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Phillips Curve Fail

In the late 1970s the impossible happened. Inflation and unemployment simultaneously went vertical. The leading economists of the day were flummoxed.

summers Larry Summers favors us with his “eternal stagnation” shrug. The man is a sheer inexhaustible fount of truly atrocious ideas. As we have previously pointed out, when he’s around, the economy can only be deemed safe under certain circumstances.
Photo credit: Reuters

The Phillips curve said there’s an inverse relationship between inflation and unemployment. When unemployment goes down, inflation goes up. Conversely, when unemployment goes up, inflation goes down.

These are the data economist William Phillips originally studied – wage rates vs. unemployment in the UK in the years 1913 to 1948. Phillips’ study will forever stand as a monument as to why economic theory cannot possibly be derived from empirical data. In the wake of the 1970s experience, at least seven Nobel prizes in economics were awarded for work that debunked the Phillips curve-based assumptions of the Keynesians in some shape or form. Recently its long dead cousin NAIRU has risen from the grave again, like a zombie – click to enlarge.

How could it be that both were going up at once? Weren’t they mutually exclusive? Indeed, it took years of heavy handed government intervention to pull off such a feat.

When unemployment began creeping up in the 1970’s the U.S. Treasury, with backing from the Federal Reserve, did what Keynes had told them to do. They spent money to stimulate the economy and spur jobs creation.

According to the Phillips curve, with rising unemployment the planners could have their cake and eat it too. They could run large deficits without inflation.

Unfortunately, something unexpected happened. Instead of jobs they got inflation. Then, when they tried it again, they still didn’t get jobs. Astonishingly, they got more inflation.

…click on the above link to read the rest of the article…

How the Business Cycle Happens Part 1

October 22, 2015

How the Business Cycle Happens Part 1

[This excerpt from the first chapters of Murray Rothbard’s America’s Great Depression (1963)] Reprinted from Mises.org

Study of business cycles must be based upon a satisfactory cycle theory. Gazing at sheaves of statistics without “pre-judgment” is futile. A cycle takes place in the economic world, and therefore a usable cycle theory must be integrated with general economic theory. And yet, remarkably, such integration, even attempted integration, is the exception, not the rule. Economics, in the last two decades, has fissured badly into a host of airtight compartments — each sphere hardly related to the others. Only in the theories of Schumpeter and Mises has cycle theory been integrated into general economics.1

The bulk of cycle specialists, who spurn any systematic integration as impossibly deductive and overly simplified, are thereby (wittingly or unwittingly) rejecting economics itself. For if one may forge a theory of the cycle with little or no relation to general economics, then general economics must be incorrect, failing as it does to account for such a vital economic phenomenon. For institutionalists — the pure data collectors — if not for others, this is a welcome conclusion. Even institutionalists, however, must use theory sometimes, in analysis and recommendation; in fact, they end by using a concoction of ad hoc hunches, insights, etc., plucked unsystematically from various theoretical gardens. Few, if any, economists have realized that the Mises theory of the trade cycle is not just another theory: that, in fact, it meshes closely with a general theory of the economic system.2 The Mises theory is, in fact, the economic analysis of the necessary consequences of intervention in the free market by bank credit expansion.

…click on the above link to read the rest of the article…

The Shocking Reality: This Chart Shows Just How Bad Unemployment Is Today Compared to The Great Depression

October 3, 2015

The Shocking Reality: This Chart Shows Just How Bad Unemployment Is Today Compared to The Great Depression

great-depression---jobs (Desperate Americans stand in soup kitchen lines and look for work. Circa 1929)

While the Obama administration and their mainstream surrogates maintain that the economy is growing at a booming pace, the reality of the situation is starkly different.

According to a report from the Bureau of Labor Statistics some 94.6 million Americans (age 16 and over) are either not working or have made no effort to find a job. With a population of 320 million, that means nearly one in three people in the United States are currently out of work.

The Bureau of Labor Statistics reports that a record 94,610,000 people (ages 16 and over) were not in the labor force in September. In other words they were neither employed nor had made specific efforts to find work in the prior four weeks.

