Saturday, August 23, 2008

It's Worse Than You Think

As Mark Twain once famously said "There are lies, damn lies, and statistics." John Williams, an independent economist is the creator of There's no big conspiracy theory here, just changing times, changing people, and changing accounting methods. With a natural curiosity about official government numbers, he poses the question; "What would the official government numbers look like if the accounting methods stayed the same?" It ain't pretty.

M1 is the physical currency plus checking accounts; the amount of money in circulation. M3 is the entire supply of money within an economy, including money created through credit; servicing the national debt, money created by banks to finance home loans etc.

One rule of accounting is: When the news starts looking bad, stop counting. In 2004 the credit bubble begins with a mounting national debt, easy credit from falling interest rates, home equity borrowing and a general shift to a cashless society. In 2006 the Federal Reserve claimed that the cost of gathering M3 data was more than the data was worth. Congress and the president agreed and the law was changed. By early 2008 the bubble bursts as the big banks write off billions in overvalued equities and smaller banks go out of business. This is followed by a rise in M1 as "Cash is king" becomes the order of the day, and the long road back to near parity begins.

Did the Reagan Revolution create economic growth? You bet it did, any way you measure it. So much growth so fast that it scared the bankers out of their wits. The decline starting in 1984 is the effect of the Federal Reserve raising interest rates to "cool down" the economy. Who needs a bank loan when you're making money hand over fist? The years 1989 to 1993 show the Bush 41 years. Not the worst economy ever, but not good either. 1993 to 2001; the peace dividend, the dot-com bubble and the much overdone "Clinton Miracle" combine to produce a sluggish 1.5% growth rate. 2000 to present: The dot-com bubble bursts, the 9/11 attack, and we've been in negative growth ever since.

Did the Reagan Revolution beat inflation? Skunked it. In 1983 the methods for measuring inflation were changed. I remember the immediate 1/2% drop caused quite a controversy. Eventually the law was passed and for years afterward, there really wasn't much difference. By 1992 the 1/2 point difference had grown to 2% and marks the beginning of an ever widening gap between the two methods. If you wonder why your paycheck doesn't seem to go as far as it did, and everything seems so outrageously expensive, while the government keeps telling you that inflation is under control, a 13% inflation rate could be why.

1 comment:

Anonymous said...

Stark graphs but on the right track. The truth hurts but things won't change until the truth is faced.

Dang, you are good.