Boom2Bust.com

Treasury Secretary Henry Paulson Stepping Down

Don’t know how I initially missed this one. MSNBC contributor Gina Pace wrote back on August 10:

Amid speculation that Treasury Secretary Henry Paulson would remain in his post to help the next president deal with the housing crisis, Paulson announced that he will not stay on during an interview on “Meet The Press” Sunday.

“I am very focused on getting everything done I can get done between now and January 19,” Paulson told moderator Tom Brokaw in Beijing. “I look forward to doing other things next year.”

Paulson told Brokaw that he thought it would take “well beyond” this year to work though the nation’s housing problems, and that they were at the heart of “our economic problems as a nation.”

Paulson, a former Chairman and Chief Executive Officer of Goldman Sachs, was sworn in as the 74th Secretary of the Treasury a little over two years ago on July 10, 2006.

Think Hank may be jumping ship because he has a pretty good idea of what’s in store for the economy down the line?

“Self-Help Yourself”
YouTube Video Link

Source:

“Paulson will not serve in next administration”
Gina Pace
MSNBC, August 10, 2008

Quote For The Week

Financial analyst Eric King talked about gold and silver on the Financial Sense Newshour this weekend, and warned listeners:

But I want people to listen carefully to what I’m about to say to them. Do not listen to statements made from this government. Ignore them. Ignore statements made by Paulson, who is retiring in November right after the election. They have been consistently wrong in all of their statements. They have lost control of the system, in my opinion, and the system is breaking right now. The United States banking system is insolvent, and they are trying to keep this hidden from people and try to get more suckers to put more money into these banks, but the suckers are not lining up anymore. A big tax bill is going to be laid on the American public, and as Greenspan stated in Belgium, the Federal Reserve, and even the Treasury, stands ready to create money without limit. We are about to go into that phase now where we are going to have very serious money printing, and the Fed knows it, Paulson knows it, the Treasury and Bernanke know it, and because of that they had to crush these metals ahead of that…

Why Do Banks Fail On Fridays?

Back on August 7, the daily web magazine Slate.com attempted to explain this phenomenon. With assistance from David Barr and Robert Schoppe of the Federal Deposit Insurance Corporation, Nina Shen Rastogi wrote:

Last week, First Priority Bank in Bradenton, Fla., became the eighth American bank to fail this year. Every single one of these institutions went under on a Friday. Why do banks always go bust on Fridays?

So the government has a full weekend to reopen them under new management. If the banking business didn’t return to normal at the earliest opportunity, the specter of agitated customers might erode public confidence in the banking system, triggering a wider panic. So regulators close banks at the end of the day on Friday to take advantage of the regularly scheduled days off. In that time, officials from the Federal Deposit Insurance Corp.—the agency in charge of supervising the actual takeover—can settle a failed bank’s accounts and carve out assets to liquidate later, thereby easing the transition to a new owner. And if there is no new owner—i.e., if no healthy bank has stepped up to purchase the failed one—then the FDIC can use the weekend to write checks to customers for the total amount of their insured deposits. (The FDIC can also create a temporary bridge bank, as it did last month with IndyMac, to take over the failed bank’s operations.)

Shena Rastogi detailed what exactly transpires on an “FDIC Friday,” as it’s now known. She wrote:

On the Friday of a typical takeover, the FDIC arrives on-site with a large team to manage the transition. (When a large bank fails, this might include upward of 100 people.) The team has two main priorities. First, it must figure out which customers’ deposits are insured and which are not. This can be a tangle, since customers can sock away money in a variety of accounts to ensure that their deposits fall under FDIC-insured limits. The second priority is getting the bank ready to open under new ownership by Monday. That involves discarding any material with the old bank’s name on it—like posters, cashiers’ checks, and marquee signs—and putting the new bank’s paperwork, advertisements, and employees in place. Specialists from other departments, such as facilities, human resources, IT, public relations, and accounting, round out the FDIC’s team. Officials once even hired a hypnotist to help a bank employee remember a vault code.

The FDIC “Failed Bank List” now includes 8 institutions. Will today be another “FDIC Friday?”

