The New Robber Barons
By PETER ROST
The U.S. Department of Labor claims we have an unemployment rate of 4.9% According to "the Economist," however, the true unemployment rate in the U.S. is over 8%, or 12.6 million Americans. The difference is due to the fact that the U.S. Government doesn't count people as unemployed after six months without a job
I recently joined the ranks of our many unemployed citizens. The termination of my employment as a Vice President at Pfizer was subject to intense media interest, partly due to the fact that Pfizer notified the press before they informed me.
Contrary to press reports, however, I have received no severance payments and for the first time in my life I am eligible for unemployment benefits; $13,078. At this annual income level my family of four would actually fall below the federal poverty level,quite a difference from a year ago when my salary was over half a million.
I'm also uninsured for the first time in my life and I have to pay the full price for drugs, just like 67 million other uninsured Americans. Contrary to many others, however, I do have a choice. In accordance with federal COBRA law, I was offered the opportunity to continue my health care coverage for 18 months. There was only one hitch; I had to pay $15,269 per year to receive this benefit. I decided that with an income of $13,078 that didn't make sense.
Clearly the system we have today isn't just broke. The system is utterly and completely sick and our weakest citizens are paying the price, every day. And while I have belatedly been forced to share some of the experiences of our poor, uninsured, and unemployed, my situation doesn't even start to compare with people with no resources, no voice, nowhere to go and no one who listens to them. For those citizens we have something that's called the Government; a government that is supposed to look out for the people who can't look out for themselves, but instead focuses on "pay to play money."
Today's system is built on greed. Greed is defined as an excessive desire to acquire or possess more than someone needs or deserves. Greed is not a corporate executive who builds an organization such as Microsoft, creates a lot of jobs, and happens to get rich. Greed is to become CEO for a drug company such as Pfizer, be responsible for a stock price drop of 40% over his five year tenure, twice as much as the AMEX Pharmaceutical Index, secure a $80 million retirement package while firing 16,385 Pharmacia and Pfizer employees, and get a 72% pay increase to $16.6 million as his reward.
According to the New York Times average worker pay has remained flat since 1990 at around $27,000, after adjusting for inflation, while CEO compensation has quadrupled, from $2.82 million to $11.8 million. Our CEO's are in a position in which they can basically use public companies as personal piggy banks. And this is perfectly legal as long as they get someone else to sign their check. Meanwhile, the federal minimum wage has remained at $5.15 an hour since September 1, 1997. In fact, after adjusting for inflation, the value of the minimum wage is at its second lowest level since 1955.
At the same time, the pharmaceutical industry spends over $100 million on lobbying activities to stop lower drug prices, according to the Center for Public Integrity. There are 1,274 registered pharmaceutical lobbyists in Washington, D.C. and during the 2004 election cycle, the drug industry contributed $1 million to President Bush. For an industry that makes $500 billion on a global basis, spending one million on a president or $100 million on lobbying is pocket change.
This money was well spent. It stopped legalized import of cheaper drugs and instead we got a new Medicare drug program. This $720 billion law includes $139 billion in profits to drug manufactures and $46 billion in subsidies to HMOs and private insurance plans. The program has been such a disaster for our poor that at least twenty-four states have enacted emergency measures to ensure access to medications in the last couple of weeks . That's what a million dollars buys in Washington.
So how could this happen? The answer is simple. The American democracy has been stolen by our new class of Robber Barons--the CEO's of our big corporations. A political system dependent on charity from rich men in hand-tailored suits with $100 million retirement packages is no democracy. It is a kleptocracy. It is not what our founding fathers envisioned.
But we have the power to change this; to free our corporations from sticky-fingered CEO's, to free our elected representatives from "pay to play money" and to free our people from all these tyrants. We have the power to be free, at last.
Can we change this? Can we build a new future? I believe that we can. I believe this because we live in a country that could rid itself of slavery, a country that finally allowed women to vote; a country that has come a long way in the short time since the civil rights movement began. But early on, each of those incredible changes was fiercely opposed by those in power, and none took place without great sacrifice. To free our corporations from sticky-fingered CEOs, to free our elected representatives from "pay to play money," and to free our people from these tyrants is going to take sacrifice and time. Perhaps a long, long time. In short, it will require a second American revolution. And I believe that one day it will happen.
Thursday, March 30, 2006
Monday, March 27, 2006
The Mobs
The Mobs against the President
At the present time, President Bush has the lowest popularity rankings of its presidency, at the same time the last two events: the port deal and the immigration debate are taking another toll in the negative side.
I wonder if they will be only two events of this kind, public outrage with the UAE Port deal and the immigration reform (claims for action) are just examples of mob-brat behavior, in today’s globalized markets and WTO courts, there is a price for promoting special protectionism.
The UAE will not bring this to the WTO but the shareholders of BO that approved the deal might pull a recourse for compensation.
The president is getting criticized from all flanks. The fact of the matter is, in both cases the position of the President is correct, even if the brat-mobs decided the opposite.
In the port case: if it is not good for UAE to run ports in the same should reciprocal for US companies running foreign ports. For that matter, any other national foreign strategic interest businesses run by american corporations will be question in the near futere. Check Point software had to pull out of buying a software company this week, it seems that we are in a roll.