The number of individuals out of the work force last month — due to discouragement, retirement or otherwise — represented a substantial 579,000 person increase over the most recent record, hit in August, of 94,031,000 people out of the workforce.

Curiously, the official unemployment rate remained unchanged at 5.1%, suggesting that some 95% of people actually have jobs.

But as we’ve repeatedly pointed out, that number has been completely skewed over the last two decades as it fails to account for people who have stopped looking for work (because there are no actual jobs available).

According to John Williams of Shadow Stats, if we were to calculate unemployment using the same metrics as we did during the 1930’s, or even the 1980’s, we’d already be in Great Depression territory. Williams, who utilizes a reporting methodology that accounts for “long-term discouraged workers who were defined out of official existence in 1994,” notes that the real unemployment rate is rapidly approaching 25%.

shadowstats-oct-2015

Now compare the above chart to similar measurements from the 1930’s and you’ll see just how bad things really are:

greatdepression-unemployment (via Casey Research)

…click on the above link to read the rest of the article…

The Dangerous Illusion That Risk Can Be Offloaded Onto Others

October 2, 2015

The Dangerous Illusion That Risk Can Be Offloaded Onto Others

This confidence in central banks raises a pernicious systemic risk.

Do you drive carelessly because your auto is equipped with airbags? Perhaps not. But would you drive more cautiously if you were perched on the front bumper? If even the slightest collision would crush the driver’s legs to pulp, I think it is safe to say we would all drive with a higher awareness of risk and with greater caution.

The faith that airbags and dashboards protect us in all conditions and times is misplaced. If vehicles were truly safe, how is it that 32,700 people lose their lives in vehicle accidents every year in the U.S. and hundreds of thousands of others are injured?

The risk, we are assured, is statistically low: “only” 21 Fatalities per 100,000 Licensed Drivers (practically zero, eh, except that it adds up to 32,700 people killed each year).

What statistics do not adequately describe, of course, is that most of those accidents occured in high-risk settings in which the drivers’ focus and/or ability was impaired, even as they reckoned risk was managed/limited by the equipment, their safe driving record, etc.

In other words, the somewhat inebriated gent who slips behind the wheel on a dark rainy night senses the heightened danger; but reassured by the fact he’s never been in a fatal accident, by his car’s airbags, by the low statistical odds of getting killed, etc., he roars off into the unlit darkness. The odds of an accident in these conditions are much higher than the average listed in statistical abstracts, yet they are glossed over by the apparent “low odds” of the drive ending badly.

…click on the above link to read the rest of the article…

Friday job numbers may tell tales GDP missed: Don Pittis

September 3, 2015

Friday job numbers may tell tales GDP missed: Don Pittis

Stats could show if slump is over and whether there is a rebound outside the oil industry

Opponents in the battle over whether the Canadian economy is collapsing or clawing its way back to recovery will get more ammunition on Friday. That’s when we learn the latest figures on job creation and unemployment.

Statistics Canada’s GDP data that we got earlier in the week is useful, but in several ways, the labour force survey is even better.

“I’d personally put more weight on labour market figures than the GDP,” says Mike Veall, professor of economics at McMaster University. Veall’s specialty is econometrics, reading economics through math and statistics.

Two months late

One of the problems with gross domestic product is that it’s not a simple figure, he says. It is more of a statistical construct estimating the total activity of the entire Canadian economy.

The owner of a Nova Scotia roofing company says he is finally getting his choice of good employees as workers return from Alberta. He says returning oil patch workers have been well trained in safety. (CBC)

One result of that lack of simplicity is a lengthy delay getting a reading of the data. Another is month-to-month inaccuracy.

The long and technical process of gathering all the components that go into creating those GDP calculations takes time. That means we don’t get a reading on each month’s economic growth until months after it happened.

Even then, new data can alter the calculations, resulting in revised figures. This week, for example, Statistics Canada told us the economy had actually shrunk by 0.8 per cent in the first three months of the year after previously telling us it had shrunk only 0.6 per cent.