Source:

“Why Do Banks Fail on Fridays?”
Nina Shen Rastogi
Slate.com, August 7, 2008

Congress’s Investigation Into Alleged Illegal Mortgages

Anyone NOT see this coming? Elizabeth MacDonald from FOX Business wrote this morning in her blog:

After being stonewalled for nearly a month, Rep. Darrell Issa (R-CA) and Rep. Mark Souder (R-IN) have sent an official request for an Ethics Committee investigation into “disturbing allegations,” first reported in Conde Nast Portfolio, that Countrywide Financial gave illegal mortgages prohibited by House rules to members of Congress, congressional staff and other officials (see blog “Where are the Ethics Hearings into Countrywide’s VIP Loans?”)

Sweetheart mortgages given by Countrywide Financial, the nation’s biggest mortgage lender, to elected officials and government bureaucrats seem tailor-made for an ethics inquiry by Congress, especially as the country is seeing a rising tide of voter anger in this presidential election year due to the massive $300 bn bailout of the housing industry at taxpayers’ expense.

Specifically, Countrywide’s sweetheart mortgages were called VIP loans, in which lawmakers and government employees allegedly received lower interest rates and point shaves on their mortgages. Countrywide’s controversial VIP mortgages were given under the “Friends of Angelo” program, nicknamed after Countrywide chief executive Angelo Mozilo, a story that first broke in Portfolio Magazine.

The mortgages were allegedly given to Congressional members and staffers championing this record bailout, a bailout that fast approaches the taxpayer cost of the S&L crisis in the late ‘80s and early ‘90s.

But Rep. Darrell Issa (R-Calif.) and Rep. Mark Souder (R-Ind.) say Rep. Henry Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform, is ignoring their demands for an investigation into cheap, VIP mortgages allegedly given by Countrywide Financial to House staff members and elected officials.

MacDonald noted:

Countrywide allegedly gave cheap, sweetheart mortgages to Sen. Kent Conrad (D-ND) and Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking committee who reportedly saved $75,000 on his inside deals from Countrywide.

“Say It Ain’t So”

Source:

“Stonewalling on Countrywide’s Loans to Congressmen”
Elizabeth MacDonald
FOXBusiness.com (Emac’s Stock Watch), August 14, 2008

Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Oops! U.S. Debt Almost $100 Trillion

Back on July 22 I wrote a post about a San Francisco Chronicle article which stated the U.S. government is $53 trillion in debt (factoring in long-term liabilities), which translates to $455,000 per U.S. household.

Turns out, the situation might be worse. A lot worse. To the tune of $99.2 trillion, to be exact.

On August 7, a piece appeared on LewRockwell.com referencing a speech about the debt by Richard W. Fisher, the President and Chief Executive Officer of the Federal Reserve Bank of Dallas. Fisher told the Commonwealth Club of California in San Francisco back in May:

In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

How did the head of the Dallas Fed come up with a number like $99.2 trillion? First, he accounted for Social Security liabilities:

Now, fast forward 70 or so years and ask this question: What is the mathematical predicament of Social Security today? Answer: The amount of money the Social Security system would need today to cover all unfunded liabilities from now on—what fiscal economists call the “infinite horizon discounted value” of what has already been promised recipients but has nofunding mechanism currently in place—is $13.6 trillion, an amount slightly less than the annual gross domestic product of the United States.

Then, he worked out Medicare entitlements:

Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.

Fisher adds it all up, and, voila:

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

And just to make his prediction a little bit more personal:

Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.

Somehow, $455,000 per household seems a lot more manageable at this point…

Source:

“Storms on the Horizon: Remarks before the Commonwealth Club of California”
Richard W. Fisher
Federal Reserve Bank of Dallas, May 28, 2008

Quote For The Week

Joseph Stiglitz, a Nobel Prize-winning economist and professor at Columbia University, talked about the housing bailout bill that was recently signed into law. From the CNBC website last Friday:

What bothers me from the point of view of public policy is that Freddie Mac and Fannie Mae came to the American taxpayers, asked for the right to write a blank check and Congress gave them that right.

