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How it's Rigged - The Economy Tim Picciott CFP® CRPC® How the Government Distorts the Unemployment Rate Like most things in government, there is always more than meets the eye when it comes to government statistics. When we hear people talk about how great Obama has been for the economy, it is usually because of the following reasons: I'm not going to tackle all the issues in this piece, but the rst issue I want to address is the unemployment rate. When Obama rst took of ce, the unemployment was in double digits, and now eight years later (March 7th, 2017) we nd ourselves sitting at 4.8%. Pretty hard to argue with those numbers or is it? Like most things in politics, there is usually more behind the numbers than what initially meets the eye. How the Government Distorts the Unemployment Rate How the Government Distorts the Unemployment Rate Source: Bureau of Labor Statistics When looking at a chart of the unemployment rate for the past ten years, it seems like we’re doing pretty good. The headline unemployment number; the number you see reported on websites, newspapers, and TV is also known by economists as the U-3 rate. The U-3 rate gives a very narrow de nition of unemployment, and its calculation methodologies have dramatically changed throughout the years. Did you know that once you’ve been unemployed for more than one year, you don’t count as being unemployed anymore? That’s right; you can be unemployed and not adversely affect the unemployment rate! If you have not looked for work the previous four weeks for any reason, you will also not be counted as being unemployed. How the Government Distorts the Unemployment Rate How the Government Distorts the Unemployment Rate So if you’ve been looking for a job for months and can’t nd anything meaningful and you become discouraged, you can now nd yourself counted in the U-6 rate. If this persists for more than one year, you will fall of this measure of unemployment as well. Now, let’s look at one of most extreme scenarios of how the unemployment rate is misleading. Let’s say George used to be an engineer making $125,000 and George was laid off. After not being able to nd work, George is now forced to take a job as a waiter and another as a bartender. Even if George is now making a fraction of what he used to make; he now has a positive impact on the unemployment rate! Despite the fact George is considerably worse off, his misery now counts as two jobs for the Obama economy. How the Government Distorts the Unemployment Rate How the Government Distorts the Unemployment Rate Once you look at what’s beneath the numbers, alarming trends are glaringly obvious. George’s example is not an isolated case, as time after time you see the hospitality sector and part time jobs as one of the brightest areas of the jobs report. Government and healthcare also typically account for a relatively large percentage of net job gains. Not to knock on anyone’s situation, but how many college educated waiters and waitresses can this stagnant economy support? Source: Shadowstats.com My favorite source for reliable economic information is www.shadowstats.com . They publish information on unemployment, in ation, money supply, etc. What makes their site unique is that they not only include the headline numbers but also include prior methodologies for how the government used to collect statistics. For example, when they calculate inflation, they will not only give you the inflation rate for today; but what the rate would be today using 1980’s and 1990’s calculation methodologies. How the Government Distorts the Unemployment Rate How the Government Distorts the Unemployment Rate When we look at Graph 2, we can see that once you count the long term discouraged and those who are underemployed, you get an unemployment rate that is hovering around 23%. On an absolute basis, this would imply the average worker is worst off today than they were before the recession started. I’ve always contended that if things were as rosy as we’ve been led to believe, then how come the FED can’t raise interest rates? Graph 3 just inverts the scale, whereby the unemployment rate (as calculated by shadow stats) increases as you go further down the axis. How the Government Distorts the Unemployment Rate How the Government Distorts the Unemployment Rate The last measure of unemployment, I would like to discuss is the labor force participation rate. When workers who become long-term unemployed fall off the voter rolls, unfortunately for the government they don’t just disappear. They show up in something known as the labor force participation rate. This rate demonstrates the percentage of able-bodied Americans who aren’t in jail and who have jobs. If we take a look at the graph below, we can see that this rate has been plummeting the past two decades and is nothing to celebrate. Source: Shadowstats.com I hope you now have a better understanding of how the unemployment is rigged. You also have another reason why the FED has been looking for every excuse in the book to not raise interest rates. How the Government Distorts the Unemployment Rate How the Inflation Rate is Rigged For the next segment, we will be discussion the Inflation rate. Source: Bureau of Labor Statistics The above chart depicts in ation as measured by the CPI-U from the Bureau of Labor Statistics. This rate may be manipulated as well, anyone who has ever been to the grocery store can probably tell you that as well. As of this writing (March 7th, 2017), the year over year CPI-U currently stands at 2.5% How the Inflation Rate is Rigged How the Inflation Rate is Rigged One thing many of you may not realize is that the government changes their methodologies about how