Many American corporations are engaged in running vital foreign government infrastructures, and it should not be surprising to see the same policy used by congress to those american corporations. The idea that it will not be used by other countries against American corporations running critical operations in those nations is just pollianish.
The port case will thread water because in the most likely scenario, the UAE will be offered to calm the waters with some other alternative to the direct investment in BO, including tax payers funded loans for infrastructure in Dubai City or other similar preferential action.
The mob posturing can be justified by sheer blindness in the face of free markets and global trade. This posturing falls in all merits of decent behavior.
Teh question is: are we for fair trade or we are protectionist at convenience.
USA claiming flag around the planet will have one more caveat: you can instill fear in others but eventually protectionism will be use in kind and fair trade dialogues.
The immigration situation falls within the same merit the fair trade doctrine. In this case, the solution is far simple and there is only one beneficiary that is the present tax payers.
Clearly there is racism involved in the debate, but if NAFTA has done something is to impoverish its members in all Latin American countries. The rpesent has a culprit and that is NAFTA and its proponents, that happen to be the same Congress we have today lynching inmigration.
The failure of leadership from the US and Mexico in lifting people's standards to deter mass iunmigration has failed. Poor standards of living has created a larger problem that was promised to be resolved with NAFTA. It turns out that the deal of NAFTA benefited again the same crowd of the super connected plutocrats.
By now, borders with Mexico and Canada need to be eliminated. Free flow of merchandise and people will deliver some of the promises of NAFTA and instead of racism and xenophobia and market protectionism.
Instead of introversion and bully attitudes, evolution is in the direction of integration and assimilation. Mob idiocy is not a recipe for success.
Friday, March 17, 2006
It's worse, way worse, than it sounds.
The trade deficit's deep bite
A $225 billion U.S. trade deficit means we're deeper in the red than 20 years ago and sinking fast. Among the impacts: A lower standard of living for all of us in the years ahead.
By Jim Jubak
It's worse, way worse, than it sounds.
Which is pretty frightening, since it certainly sounds really bad.
On Mar.14, the U.S. Bureau of Economic Analysis announced that the broadest measure of the U.S. trade deficit grew to $225 billion in the fourth quarter of 2005. That marked an increase of 21% from the $185 billion deficit in the third quarter of 2005. And the quarter's results drove the deficit for all of 2005 to $805 billion, a new record.
The current account deficit -- defined by economists as the combined balance on trade in goods and services plus income transfers between the U.S. and the rest of the world -- increased in the fourth quarter to 7% of U.S. gross domestic product (the most common measure of the U.S. national income). For all of 2005, the deficit was 6.4% of GDP.
In 1985, when the G7, then the club of the world's seven largest free-market economies, pushed through a major devaluation of the U.S. dollar in the Plaza Accord, the current account deficit was a mere 3.5% of U.S. gross domestic product. The good news is that the world is a lot more tolerant of a massive U.S. deficit with the rest of the globe than it was 20 years ago. The bad news is that we're running a lot deeper in the red than we were in 1985.
So how can I say that the news is actually worse than it sounds?
First, because if you look at the long trends driving the deficit numbers, they're still picking up steam. The momentum is running very strongly against the United States, and when you're talking about reversing the course of something as big as the U.S. or the global economy, momentum counts.
Second, because the deficit has become so large that there isn't any silver bullet that will let us get out of this hole painlessly and quickly.
And, third, the demographics of an aging world say that our creditors are going to need the money they've lent us not too far down the road in order to support their own retirements.
Depressed yet? Wait, I'm just getting warmed up.
Overseas investors buying U.S. assets
Let's take a look at the most ominous trend in the 2005 numbers.
Unlike the trade deficit, which just measures the difference between what we export in goods and services and what we import, the current account deficit also includes international flows of investment income. That's worked to the benefit of the United States over the decades since World War II because we've built up quite a big portfolio of overseas investments from real estate to ownership stakes in foreign companies to holdings of foreign bonds that pay income to the U.S. owners of those foreign investments. For all of 2005, that income flowing into the U.S. came to a whopping $466 billion, up 24% from 2004.
But for years, overseas investors have been buying our assets faster than U.S. investors buy foreign assets. In 2005, for example, U.S.-owned assets overseas increased by $492 billion, while foreign-owned assets in the U.S. increased by $1,293 billion. (Or $1.29 trillion, if you prefer.)
And as you'd expect, the faster growth in foreign ownership of U.S. assets has gradually increased the amount of income that overseas investors receive from the United States. In the fourth quarter, the income flow actually turned against the U.S. We sent $2.4 billion more in income overseas than we received. That was a shift from the $4.9 billion income surplus in favor of the United States in the third quarter of 2005, and only the second time EVER (or at least since there have been decent records) that income from investments has been in deficit for the United States. In 2004, the surplus from income was more than $30 billion. From 1980 to 1985, the annual average was above $30 billion, and from 1980 to 2004, the smallest annual surplus was $4.3 billion in 1998.
So the shift from surplus to deficit in the fourth quarter is a big deal. It quite probably marks the end of a long period when flows of income into the United States from U.S.-owned assets helped offset deficits in years when U.S. imports exceeded U.S. exports.
Trend is accelerating
A turning point like this is just the beginning of an accelerating trend. It's extremely likely that the income deficit will continue to grow for years to come, because foreign investors are increasing their ownership of U.S. assets -- an increase of $278 billion in the fourth quarter -- faster than U.S. investors are buying overseas assets -- an increase of $43 billion for the quarter.