“The main advantage of jobs numbers is their currency,” says Veall. “They’re more up to date.”

…click on the above link to read the rest of the article…

Is China’s “Black Box” Economy About to Come Apart?

August 9, 2015

Is China’s “Black Box” Economy About to Come Apart?

A China crisis will de-stabilize the world

After 30 years of torrid expansion, perhaps the single most consequential factor in China’s economy is how much of it is a “black box”: a system with visible inputs and outputs whose internal workings are opaque.

There are number of reasons for this lack of transparency:

Official statistics reflect what officials want to project, not the unfiltered data.
Policy decisions are made behind closed doors by a handful of leaders.
There is little institutional history of transparency.
Many important statistics are self-reported and prone to distortion.
Large sectors of the economy are informal and difficult if not impossible to measure accurately.
Endemic corruption distorts critical economic yardsticks.
There is little historical precedent to guide policy makers and individual investors.

None of these is unique to China, of course, with the possible exception of #7: few nations in history (if any) have experienced an equivalent boom in infrastructure, credit, housing and wealth in such a short span of time.

Saving Face By Editing Data

As anyone who has lived and worked in Asia can attest, public perception (i.e. “face”) is of paramount concern. There is tremendous pressure to put a positive spin on everything in the public sphere. Negative publicity causes not just the individual to lose face, but his boss, agency, company and family may also be tarnished.

For this reason, reporting potentially negative numbers accurately may put careers and hopes for advancement at risk.

This accretion of fear of reprisal/disapproval builds as it moves up the pyramid of command. This process can lead to tragic absurdities being taken as truth. In one famous example in Mao-era China, officials ordered rice planted in thick abundance along a particular stretch of road, so that when Chairman Mao was driven along this roadway, he would see evidence of a spectacular rice harvest.

…click on the above link to read the rest of the article…

Bad Debt Soars 35% In China As Government Set To Fabricate Dismal Loan Data

August 6, 2015

Bad Debt Soars 35% In China As Government Set To Fabricate Dismal Loan Data

Back in March, we noted that decelerating economic growth and bad debt are taking a toll on profitability at China’s largest banks, leading them to slash payouts to shareholders.

“Particularly hard hit is ABC, which saw its non-performing loans jump 25bps Q/Q,” we observed, adding that “NPLs for loans made to manufacturers more than doubled that number, rising 54bps sequentially.” That figure underscores the degree to which China’s transition from an investment-led, smokestack economy to a model driven by consumption and services is weighing heavily on industry and in turn, on banks that lend to the manufacturing sector.

Although NPLs have been rising for some time in China, determining the true extent of the problem is largely impossible due to Beijing’s “management” of bad loans. As we outlined in “How China’s Banks Hide Trillions In Credit Risk,” there’s no way to know how pervasive Beijing’s practice of forcing banks to roll-over problem loans truly is, meaning that even if we ignore the fact that quite a bit of credit risk is obscured by the practice of shifting it around, moving it off balance sheet, and reclassifying it, (i.e. if we just look at traditional loans) it’s still difficult to know what percentage of loans are actually impaired because it’s entirely possible that a non-trivial percentage of sour debt is forcibly restructured and thus never makes it into the official NPL figures.

Indeed, the fact that NPLs are remarkably similar across banks suggests the numbers are, much like China’s GDP data, “smoothed out.” That said, a look at “special mention” loans and overdue loans can help to paint a more accurate picture although the figures still look grossly understated.

Source: Fitch

…click on the above link to read the rest of the article…

Lies, Damned Lies, and Statistics

July 19, 2015

Lies, Damned Lies, and Statistics

The government released their monthly CPI report this week. Even though it came in at an annualized rate of 3.6%, they and their mouthpieces in the corporate mainstream media dutifully downplayed the uptrend. They can’t let the plebs know the truth. That might upend their economic recovery storyline and put a crimp into their artificial free money, zero interest rate, stock market rally. If they were to admit inflation is rising, the Fed would be forced to raise rates. That is unacceptable in our rigged .01% economy. There are banker bonuses, CEO stock options, corporate stock buyback earnings per share goals and captured politician elections at stake.