What should have happened was corporate reorganization, keep the companies going but not protect the management, the shareholders, not even protect the creditors… The whole basis of a market economy is a system of accountability. You make decisions, you take risks, you get the upside, but you also take the downside.

These guys that are supposed to be assessing and managing risks have repeatedly failed and I think that’s what we really have to get our minds around. The fact that we had such confidence in these gurus of the financial markets… We turn to them about how to fix the system, but these are the guys that broke the system.

The amount of potential liability that we undertook when we passed that bill with that blank check— we just don’t know. This is the worst kind of public irresponsibility.

And America will probably pay dearly for it in the end…

I.O.U.S.A.

For those of you looking for some feel-good cinema this summer, you may want to pass on the movie “I.O.U.S.A.,” which debuts August 21. Frank Ahrens of the Washington Post wrote Thursday:

A private-equity billionaire, a former federal government official and a Baltimore newsletter editor have made a documentary film that they hope can do what an endless parade of policy papers has not: Persuade Americans that debt has created a looming economic crisis that would make the Great Depression look like a market correction.

The movie, “I.O.U.S.A.,” debuting Aug. 21, is an 87-minute alarum on what it calls the tsunami of debt bearing down on the United States’ future, caused by the rising national deficit, the trade imbalance and the pending costs of baby boomers cashing in on entitlements…

The film will debut in 400 theaters around the country on Aug. 21, followed by a live video town hall meeting from Omaha, featuring Walker, Peterson and Buffett. The next day, the film opens in 10 cities, including Washington.

From the movie’s website:

Wake up, America! We’re on the brink of a financial meltdown. I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions.

Throughout history, the American government has found it nearly impossible to spend only what has been raised through taxes. Wielding candid interviews with both average American taxpayers and government officials, Sundance veteran Patrick Creadon (Wordplay) helps demystify the nation’s financial practices and policies. The film follows former U.S. Comptroller General David Walker as he crisscrosses the country explaining America’s unsustainable fiscal policies to its citizens.

With surgical precision, Creadon interweaves archival footage and economic data to paint a vivid and alarming profile of America’s current economic situation. The ultimate power of I.O.U.S.A. is that the film moves beyond doomsday rhetoric to proffer potential financial scenarios and propose solutions about how we can recreate a fiscally sound nation for future generations.

I know where I’ll be August 21…

Trailer, “I.O.U.S.A.” (2008)
YouTube Video Link

Source:

“Indebted Ever After”
Frank Ahrens
Washington Post, August 7, 2008

Windfall Profits Tax? Where’s The Windfall?

Driving back and forth between Chicago and Burlington, Wisconsin, last week, I listened to the news on the radio quite a bit. There was a lot of chatter about Exxon Mobil reporting its highest quarterly profit ever ($11.7 billion) on Thursday. Not surprisingly, politicians were quick to criticize the announcement. The New York Times’ Clifford Krauss wrote Friday:

Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment felt by many drivers over high gasoline and diesel prices could help them in an election year.

“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator Charles E. Schumer, Democrat of New York.

Does anyone still pay attention to this guy? IndyMac. Lest we forget!

Anyway, one politician decided to take on the issue of oil company profits directly. On Friday, Senator Barack Obama (D-IL) announced a new proposal where oil companies enjoying record profits would face a “windfall profits” tax, where the cash would be passed on to consumers in the form of a rebate.

Hmm. A “windfall-profits” tax. I seem to recall that a windfall-profits tax was previously imposed on oil companies back in 1980, but was eliminated in 1988 after oil exploration and gasoline prices both fell. I’ve also heard that the tax raised only $79 billion, well below its proponents’ estimates. As a matter of fact, oil industry economists blamed the tax for contributing to a decline in exploration and drilling, helping set the stage for the energy crisis we currently face.

A reduction in oil exploration and drilling. Great. That’s exactly what our country needs right now. Which leads me to ask, which rocket scientist came up with this idea?