And ownership of an asset today creates a stream of income for a lot of tomorrows.
A shift from an income surplus of $30 billion to the income deficit of the $10 billion or so some economists project for 2006 isn't much help if you're trying to balance an annual current account deficit north of $800 billion. But it becomes positively devastating if you add this trend to other trends now working to push the current account deficit higher in the years ahead.
Look at oil, for example. In 2005, the United States imported $176 billion in crude oil at an average cost per imported barrel of $46.78, according to the Census Bureau. Our trade deficit with OPEC (the Organization of the Petroleum Exporting Countries) came to $92 billion. That's less than half our huge deficit with China in 2005 of $202 billion, but it's still a significant part of the $805 billion record deficit in 2005.
And there's certainly a good chance that the price of that oil -- and hence the size of the U.S. trade and current account deficits -- will climb in the years ahead. On the same day that the fourth-quarter current account numbers hit the news, the president of OPEC said the organization's new price target was between the upper $50s and the lower $60s per barrel. That's a huge jump from the last announced price target of $22 to $28 a barrel.
There's an unfortunately long list of similar trends that are working to continue to push the U.S. current account deficit higher. The size of the U.S. surplus in agricultural products has been falling as U.S. consumers eat more specialty and out-of-season products from around the world. Higher U.S. interest rates will increase the income flowing to the overseas owners of U.S. financial assets. And so on…
But you get the idea.
No magic fix
It would be comforting to believe that this huge problem can be fixed by a single, simple act. That's why our politicians are so fond of "solutions" such as forcing China to revalue its currency, the yuan, so that Chinese goods become more expensive. Or of rhetorical solutions such as "The U.S. can grow its way out of this problem by making U.S. exports more competitive."
Well, when you're running an $800 billion current account deficit, "it don't work like that." In many categories, Chinese goods are so much cheaper than the alternatives and so embedded in the global supply chain that making the yuan more expensive would, for some painfully long period, just increase the profits of Chinese manufacturers and the size of the U.S. trade deficit with China.
And our chances of growing our way out of this mess? Since U.S. exports make up such a small percentage of the U.S. economy, exports would have to grow by 70%, Paul Ashworth of Capital Economics has estimated, to eliminate the deficit.
A slew of solutions
In truth, it's going to take the combination of a lot of different "solutions" to get us out of this fix.
Yes, we should work to increase U.S. productivity, because that will drive U.S. exports higher -- and because high U.S. productivity growth, relative to the rest of the developed world, will continue to attract the overseas investments that we'll need to finance our deficit while we dig ourselves out of this hole
Yes, we should put pressure on China to take down barriers in its markets that prevent U.S. companies in fields such as financial services from doing more business in China. And we should demand that the Chinese adopt adequate rules protecting intellectual property. Add that to some appreciation in the yuan, and the trade deficit with China will shrink. Gradually.
Yes, we should do everything we can to encourage economic growth in the rest of the world. The U.S. can't continue to pull the global economy -- even with strong assists from China and India.
Yes, U.S. consumers have to spend less and save more. The odds are that it will take a painful slowdown in the U.S. economy to produce the "spend less" result. Higher U.S. interest rates would go a long way toward creating that spend-less environment and encourage U.S. consumers to save more as well. Part of the U.S. savings "problem" is a result of the negative real interest rates that Alan Greenspan engineered to keep the economy from deflating after the popping of the tech stock bubble in 2000. But certainly, no rational economist expects people to save when banks pay 1% and inflation is 2%.
Yes, those of us who live in the U.S. are looking at a reduction in our standard of living. We've used borrowed money to live beyond our means, and the bill is coming due.
And most of all, we need to follow the first law of holes: When you find yourself in one, stop digging. We need to adopt policies on energy, government budget deficits, health care and education that won't put us even further in hock while we're trying to work our way out of this deficit.
We don't have an endless amount of time to take these steps. Japan, a major funding source for the U.S. current account deficit, is one of the most rapidly aging societies in the world. Japanese savers will need to keep more and more of their money at home to pay the costs of that aging. The Chinese, another society of savers, have only a relatively small window of opportunity for putting aside the money they'll need to pay for their own retirements and health care in a society virtually without pensions or health insurance.
All this may sound very abstract to you. Global problems do seem far away from the everyday tasks of getting the kids to school or paying the doctor.
So in my next column, I'll talk about how the U.S. trade deficit and the budget deficit in Washington have already put the squeeze on your future.
A $225 billion U.S. trade deficit means we're deeper in the red than 20 years ago and sinking fast. Among the impacts: A lower standard of living for all of us in the years ahead.
By Jim Jubak
It's worse, way worse, than it sounds.
Which is pretty frightening, since it certainly sounds really bad.
On Mar.14, the U.S. Bureau of Economic Analysis announced that the broadest measure of the U.S. trade deficit grew to $225 billion in the fourth quarter of 2005. That marked an increase of 21% from the $185 billion deficit in the third quarter of 2005. And the quarter's results drove the deficit for all of 2005 to $805 billion, a new record.
The current account deficit -- defined by economists as the combined balance on trade in goods and services plus income transfers between the U.S. and the rest of the world -- increased in the fourth quarter to 7% of U.S. gross domestic product (the most common measure of the U.S. national income). For all of 2005, the deficit was 6.4% of GDP.
