Medicare, Medicaid and the Railroad Retirement Fund.
To the credit of the Bush administration, later reports, published in April 2003 and April 2004 for fiscal years 2002 and 2003, indicated for the first time since the 1980s what the Social Security and related numbers would look like if they were included in the accounting, just as corporations need to account for pension and retiree health benefit liabilities.
The gimmicked accounting standards, as established during the Johnson era, and as used today for official, unified budget reporting, show a 2003 deficit of $374.3 billion. Using GAAP reporting (without Social Security reporting), the official GAAP deficit for 2003 expands to $665.0 billion. Including accounting for Social Security and related areas, the 2003 deficit balloons to $3,702 billion, or $3.7 trillion. The accounting reflects no adjustment for the new, more expensive Medicare program.
As an aside, if you download a copy of the financial statements, the GAO's auditor's letter as to why they won't certify the statements is an exposé of significant financial mismanagement within the federal government.
Beyond the $3.7 trillion deficit in 2003, however, the numbers get even worse, because the shadow deficit has been taking its toll ever since the Johnson era. According to the Treasury's 2003 financial statement, the U.S. government has a negative net worth of $34.8 trillion. That $34.8 trillion reflects $36.2 trillion in financial liabilities offset by $1.4 trillion in assets, of which only $0.4 trillion are liquid.
Part of the underlying reality-the actual operating cash shortfall-is reflected in the growth of the federal debt. During fiscal 2003, for example, gross federal debt increased from $6.2 trillion to $6.8 trillion, or by $600 billion, against the unified $374 billion deficit. As of the end of August 2004, the debt had increased to $7.3 trillion.
While gross federal debt is at a record, relentlessly pushing against borrowing ceilings, the markets, press and politicians generally ignore that portion of the debt borrowed from Social Security and similar programs. So, the September 30, 2003 debt level commonly is reported as only the $3.9 trillion owed to the public, instead of the total $6.8 billion. Again, the more accurate GAAP estimate of total government liabilities is $36.2 trillion.
article to be continued...
| 2007/10/30 1:42||Profile|
Results for the official 2004 deficit will be published in the next several months, and the numbers are projected by the Bush administration to be significantly worse than in 2003, $445 billion versus $374 billion, with the actual deficit likely to near $4.3 trillion (my estimate). The 2004 GAAP financial statements on the government will not be published until March/April 2005.
Fiscal "Official" Deficit Without Deficit With
Year Deficit Soc. Sec., Etc. Soc. Sec., Etc.
2004 est. $445 Billion $800 Billion $4.3 Trillion
2003 $374 Billion $665 Billion $3.7 Trillion
2002 $158 Billion $365 Billion $1.5 Trillion
The credit markets were rattled slightly by the early official projections of an increasing shortfall in government finances, but only the surface problems have gained any market recognition. The full magnitude of the difficulties ahead is not recognized by the markets, yet.
With 2003 gross domestic product (GDP) (annual average for the government's fiscal year) at $10.83 trillion, that places the annual budget deficit and total government obligations at respectively 34.2% and 334.3% of GDP, negative extremes never before breached outside the environment of third-world, net-debtor nations.
article to be continued...
I saw a new article today that stated that our total debt had doubled in the last 7 years.
Yet all our leaders say that our economy and and our country are rock solid....pride is an ugly thing. Our whole nation is drunk.
| 2007/11/1 3:18||Profile|