Exhibit Three: Fudging the Numbers on Economic Decline

The US government – like most national governments – is reluctant to recognize the ecological/economic damages being done by its command-and-control management systems. Therefore over the past several decades it has increasingly fudged the numbers on the ongoing economic decline. The following charts attempt to take the fudge out of some important official numbers, giving us a more reliable picture of economic reality.

By understating inflation, for example, governments make GDP looks stronger than it really is, which creates a false sense of economic security. Erroneous price signals also distort economic decision-making by encouraging the misallocation of resources.

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In the foregoing chart the economic consultancy, ShadowStats, states inflation in terms of government standards prevailing in 1980 (blue line). The US Bureau of Labor Statistics (BLS) inflation numbers (red line) represent official representations of consumer price inflation.

The widening gap between these reported inflation rates correlates with the growth of ecological overshoot as shown in Exhibit One. Today the ShadowStats adjusted rate of inflation (8.80%) is roughly seven times the official rate (1.18%).

ShadowStats uses the former BLS method of accounting for inflation based on the prices of a fixed basket of goods that consumers normally buy. Over the years, the BLS has revised this methodology by taking into account changes in the quality of goods (hedonic adjustments) and the ways consumers alter purchasing decisions based on price changes (substitution effects), which produces a lower CPI.

Metrics on consumer price inflation have major political and economic implications because they affect other important indicators (notably GDP), government transfer payments (Social Security), consumer behavior, wage demands and foreign confidence in the US dollar. For these reasons, governments have a vested interest in understating inflation. Economic consultancies are not so constrained.

Several conclusions can be drawn from all this. First, there is no absolute and objective gauge of inflation. Any particular measure is simply one way of making the calculation, based on a host of assumptions. Second, a number of the costs that middle-class households face are going up considerably faster than the CPI.
– Miachel Sivy, “If there’s no inflation, why are prices up so much?” Time Magazine, March 12, 2013

 

The effects of inflation on reported GDP can be seen in the following chart.

According to ShadowStats third quarter 2013 GDP was a negative (-1.70%) rather than a positive (+1.65%) as reported by the Bureau of Economic Analysis.

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In both sets of data we note the rate of GDP growth has slowed from cycle to cycle since the early 1980s. This too correlates with the growth of global ecological overshoot Shown in Exhibit One.

As that overshoot has become more pronounced, ShadowStats data show GDP falling deeper into recession from cycle to cycle with virtually no recovery since the year 2000. While one can argue the merits of both approaches, the weight of other economic data tend to support ShadowStat’s analysis.

Take, for example unemployment. The broadest measure of workers without full time jobs is now 23.7% – roughly three times government’s official rate (7.3%). This higher rate includes the official rate PLUS two others: people working part-time because they can’t find full time work (6.2%) and “long-term discouraged workers” whom the Bureau of Labor Statistics (BLS) defined out of existence in 1994 (10.2%).

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High and rising unemployment rates are both a cause and effect of declining GDP. Unemployed people spend less than those who are employed; and lower spending tends to drag down GDP, which feeds back to unemployment.

Importantly, whereas government data show unemployment gradually receding since 2010, ShadowStats shows it actually increasing (blue line). This finding is consistent with US Census data on the rising number of Americans receiving needs-based government assistance.

 

Unemployment, like inflation is a politically sensitive, metric; and, since passage of the Federal Reserve Reform Act of 1977, it has become an increasingly important factor in US monetary policy. The Act requires the Federal Reserve Board (FRB) and the Federal Open Market Committee (FOMC) “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The Fed’s aggressive use of monetary stimulus (“quantitative easing”) today is openly justified as a means to stimulate the economy and boost employment. Rather than achieving these goals, however, successive waves of QE have weakened the dollar’s purchasing power, which adds to inflation and economic distortion: further evidence of the futility of treating symptoms rather than causes as discussed in Exhibit Five.

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Since all of the world’s major currencies are inflating, this chart simply shows the relative decline of the dollar. The real decline of the dollar can be seen more clearly in terms of the price of gold (a universally recognized central bank reserve asset). At today’s price ($1,300/oz) gold is trading more than 4.6 times its average price in 1999 ($279/oz).

The composite picture we get from the foregoing charts is an economy in disarray. And the situation gets worse each year as humanity’s ecological overshoot grows.

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