In 1985, when the G7, then the club of the world's seven largest free-market economies, pushed through a major devaluation of the U.S. dollar in the Plaza Accord, the current account deficit was a mere 3.5% of U.S. gross domestic product. The good news is that the world is a lot more tolerant of a massive U.S. deficit with the rest of the globe than it was 20 years ago. The bad news is that we're running a lot deeper in the red than we were in 1985.
So how can I say that the news is actually worse than it sounds?
First, because if you look at the long trends driving the deficit numbers, they're still picking up steam. The momentum is running very strongly against the United States, and when you're talking about reversing the course of something as big as the U.S. or the global economy, momentum counts.
Second, because the deficit has become so large that there isn't any silver bullet that will let us get out of this hole painlessly and quickly.
And, third, the demographics of an aging world say that our creditors are going to need the money they've lent us not too far down the road in order to support their own retirements.
Depressed yet? Wait, I'm just getting warmed up.
Overseas investors buying U.S. assets
Let's take a look at the most ominous trend in the 2005 numbers.
Unlike the trade deficit, which just measures the difference between what we export in goods and services and what we import, the current account deficit also includes international flows of investment income. That's worked to the benefit of the United States over the decades since World War II because we've built up quite a big portfolio of overseas investments from real estate to ownership stakes in foreign companies to holdings of foreign bonds that pay income to the U.S. owners of those foreign investments. For all of 2005, that income flowing into the U.S. came to a whopping $466 billion, up 24% from 2004.
But for years, overseas investors have been buying our assets faster than U.S. investors buy foreign assets. In 2005, for example, U.S.-owned assets overseas increased by $492 billion, while foreign-owned assets in the U.S. increased by $1,293 billion. (Or $1.29 trillion, if you prefer.)
And as you'd expect, the faster growth in foreign ownership of U.S. assets has gradually increased the amount of income that overseas investors receive from the United States. In the fourth quarter, the income flow actually turned against the U.S. We sent $2.4 billion more in income overseas than we received. That was a shift from the $4.9 billion income surplus in favor of the United States in the third quarter of 2005, and only the second time EVER (or at least since there have been decent records) that income from investments has been in deficit for the United States. In 2004, the surplus from income was more than $30 billion. From 1980 to 1985, the annual average was above $30 billion, and from 1980 to 2004, the smallest annual surplus was $4.3 billion in 1998.
So the shift from surplus to deficit in the fourth quarter is a big deal. It quite probably marks the end of a long period when flows of income into the United States from U.S.-owned assets helped offset deficits in years when U.S. imports exceeded U.S. exports.
Trend is accelerating
A turning point like this is just the beginning of an accelerating trend. It's extremely likely that the income deficit will continue to grow for years to come, because foreign investors are increasing their ownership of U.S. assets -- an increase of $278 billion in the fourth quarter -- faster than U.S. investors are buying overseas assets -- an increase of $43 billion for the quarter.
And ownership of an asset today creates a stream of income for a lot of tomorrows.
A shift from an income surplus of $30 billion to the income deficit of the $10 billion or so some economists project for 2006 isn't much help if you're trying to balance an annual current account deficit north of $800 billion. But it becomes positively devastating if you add this trend to other trends now working to push the current account deficit higher in the years ahead.
Look at oil, for example. In 2005, the United States imported $176 billion in crude oil at an average cost per imported barrel of $46.78, according to the Census Bureau. Our trade deficit with OPEC (the Organization of the Petroleum Exporting Countries) came to $92 billion. That's less than half our huge deficit with China in 2005 of $202 billion, but it's still a significant part of the $805 billion record deficit in 2005.
And there's certainly a good chance that the price of that oil -- and hence the size of the U.S. trade and current account deficits -- will climb in the years ahead. On the same day that the fourth-quarter current account numbers hit the news, the president of OPEC said the organization's new price target was between the upper $50s and the lower $60s per barrel. That's a huge jump from the last announced price target of $22 to $28 a barrel.
There's an unfortunately long list of similar trends that are working to continue to push the U.S. current account deficit higher. The size of the U.S. surplus in agricultural products has been falling as U.S. consumers eat more specialty and out-of-season products from around the world. Higher U.S. interest rates will increase the income flowing to the overseas owners of U.S. financial assets. And so on…
But you get the idea.
No magic fix
It would be comforting to believe that this huge problem can be fixed by a single, simple act. That's why our politicians are so fond of "solutions" such as forcing China to revalue its currency, the yuan, so that Chinese goods become more expensive. Or of rhetorical solutions such as "The U.S. can grow its way out of this problem by making U.S. exports more competitive."
Well, when you're running an $800 billion current account deficit, "it don't work like that." In many categories, Chinese goods are so much cheaper than the alternatives and so embedded in the global supply chain that making the yuan more expensive would, for some painfully long period, just increase the profits of Chinese manufacturers and the size of the U.S. trade deficit with China.
And our chances of growing our way out of this mess? Since U.S. exports make up such a small percentage of the U.S. economy, exports would have to grow by 70%, Paul Ashworth of Capital Economics has estimated, to eliminate the deficit.
A slew of solutions
In truth, it's going to take the combination of a lot of different "solutions" to get us out of this fix.