they calculate these numbers. I’m not going to get into exactly how they did this but if we take a look at what current in ation is but using a 1990 methodology we get quite the different story. Applying 1990 in ation calculations to today’s raw data would place the current inflation rate at 6%! Things get even bleaker once we apply the 1980’s methodologies to today’s raw data as seen below. How the Inflation Rate is Rigged How the Inflation Rate is Rigged Using a 1980’s methodology it would insinuate that the true in ation rate was just a few ticks above 10%. Another way the government distorts the data is by their usage of substitutions or Chained CPI. Below is excerpt taken from Investopedia. Source: http://www.investopedia.com/terms/c/chain-linked-cpi.asp So if Mrs Smith still spends $20/ month on Beef and Chicken but now because she buys more Chicken and less beef, the net result of Mrs Smith’s in ation could be ZERO! In ation can also come in the form of smaller bottles and packaging, lower quality ingredients, etc. How the Inflation Rate is Rigged How the GDP is rigged It is true that many of the things we buy today are cheaper, they tend to be luxury goods like TV’s, phones, computers, etc. When it comes to things people need such as food and energy (which aren’t counted in CPI by the way), or Text books, or college costs or housing costs the average American is struggling to get by. I think we’ve also seen in ation in many nancial assets which have by and large bene ted the very same 1% the former president likes to rail against. Since most American’s don’t own stocks and have seen their wages stagnate the past two decades inflation is devastating the middle class. Imagine the retiree who lives off $30k per year. If the price of everything they buy goes up 5% then every 14.4 years their cost of living doubles! If the rate is closer to 10% then their cost of living would double every 7.2 years! The next part we will tackle is the manipulation of the nation's GDP. The rst issue I want to address is the fact that when the GDP increases, it generally means people are spending more money. How the Inflation Rate is Rigged How the GDP is Rigged The past few years Americans have spent more money on Health Care, Food, regulations, bombs, and taxes just to name a few. I’d argue that the average American is not better off for having the cost of their: Children’s college go up, their health care costs going up, funding more bombings of brown people in the middle east, or spending more on taxes. These are all drains on productivity and take capital that could’ve been deployed in the real economy productively and force us to fund bigger liabilities just to survive. The other issue that is usually ignored is the pace at which we need to accumulate debt just to add to GDP. If we look at the graph above we can see that until 2009 the GDP was growing faster than the debt. Since 2009 it’s more than $1 of debt to raise the GDP $1. Any business that lets say took $2 to earn $1 would not stay in business very long. Although this is not comparing apples to apples, the chart from Zerohedge below shows it took $10 in total new debt added to the economy (so not just government debt) to produce a $1 increase in GDP! How the GDP is Rigged How the GDP is Rigged Again, if anyone were running a business this way, they would nd themselves on the wrong end of the labor force participation rate we discussed in part 1. If we look back to part two of the series on in ation it will bring to light another key distortion in the GDP data. Since the in ation rate is arti cially kept down through various methods Real GDP growth usually takes the Percentage increase in GDP and subtracts the in ation rate to give you a more accurate GDP number. The data from the World Bank below shows a current deflator of 1%. How the GDP is Rigged How the GDP is Rigged Source: World Bank This means if we take the current (March 7th, 2017) GDP increase of 2.1% and subtract 1% which is the deflator we get a Real GDP of: 1.1% (See figure above). Imagine if in ation was admitted to be only 3%. Now instead of having GDP growth we would actually see GDP shrinking and as we all know if you aren’t growing your dying. Now imagine a scenario where in ation was actually 5% or 8%. How the GDP is Rigged How the GDP is Rigged If we take a look at how www.shadowstats.com calculates in ation and how they overlay their calculation with the governments GDP data we get a much less rosy picture than what is currently being presented. This would suggest that we have been in recession since early 2014. When looking at GDP in a vacuum it is easy to get optimistic about the absolute number. However when we dig beneath the surface you can easily see how we’re not told the entire story. At the end of the day, the GDP is an antiquated measurement for the true health of an economy. I would rather use a gure that takes into account Debt or uses Key Performance Indicators that actually matter to the average person. How the GDP is Rigged How the GDP is Rigged These may include: Median 401(k) balance for retirees, or networth or those who have 6 months of savings… or any savings. If the .01% get all the spoils while the average American slowly slips into despondency then we can expect a Brexit style revolution here. My only fear is that those who have created the crisis (The FED and Politicians) will be the same ones who offer the solution. We know big government and de cit spending is like trying and anchor around the economy but that doesn’t mean we can’t expect the same response from the FED which is hitting CTRL P (print) down over at Constitution Ave ( FED HQ’s). Cheers, Tim Picciott CFP® CRPC® A.K.A The Libertarian Advisor How the GDP is Rigged