The corporate MSM immediately shifted the focus to the annual CPI figure of 0.1%. That’s right. Your government keepers expect you to believe the prices you pay to live your everyday life have been essentially flat in the last year. Anyone who lives in the real world, not the BLS Bizarro world of models, seasonal adjustments, hedonic adjustments, and substitution adjustments, knows this is a lie. The original concept of CPI was to measure the true cost of maintaining a constant standard of living. It should reflect your true inflation of out of pocket costs to live a daily existence in this country.

Instead, it has become a manipulated statistic using academic theories as a cover to systematically under-report the true level of inflation. The purpose has been to cut annual cost of living adjustments to Social Security and other government benefits, while over-estimating the true level of GDP. Artificially low inflation figures allow the mega-corporations who control the country to keep wage increases to workers low. Under-reporting the true level of inflation also allows the Federal Reserve to keep their discount rate far lower than it would be in an honest free market.

…click on the above link to read the rest of the article…

Lab rats and the corruption of how we count

July 6, 2015

Lab rats and the corruption of how we count

There’s an old joke about lab rats in which the teller says he or she secretly suspects that all lab rats are prone to cancer and so all research about the risk of cancer in humans based on tests in rats is likely useless.

The Committee for Independent Research and Information on Genetic Engineering, a European-based research group, thought it would look into such a possibility.

Last week the group released its findings and that joke became a reality. The diet fed to most lab rats is so laced with pesticides, heavy metals, genetically engineered feed and other man-made contaminants that lab rats worldwide are indeed at much higher risk of developing cancer and other diseases and disabilities just from the food they are reared on.

This doesn’t necessarily mean that certain substances thought likely to cause cancer in rats and possibly humans now somehow don’t. Rather, the study calls into question practically all safety tests which rely on these rodents. And, in fact, it suggests that the dangers of many substances and genetically engineered plants may have been underplayed.

The researchers point out that some studies purporting to demonstrate the safety of genetically engineered foods fed significant amounts of such GE foods to control groups of rats. These rats should not have gotten any GE food in order that their health profile could be compared accurately to those intentionally fed GE food.

And, even if the rats in the control groups don’t ingest the chemical or plant being tested–as is the case in a proper study–they still get sick at abnormally high rates due to their diet. That can make substances being tested appear safer than they truly are because it is more difficult to sort out which effects in the test group are due to the substance or plant being tested.

…click on the above link to read the rest of the article…

U.S. Oil Glut An EIA Invention?

June 26, 2015

U.S. Oil Glut An EIA Invention?

In the latest weekly production data from the EIA, on the back of recent March revisions, the U.S. managed to post a 76,000 barrel per day increase in the lower 48. Production from Alaska fell by 61,000 barrels per day, putting overall U.S. output 15,000 barrels per day higher for the week ending June 12 compared to the previous week.

This comes at a time when multimillion barrel draws have become the norm. It is important to note that lower 48 production is estimated based on an EIA black box model, while Alaska is virtually real time data. That suggests that the weekly supply estimates are hugely overestimated.

These weekly supply numbers are then used as a basis to jump to the conclusion that the markets are suffering from too much supply. As stated on OilPrice.com many times before, the amount of “over supply” vs. the averages in the U.S. according to the EIA amounts to tens of millions of barrels of oil.

I continue to maintain that the EIA revision to production came very suspiciously at exactly the same time inventory draws began, as did the “Miscellaneous to Balance” figure used in calculating inventory. The chart below clearly shows when this figure started to grow and by what amount. It totals more than 30 million barrels since April and has been rising, which is virtually all of the oversupply above the mean in the U.S! To reiterate that number is at discretion of the EIA and is not an actual data point but an “adjustment.”