Yes, we should work to increase U.S. productivity, because that will drive U.S. exports higher -- and because high U.S. productivity growth, relative to the rest of the developed world, will continue to attract the overseas investments that we'll need to finance our deficit while we dig ourselves out of this hole
Yes, we should put pressure on China to take down barriers in its markets that prevent U.S. companies in fields such as financial services from doing more business in China. And we should demand that the Chinese adopt adequate rules protecting intellectual property. Add that to some appreciation in the yuan, and the trade deficit with China will shrink. Gradually.
Yes, we should do everything we can to encourage economic growth in the rest of the world. The U.S. can't continue to pull the global economy -- even with strong assists from China and India.
Yes, U.S. consumers have to spend less and save more. The odds are that it will take a painful slowdown in the U.S. economy to produce the "spend less" result. Higher U.S. interest rates would go a long way toward creating that spend-less environment and encourage U.S. consumers to save more as well. Part of the U.S. savings "problem" is a result of the negative real interest rates that Alan Greenspan engineered to keep the economy from deflating after the popping of the tech stock bubble in 2000. But certainly, no rational economist expects people to save when banks pay 1% and inflation is 2%.
Yes, those of us who live in the U.S. are looking at a reduction in our standard of living. We've used borrowed money to live beyond our means, and the bill is coming due.
And most of all, we need to follow the first law of holes: When you find yourself in one, stop digging. We need to adopt policies on energy, government budget deficits, health care and education that won't put us even further in hock while we're trying to work our way out of this deficit.
We don't have an endless amount of time to take these steps. Japan, a major funding source for the U.S. current account deficit, is one of the most rapidly aging societies in the world. Japanese savers will need to keep more and more of their money at home to pay the costs of that aging. The Chinese, another society of savers, have only a relatively small window of opportunity for putting aside the money they'll need to pay for their own retirements and health care in a society virtually without pensions or health insurance.
All this may sound very abstract to you. Global problems do seem far away from the everyday tasks of getting the kids to school or paying the doctor.
So in my next column, I'll talk about how the U.S. trade deficit and the budget deficit in Washington have already put the squeeze on your future.
Sunday, March 12, 2006
The Kingdom of Idiocy
The latest award winning idiotic behavior comes from an irresistible out loud clamor opposing the deal, by a foreign company holding trust from the UAE, controlling the ports operations in three major US cities.
This hypocritical posturing is the most idiotic behavior posed by politicos, media and other irrational morons in a long while.
Let’s start by looking at the radical and biased news reporting that emanates from FoxNews. Coincidentally, Fox News parent company News Corp happens to have as majority share-owner a corporation named Kingdom Holding Company. This holding company is led by Prince Alwaleed Bin Tabal, an articulate and brilliant individual who runs the Saudi Royal family trust. At the same time Fox has become the number one media outlet of disinformation, dispersing lies, baseless commentary, ran by a radical right wing apologist, and with a corporate parent manager named Rupert Murdoch, who is an expert at democracy manipulation and election media intoxication.
Kingdom Holdings also is the largest shareowner in Citibank. By now we all know that Andrew Weil, was “asked to retire” as CEO because his runs with regulators and the large sums of fines accumulated by its operation and other penalties. Among the things that brought such fiasco to Citi where: allowing Citibank to launder dirty money of drug trafficking from Mexico’s Carlos Salinas de Gortari ,former president of Mexico, who is personal friend of Robert Rubin –Present Chairman of Citibank and secretary of the Treasury under Bill Clinton- and great friend of the Bush family as their are friends and "brothers" with the Royal family of Saudi Arabia.
Today Carlos Salinas de Gortari is exiled in Ireland and has a vacation home in Dubai. The list of irregularities at Citibank is so long that it took two truck loads to move the files with evidence of misbehavior. The latest nightmares for Citi are around the on going investigation of Pinochet, Argentinian president LaRua laundering charges of public money under "advice" of Citi or the Osama Bin-laden family bank accounts. If you worry who moves containers in which port, better start to worry about who allows the money to move around to finance the deals.
Other mundane things Kingdom Holding are involved include, luxury Hotels as the Four Seasons, hey, leave no bed unmade in your way to Washington, the Plaza Hotel in NYC, Samba Financial Group the largest financial group in SA or the grandiose Hotel George V in Paris.
So why the present attack to the UAE and not Saudi Arabia?
It is a convenient attack falling in the lap of the President. Moreover, it is an attack based on racism and islamophia, this is not far away from other phobic behavior and biases used to twist politics and the herd’s brains. The illegal Mexican border crossing, of latest headliners, events that for 200 years were accepted as common, got a reprieve thanks to the infatuation of the "media" with the gaffe of the UAE.
In the kingdoms of idiocy the herds move in sync.
You can blame it on the President and his crony plutocrats with absolutist behavior but do not forget to put most of the blame in the Congressional crowd on election day, who were the ones who started all this sell-off, from the fascists driven republicans to the reactionary right wing democrats.
Attacking the sale-off to foreign companies of key strategic operations is old news and misplaced after so many years of foreign ownership of key assets.
"Dud" all these things go against the Party of Davos.
It is difficult to resist all this enjoyment thanks to the Kingdom of Idiocy.
US focus on risk
US focus on risk 'poses threat to economy'
All Financial Times News
Michael Chertoff, the US homeland security secretary, has warned that emotional responses by Congress to security issues, such as the recent flare-up over ports, threaten to damage the nation's economy.