Earlier today, ABC News’ Jake Tapper asked the Obama campaign about the specifics behind the tax proposal. From their exchange:

TAPPER: What is a “windfall profit”?
OBAMA CAMPAIGN: Senator Obama believes that while oil companies and shareholders need incentives to run well managed businesses that invest in efficiency and innovation, a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.” [Emphasis added, “The Crude Oil Windfall Profits Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, 3/9/06, p. 32.]
TAPPER: Should such a tax only be applied to oil/gas industries?
OBAMA CAMPAIGN: Yes.

Okay. Enough of this foolishness.

…a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Geez, is that the best they can come up with? In which parallel universe is any business or industry NOT affected by external factors such as supply-and-demand fluctuations, disruptions, and distortions? As such, is it fair to impose additional taxes on a business or industry just because these factors (which had “nothing to do with their management skill or investment decisions”) played out the way they did?

Yet, the most disturbing aspect of this ill-contrived proposal is the fact that profit margins in the oil and gas industry aren’t exactly at windfall levels. The evidence? From the July 27 issue of Parade Magazine (based on U.S. Department of Energy data):

Although Exxon Mobil netted $40 billion in 2007, the average profit margin for oil companies is just 7.6%, compared with 9.2% for most manufacturers.

Adding to growing speculation that the proposal is purely for political pandering, the Wall Street Journal wrote yesterday:

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come…

The Journal summed it up best when it stated:

…a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It’s what politicians do in Venezuela, not in a free country.

Sources:

“Exxon’s Second-Quarter Earnings Set a Record”
Clifford Krauss
New York Times, August 1, 2008

“Obama’s Proposed ‘Windfall Profits Tax’”
Jake Tapper
ABC News, August 5, 2008

“With Gas at $4 a Gallon… Who Is Getting Your Money?”
Parade Magazine, July 27, 2008

“What Is a ‘Windfall’ Profit?”
Review & Outlook
Wall Street Journal, August 4, 2008

Consumer Blues

Who HASN’T noticed escalating prices these days? Judging from recent purchases, from flowers for my girlfriend to car washes to movie tickets, it’s pretty apparent to me, at least, that the cost of living is on the rise. According to Reuters’ Herbert Lash and Richard Leong this morning:

Consumer prices jumped at the sharpest rate in more than a quarter century during June, and consumers coping with soaring costs received their smallest income gain in a year, the government said on Monday.

The Commerce Department said personal incomes edged up 0.1 percent after rising 1.8 percent in May. June’s rise was the smallest since April 2007, when income was flat.

On a year-over-year basis, prices rose 4.1 percent in June, up from 3.5 percent in May, for the biggest annual gain since May 1991.

An inflation gauge tied to consumer spending jumped 0.8 percent in June, its steepest gain since a 1 percent rise more than 27 years ago, in February 1981.

Source: bobmccarty.com

Source:

“June inflation jumps, incomes barely rise”
Herbert Lash, Richard Leong
Reuters, August 4, 2008

Second Stimulus Package Update

Seems like there’s been a lot of interest lately in a second stimulus package to get the U.S. economy back on its feet. On July 15, I talked about how House Speaker Nancy Pelosi met with several economists and announced afterwards that:

We will be proceeding with another stimulus package.

On July 22, Reuters reported:

The U.S. Congress is discussing a second economic stimulus bill that could include nearly $15 billion in infrastructure spending, a senior member of the House of Representatives told Reuters on Tuesday.

Rep. James Oberstar, a Minnesota Democrat who chairs the Transportation and Infrastructure Committee, said a stimulus package could include “accelerating” pay-outs of $9.5 billion from the federal trust fund dedicated to road construction and maintenance…

The money would go to funding more than 2,600 projects, he said. States would receive full federal funding and then have a few years to pay back any matching funds.

Richard Cowan, John Crawley, and Lisa Lambert noted:

Congressional aides have discussed infrastructure elements to the plan, but have not provided cost estimates or other details. The timing of any second stimulus bill remains up in the air.

The Senate Appropriations Committee on Tuesday postponed consideration of its version of a second stimulus plan until September, said Robert Byrd, the panel’s chairman and a West Virginia Democrat.

President George W. Bush has indicated he wants to see how effective the first stimulus package is before looking at another one.