Data Errors Have Real World Consequences

This figure, as created by the EIA, has (with the media’s help) created the impression of a huge oil glut in the U.S. market. No one, either within the media or the industry, has asked for clarification of this number and it is instead taken as gospel. This is now wreaking havoc in energy states such as Texas, as well as threatening most oil companies as well as tens of thousands employed within the oil and gas industry. With such importance placed on a number which has impacted not only billions of dollars in company revenue but many lives for the worse, how can it be largely unchallenged by all but a few in the media?

…click on the above link to read the rest of the article…

If Your BS Detector Isn’t Shrieking, It’s Broken

June 9, 2015

If Your BS Detector Isn’t Shrieking, It’s Broken

Wishing it was true doesn’t make it true–it makes you a chump who fell for the con.

Once upon a time in America, no adult could survive without possessing a finely tuned BS detector. Herman Melville masterfully captured America’s fascination with cons and con artists in his 1857 classic The Confidence-Man, which I discussed in The Con in Confidence (October 4, 2006).

An essential component of the American ethos is: don’t be a chump. Don’t fall for the con. And if you do, it’s your own fault. The Wild West wasn’t just thieves shooting people in the back (your classic “gunfight” in the real West)–it was a simmering stew of con artists, flim-flammers and grifters exploiting the naive, the trusting and the credulous.

The employment/unemployment statistics are obviously BS. 93 million people aren’t even counted any more–they’re statistical zombies, no longer among the living workforce. If the unemployment rate were calculated on the number of full-time jobs and the true workforce (everyone ages 18 – 70 that isn’t institutionalized or in prison), the unemployment rate would not be the absurdly delusional 5.6% claimed by the bureaucratic con artists.We now inhabit a world where virtually everything is a con. That “organic” produce from some other country–did anyone test the soil the produce grew in? It could be loaded with heavy metals and be certified “organic” because no pesticides were used during production. But what about last year? And the year before? What’s in the water used to irrigate the crops?

The corrupts-everything-it-touches bribe vacuum known as Hillary Clinton is still disgracing the national stage, 24 years after she first displayed her con-artist colors. Hillary’s most enduring accomplishment is the Clinton Foundation–a glorification of bribery, chicanery, flim-flam and cons so outrageously perfected that it serves up examples of every con known to humanity in one form or another.

…click on the above link to read the rest of the article…

2 Things That Are Happening Right Now That Have Never Happened Outside Of A Recession

June 3, 2015

2 Things That Are Happening Right Now That Have Never Happened Outside Of A Recession

If we are not heading into a recession, why does our economy continue to act as if that is precisely what is happening? As you will see below, we learned this week that factory orders have declined year over year for six months in a row. That is something that has never happened outside of a time of recession. We have also seen new orders for consumer goods fall dramatically. In fact, the only time we have seen a more dramatic decline in that number was during the last recession. And when you add these two items to what I have written about previously, the overall economic picture becomes even more disturbing. Corporate profits have fallen for two quarters in a row, our exports fell by 7.6 percent during the first quarter of 2015, and U.S. GDP contracted by 0.7 percent during Q1. Even though Barack Obama and the mainstream media are willingly ignoring them, the truth is that these numbers are absolutely screaming that we are going into a new recession.

Sometimes, a picture is worth more than a thousand words, and I believe that is certainly the case with the chart that I have posted below. It comes from Zero Hedge, and it shows that factory orders have declined year over year for six months in a row. The only times when this has ever happened before have been when the U.S. economy has been in recession…

When we look at new orders for consumer goods, we see a similar thing happening. This next chart comes from Charles Hugh Smith, and it really doesn’t need much explanation…

…click on the above link to read the rest of the article…

A Recession Within A Recession

May 30, 2015

A Recession Within A Recession

On Friday, the federal government announced that the U.S. economy contracted at a 0.7 percent annual rate during the first quarter of 2015. This unexpected shrinking of the economy is being primarily blamed on “harsh” weather during the first three months of this year and on the strengthening of the U.S. dollar. Most economists are confident that U.S. GDP will rebound back into positive territory when the numbers for the second quarter come out, but if that does not happen we will officially meet the government’s criteria for being in another “recession”. To make sure that the numbers for Q2 will look “acceptable”, the Bureau of Economic Analysis is about to change the way that it calculates GDP again. They are just going to keep “seasonally adjusting” the numbers until they get what they want. At this point, the government numbers are so full of “assumptions” and “estimates” that they don’t really bear much resemblance to reality anyway. In fact, John Williams of shadowstats.com has calculated that if the government was actually using honest numbers that they would show that we have continually been in a recession since 2005. That is why I am referring to this as a “recession within a recession”. Most people can look around and see that economic conditions for most Americans are not good, and now they are about to get even worse.