"We do not want a regime in which we are so focused on risk to the exclusion of all else that we lock everything down and we destroy our country," Mr Chertoff told the FT. In his first interview since congressional opposition forced Dubai Ports World to divest the five US terminals it obtained through its acquisition of Britain's P&O, Mr Chertoff said Congress underestimated the progress made by the Bush administration in promoting port security.
While conceding that more work was needed, he stressed that the administration had to focus on "intelligent security" in a way that "doesn't burn down the village in order to save it".
In the wake of the ports controversy, some lawmakers have argued that all cargo containers entering the US should be inspected. But Mr Chertoff said such a move would be "tantamount to shutting the ports down".
"Anybody who is thinking about that ought to go to their local port community and ask the longshoremen how they feel about losing their jobs, and Wal-Mart and Target about how they feel about losing goods coming in," said Mr Chertoff. "There would be a tremendous negative side-effect."
Mr Chertoff said he was surprised the US business community had not been more vocal on the ports dispute and other homeland security issues that could hurt their companies.
"The business community...doesn't really get as aggressive as I would imagine that they would be on issues that really strike at the heart of their interests," he said. "Every business has employees. If there is anything people care about...in politics, it's employment."
"If I were in the shipping industry, the maritime industry, the cargo industry. I would be concerned about measures that would strangle business and put workers out of work in this country."
Asked whether the administration should shoulder the blame for the congressional backlash over the ports deal, the security chief replied: "There are times when, if we were quicker in explaining what we do, we might avert a certain amount of heartburn." Sometimes the hard thing to anticipate was "when the reaction is not based on the facts necessarily but based upon some emotional reaction."
On whether the administration's constant warnings about terrorism were making the public overly sensitive to security risks, Mr Chertoff said: "We have to have alertness and care but not hysteria or anxiety?.?.?.?We don't want to build a system that smothers us as a society, whether it is civil liberties or our economy."
Mr Chertoff, who faced calls for his resignation following the administration's dismal response to Hurricane Katrina last year, declined to say whether he had considered stepping down. "For me to quit just because the going got rough was not what I think is my responsibility," he said.
All Financial Times News
Michael Chertoff, the US homeland security secretary, has warned that emotional responses by Congress to security issues, such as the recent flare-up over ports, threaten to damage the nation's economy.
"We do not want a regime in which we are so focused on risk to the exclusion of all else that we lock everything down and we destroy our country," Mr Chertoff told the FT. In his first interview since congressional opposition forced Dubai Ports World to divest the five US terminals it obtained through its acquisition of Britain's P&O, Mr Chertoff said Congress underestimated the progress made by the Bush administration in promoting port security.
While conceding that more work was needed, he stressed that the administration had to focus on "intelligent security" in a way that "doesn't burn down the village in order to save it".
In the wake of the ports controversy, some lawmakers have argued that all cargo containers entering the US should be inspected. But Mr Chertoff said such a move would be "tantamount to shutting the ports down".
"Anybody who is thinking about that ought to go to their local port community and ask the longshoremen how they feel about losing their jobs, and Wal-Mart and Target about how they feel about losing goods coming in," said Mr Chertoff. "There would be a tremendous negative side-effect."
Mr Chertoff said he was surprised the US business community had not been more vocal on the ports dispute and other homeland security issues that could hurt their companies.
"The business community...doesn't really get as aggressive as I would imagine that they would be on issues that really strike at the heart of their interests," he said. "Every business has employees. If there is anything people care about...in politics, it's employment."
"If I were in the shipping industry, the maritime industry, the cargo industry. I would be concerned about measures that would strangle business and put workers out of work in this country."
Asked whether the administration should shoulder the blame for the congressional backlash over the ports deal, the security chief replied: "There are times when, if we were quicker in explaining what we do, we might avert a certain amount of heartburn." Sometimes the hard thing to anticipate was "when the reaction is not based on the facts necessarily but based upon some emotional reaction."
On whether the administration's constant warnings about terrorism were making the public overly sensitive to security risks, Mr Chertoff said: "We have to have alertness and care but not hysteria or anxiety?.?.?.?We don't want to build a system that smothers us as a society, whether it is civil liberties or our economy."
Mr Chertoff, who faced calls for his resignation following the administration's dismal response to Hurricane Katrina last year, declined to say whether he had considered stepping down. "For me to quit just because the going got rough was not what I think is my responsibility," he said.
Tuesday, March 07, 2006
Why the Rich Get Richer
http://finance.yahoo.com/columnist/article/richricher/2844?p=1
by Robert Kiyosaki
Investing: Assets That Are Lifeboats in a Shaky Future
*Another great piece by Kiosaki. If you have not read his books and follow his columns at yahoo finance, I wil suggest you do, take a minute and buy his books and read them with time to grasp his message, the books and the subscription are worth every single penny many times over. His views are unbiased and well thought out with timing of good decissions on his side.
Investing: Assets That Are Lifeboats in a Shaky Future
by Robert Kiyosaki
Tuesday, March 7, 2006
As retirement nears, millions of Baby Boomers are scrambling for deck chairs on the Titanic. For about 30 years now I have been watching a major financial disaster developing. Its contributing factors include the shaky financial foundations of Social Security and Medicare, compounded by most Americans' lack of financial education and entitlement mentality.