The idea of a second stimulus package hasn’t been lost on U.S. presidential candidate Barack Obama. According to the Star Tribune of Minneapolis-St. Paul yesterday:

Back from a nine-day overseas trip, Sen. Barack Obama made a point of turning to domestic concerns, calling a meeting Monday to solicit advice on reviving the economy and lifting wages.

Obama’s 2 1/2-hour economic forum, which was closed to the media, included some of the top economic policymakers of recent Democratic and Republican administrations. Among them were Robert Rubin and Paul O’Neill, Treasury secretaries in the administrations of Presidents Bill Clinton and George W. Bush. Billionaire investor Warren Buffett took part by phone.

Obama said the economy needs short- and long-term fixes, including another “stimulus” from Congress…

The group agreed with Obama’s call for a second stimulus plan, although there was some debate about the size.

Obama wants to inject another $50 billion into the economy. Laura Tyson, who headed Clinton’s Council of Economic Advisers, said, “There were people in the room who felt it should be more.”

Sources:

“Infrastructure could spur new stimulus: Rep”
Richard Cowan, John Crawley, and Lisa Lambert
Reuters, July 22, 2008

“Obama gains support from economic team for a second economic stimulus plan”
Star Tribune, July 29, 2008

How Will McCain, Obama Deal With A Record Budget Deficit?

Last week, I talked about the U.S. national debt. $53 trillion of debt (factoring in long-term liabilities), or $455,000 per American household.

This week, it’s the U.S. budget deficit, which the White House predicts will reach close to half a trillion dollars in 2009. The Associated Press’ Andrew Taylor wrote earlier today:

The government’s budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.

The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn’t include, and the total could be higher yet if the economy fails to recover as the administration predicts.

The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.

Both presidential candidates have proposed new initiatives as part of their campaign platforms. The question is, how will this latest deficit forecast affect their agendas? Taylor noted:

Neither campaign is backing off campaign promises — McCain to cut taxes and Obama to expand health and education programs — in light of the bleaker new figures.

“We can’t afford not to invest in some major initiatives such as health and energy and middle-class tax cuts,” said Obama economic adviser Jason Furman. “And we also can’t afford not to pay for those initiatives.”

Some would disagree with Furman. MarketWatch’s Robert Schroeder wrote today:

Stan Collender, a managing director for Qorvis Communications who formerly worked on both the Senate and House Budget Committees, is skeptical that the next president will have an easy time getting much accomplished as long as the deficit remains high.

“Based on what we now know for sure about next year’s budget, none of the presidential candidates’ promises should be taken seriously,” said Collender. “Unless they, the country, and those lending us money are willing to tolerate much higher nominal deficits and a larger debt than has so far been imaginable, the next president’s options will be severely limited,” Collender wrote Tuesday.

Sources:

“US deficit zooming to half-trillion as Bush leaves”
Andrew Taylor
Associated Press, July 29, 2008

“Deficit projections complicate candidates’ plans”
Robert Schroeder
MarketWatch, July 29, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

Quote For The Week

When I was down at the University of Illinois at Urbana-Champaign in the early nineties, I used to read the The Onion, a fake newspaper chock full of satirical articles, every once in a while. Apparently, the publication’s still going strong. From their July 14 issue:

Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.

Current bubbles being considered include the handheld electronics bubble, the undersea-mining-rights bubble, and the decorative office-plant bubble. Additional options include speculative trading in fairy dust—which lobbyists point out has the advantage of being an entirely imaginary commodity to begin with—and a bubble based around a hypothetical, to-be-determined product called “widgets.”

The most support thus far has gone toward the so-called paper bubble. In this appealing scenario, various privately issued pieces of paper, backed by government tax incentives but entirely worthless, would temporarily be given grossly inflated artificial values and sold to unsuspecting stockholders by greedy and unscrupulous entrepreneurs.

“Little pieces of paper are the next big thing,” speculator Joanna Nadir, of Falls Church, VA said. “Just keep telling yourself that. If enough people can be talked into thinking it’s legitimate, it will become temporarily true.”

Why is there a lurking suspicion that this story might not be so fake after all?