For quite a while I have been warning that another economic downturn was coming. Well, now we have official confirmation from the Obama administration that it is happening. The following is an excerpt from the statement that the Bureau of Economic Analysis released on Friday…

…click on the above link to read the rest of the article…

Inaccurate statistics and the threat to bonds

May 29, 2015

Inaccurate statistics and the threat to bonds

Statistics have become very misleading: in particular we are being badly misled into believing that the US is teetering on the edge of price deflation, because the US official rate of inflation is barely positive, a level that US bonds and therefore all other financial markets have priced in without accepting it is actually significantly higher.

There are two possible approaches to assessing the true rate of price inflation. You can either reverse all the tweaks government statisticians have implemented over the decades to reduce the apparent rate, or you can collect a statistically significant sample of price data independently and turn that into an index. John Williams of Shadowstats.com is well known for his work on the former approach, but until recently I was unaware that anyone was attempting the latter. That is until Simon Hunt of Simon Hunt Strategic Services drew my attention to the Chapwood Index, which deserves wider publicity.

This is from the website: “The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation.” It is, therefore, statistically significant, and it consistently shows price inflation to be much higher than that indicated by the Consumer Price Index (CPI).

The table below shows this difference since 2011, and how it affects real GDP.

Chapwood index

Sources: Chapwood Index, US Bureau of Labor Statistics and Bureau of Economic Analysis. Figures may not total due to rounding.

The Chapwood number in the table is the simple arithmetic average of the 50 cities. The year-in, year-out 10% inflation rate is notable. Furthermore, Chapwood shows cumulative inflation rate as shown by the CPI for the four years to be understated by 39.9%, and using Chapwood numbers in place of the GDP deflator, real GDP has slumped a cumulative total of 21.4% over the four years.

…click on the above link to read the rest of the article…

Economic Disinformation Keeps Financial Markets Up

May 9, 2015

Economic Disinformation Keeps Financial Markets Up

Today’s payroll jobs report is more of the same. The Bureau of Labor Statistics claims that 223,000 new jobs were created in April. Let’s accept the claim and see where the jobs are.

Specialty trade contractors are credited with 41,000 jobs equally split between residential and nonresidential. I believe these are home and building repairs and remodeling.

The rest of the jobs, 182,000, are in domestic services.

Despite store closings and weak retail sales, 12,000 people were hired in retail trade.

Despite negative first quarter GDP growth, 62,000 people were hired in professional and business services, 67% of which are in administrative and waste services.

Health care and social assistance accounted for 55,600 jobs of which ambulatory health care services, hospitals, and social assistance accounted for 85% of the jobs.

Waitresses and bartenders account for 26,000 jobs, and government employed 10,000 new workers.

There are no jobs in manufacturing.

Mining, timber, oil and gas extraction lost jobs.

Temporary help services (16,100 jobs) offered 3.7 times more jobs than law, accounting architecture, and engineering combined (4,500 jobs).

As I have pointed out for a number of years, according to the payroll jobs reports, the complexion of the US labor force is that of a Third World country. Most of the jobs created are lowly paid domestic services.

The well paying high productivity, high value-added jobs have been offshored and given to foreigners who work for less. This fact, more than the reduction in marginal income tax rates, is the reason for the rising inequality in the distribution of income and wealth.

Offshoring middle class jobs raises corporate profits and, thereby, the incomes of corporate owners (shareholders) and executives. But it reduces the incomes of the majority of the population who are forced into either lowly paid and part time jobs or unemployment.

…click on the above link to read the rest of the article…

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