As a result, my investment strategy is to get out of anything that's "paper with ink on it." I explain what this means and what investments I favor later in this article.
Speed and Agility Will Win the Day
But first, let me discuss the iceberg known as Financial Excess, which I believe lies before the SS U.S.A. In the last three decades, we as a nation have only increased our excesses, accelerated our mistakes, and mismanaged America's wealth. Turning the ship's wheel at this time -- hard left or hard right -- will do no good. It's too late.
So it's not a good time to be captain of SS U.S.A., or the skipper of SS Big Mutual Fund or SS Pension Plan. In the coming years, I believe big will not be better.
Instead, for many of us, it's better to be a small, disciplined investor. I believe speed, financial education, and maneuverability will prove to be better than size. It'll be far better to be in a well-stocked lifeboat than be treading water with millions of pensioners and laid-off workers, many with their party hats still on.
Why so pessimistic? Well, I would rather be known as a realist. Most of us are aware of the problems ahead. Some are:
1. A pervasive entitlement mentality.
It's not just the poor who are expecting a government hand out. Everyone from senators to farmers and retirees expect it, too. Unfortunately, this problem is not an issue for my generation, the Baby Boomers, but will fall squarely on the shoulders of the children and grandchildren of Baby Boomers.
2. Social Security is a small problem when compared to Medicare.
As of 2004, Social Security was a $10 trillion off-balance-sheet liability. Medicare is a $64 trillion liability. The Social Security fund will begin to run in the red around 2015. The Medicare fund is already operating in the red, a situation that started in 1992. The combined $74 trillion off-balance sheet IOU to Americans is more money than is available in all the stock and bond markets of the world. This means life or death will be determined by your wallet, not your doctor.
3. A lack of financial education.
Many people do not know such basic realities as:
A 401(k) is not a retirement plan (it's a savings plan).
Bonds aren't safe.
Saving money is risky.
Why mutual funds have such low returns.
What is inflation.
Why workers are taxed more than owners.
Why pensions are disappearing -- legally.
People know there's a problem, yet they continue to do the same things. Today millions of people have trillions of dollars riding in the stock market, their homes, savings plans, and bonds -- financial assets that worked in the past but probably won't work when the SS U.S.A. hits the iceberg.
Investing in Tangible ValueAs an investor, I'm investing against the U.S. dollar. Let me be clear: I'm not investing against the U.S. -- America is a rich, productive country. But our dollar is toast. Those who have followed my articles know that in 1971, our dollar stopped being money and became a currency, a piece of paper with ink on it (see "Why Savers Are Losers").
In my opinion, that means getting out of anything else that's "paper with ink on it" -- anything backed by the full faith and confidence of the SS U.S.A. That means I'm very suspicious of stocks, bonds, savings, and mutual funds, especially if they're U.S. dependent. Although I love real estate, I'm suspicious of any piece of property that doesn't generate cash flow today. I don't invest in future appreciation of real estate -- not today, at least.
Today, I invest in assets with tangible value, especially assets that go up in price as the dollar's purchasing power sinks. Today, I have large positions in gold, silver, and oil.
For the small investor, I believe buying silver coins is a safe bet. As the dollar drops, silver will hold its value or go up. I don't recommend buying coins for numismatic value (rarity). A friend has his son buy one silver dollar a week instead of saving money in the bank. As I write this, that's worth about $12 a week. He keeps the coins in a safe-deposit box. It's not big investing -- but it's a great habit.
In today's economic environment, it's better to save silver than to save paper with ink on it, and that includes cash, mutual funds, stocks, and bonds. If it seems unpatriotic to short the dollar and other forms of U.S. paper, then buy a few U.S. silver and gold coins. While I'm bullish on America, I've been very bearish on our dollar for years.
by Robert Kiyosaki
Investing: Assets That Are Lifeboats in a Shaky Future
*Another great piece by Kiosaki. If you have not read his books and follow his columns at yahoo finance, I wil suggest you do, take a minute and buy his books and read them with time to grasp his message, the books and the subscription are worth every single penny many times over. His views are unbiased and well thought out with timing of good decissions on his side.
Investing: Assets That Are Lifeboats in a Shaky Future
by Robert Kiyosaki
Tuesday, March 7, 2006
As retirement nears, millions of Baby Boomers are scrambling for deck chairs on the Titanic. For about 30 years now I have been watching a major financial disaster developing. Its contributing factors include the shaky financial foundations of Social Security and Medicare, compounded by most Americans' lack of financial education and entitlement mentality.
As a result, my investment strategy is to get out of anything that's "paper with ink on it." I explain what this means and what investments I favor later in this article.
Speed and Agility Will Win the Day
But first, let me discuss the iceberg known as Financial Excess, which I believe lies before the SS U.S.A. In the last three decades, we as a nation have only increased our excesses, accelerated our mistakes, and mismanaged America's wealth. Turning the ship's wheel at this time -- hard left or hard right -- will do no good. It's too late.
So it's not a good time to be captain of SS U.S.A., or the skipper of SS Big Mutual Fund or SS Pension Plan. In the coming years, I believe big will not be better.
Instead, for many of us, it's better to be a small, disciplined investor. I believe speed, financial education, and maneuverability will prove to be better than size. It'll be far better to be in a well-stocked lifeboat than be treading water with millions of pensioners and laid-off workers, many with their party hats still on.
Why so pessimistic? Well, I would rather be known as a realist. Most of us are aware of the problems ahead. Some are:
1. A pervasive entitlement mentality.
It's not just the poor who are expecting a government hand out. Everyone from senators to farmers and retirees expect it, too. Unfortunately, this problem is not an issue for my generation, the Baby Boomers, but will fall squarely on the shoulders of the children and grandchildren of Baby Boomers.
2. Social Security is a small problem when compared to Medicare.
As of 2004, Social Security was a $10 trillion off-balance-sheet liability. Medicare is a $64 trillion liability. The Social Security fund will begin to run in the red around 2015. The Medicare fund is already operating in the red, a situation that started in 1992. The combined $74 trillion off-balance sheet IOU to Americans is more money than is available in all the stock and bond markets of the world. This means life or death will be determined by your wallet, not your doctor.
3. A lack of financial education.
Many people do not know such basic realities as:
A 401(k) is not a retirement plan (it's a savings plan).
Bonds aren't safe.
Saving money is risky.
Why mutual funds have such low returns.
What is inflation.
Why workers are taxed more than owners.
Why pensions are disappearing -- legally.
People know there's a problem, yet they continue to do the same things. Today millions of people have trillions of dollars riding in the stock market, their homes, savings plans, and bonds -- financial assets that worked in the past but probably won't work when the SS U.S.A. hits the iceberg.
Investing in Tangible ValueAs an investor, I'm investing against the U.S. dollar. Let me be clear: I'm not investing against the U.S. -- America is a rich, productive country. But our dollar is toast. Those who have followed my articles know that in 1971, our dollar stopped being money and became a currency, a piece of paper with ink on it (see "Why Savers Are Losers").
In my opinion, that means getting out of anything else that's "paper with ink on it" -- anything backed by the full faith and confidence of the SS U.S.A. That means I'm very suspicious of stocks, bonds, savings, and mutual funds, especially if they're U.S. dependent. Although I love real estate, I'm suspicious of any piece of property that doesn't generate cash flow today. I don't invest in future appreciation of real estate -- not today, at least.
Today, I invest in assets with tangible value, especially assets that go up in price as the dollar's purchasing power sinks. Today, I have large positions in gold, silver, and oil.
For the small investor, I believe buying silver coins is a safe bet. As the dollar drops, silver will hold its value or go up. I don't recommend buying coins for numismatic value (rarity). A friend has his son buy one silver dollar a week instead of saving money in the bank. As I write this, that's worth about $12 a week. He keeps the coins in a safe-deposit box. It's not big investing -- but it's a great habit.
In today's economic environment, it's better to save silver than to save paper with ink on it, and that includes cash, mutual funds, stocks, and bonds. If it seems unpatriotic to short the dollar and other forms of U.S. paper, then buy a few U.S. silver and gold coins. While I'm bullish on America, I've been very bearish on our dollar for years.
Sunday, March 05, 2006
Ignoring The Obvious
The present prevalent intended behavior of ignoring the obvious is as much ideological, hypocritical, arrogant, abusive, ignorant as it is an exercise of self-denying reality.
Those who intend their behavior to ignore the obvious usually are driven by short term greed with corrupt moral guidance.
Those who acknowledge the obvious, they should bring their energy to the front at first, we all must try to educate deniers of the obvious to the reality of the obvious.
Second, if the effort is futile we must defy their ignorance by imposing the reality in front of them by using rational means.
This could mean participating in local dialogue with elected officials, writing letters to news papers or even taking the courageous step to run for any elected office.
The obvious today is the research results of weather change and its consequences.
When Warren Buffet starts to postulate weather change as a rational variable to increase liability insurance rates, then, we better start paying attention.
Warren Buffet’s action and insurers, in top of the thousand of researchers that are raising the flags on weather change warnings, it is something we must stop be indifferent, and take positive and serious actions to change our present path and act on the recommendations of experts, but we cannot stand still and continue this route if we want to have an livable planet as legacy for our future generations.
Anyone with kids should start to take the responsibility of leaving a better earth to the next generation. A better hearth than they encountered, but it seems that this is not going to happen if the apathy we are experiencing in the subject is not addressed.
The consequences of weather change and ignorance are starting to be too obvious to ignore as hurricane Katrina proved in the Mississippi and Alabama, or the heat wave in France that killed 12,000 two years ago, or the Monsoon patterns of past years that are killing thousands every year, or the long rain patterns in areas that are too populated to be safe to reside, and societies are not really to confront human disasters.
We might think the news of glaziers melting, might not have clear impact on us today, but they do. We might think that change on concentration of pollutants from the US, China and India are not changing heat air patterns and destroying defenses for sun heating pattern in the soil. Scientists are crying out loud saying these patterns changes are dangerously serious and very real.
I am not sure if all the negative and doom and gloom is as hard and bad as it is stated.
I know one thing, scientists are the ones who have made their lives to study this planet, and most of us only hold biased opinions and we are not the ones to be debating the science presented with overwhelming data. If erring in the side of prudence has made great leaders, our present leaders denying the obvious on weather change are plain cowards by walking away of their responsibilities and the future generations for not acting with prudence and pro-actively addressing the necessary changes to bring earth back to balance.
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. Here’s 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. Start investing with $100.
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.
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. Start investing with $100.
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.
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