The Economy is Okay, Isn’t It?

This is the first step down…

A few days before Christmas, Standard & Poors put the US financial system on its watchlist of 20 countries that are "vulnerable to a credit bust." Others include China and Turkey. William Greider, MSNBC, 1/7/00

What do Cyprus, Panama, Egypt and the US have in common? The Standard & Poor’s rating service recently said that the economic systems of these countries are vulnerable to problem.

This isn’t the kind of company that the US would like to be in, especially since the politicians say we’re in the best economy this country has ever had. Also in this group of vulnerable countries is Ireland, New Zealand and Norway – none of which has ever been mistaken for a financial powerhouse.

…S&P is afraid the whole financial system could come tumbling down. - John Crudele, NY Post, 2/14/00

Too much debt is the problem

…the disconcerting truth is that the next debt crisis is more likely to occur not in the developing world, but in one of the world’s two biggest economies. Private borrowers in the US have been on a five-year spree which increases the future risk of a hard landing, while in Japan, government debt is in danger of spiraling out of control, which could prove to be a potent drag on efforts to get the sluggish Japanese economy humming again. - The Economist, 1/2000

Total household debt has jumped from 85% of personal income in 1992 to 103% last year. Most worrying of all, margin debt has tripled over the past five years… If share prices fall, some of this would have to be repaid immediately, forcing investors to sell shares – and so send share prices lower still. - The Economist, 1/2000

On the consumer side, the Federal Reserve calculates that the average household’s total debt load now exceeds its annual income – for the first time in history. - Dr. Irwin Kellner, CBS MarketWatch, 2/22/2000

The ratio of debt-to-equity for the companies in the S&P 500 is now 116%, according to McKinsey –even higher than the 84% posted at the end of the junk bond explosion of the 1980s. - Dr. Irwin Kellner, CBS MarketWatch, 2/22/2000

Sub-Prime loans on the books of the banks now total $100 billion, up by an annual rate of 80% since 1995. - Dr. Irwin Kellner, CBS MarketWatch, 2/22/2000

Americans are spending as never before – because they think they can’t lose. They are so confident about the money they are making on high tech stocks, that they think they don’t need to put anything away for a rainy day.
Last month [December, 1999] …US citizens spent their wealth more than twice as fast as they earned it. ...Consumer spending rose 0.8% - Income rose 0.3%
This brought the increase in spending over a buoyant year to 6.9% - when incomes rose only 5.9%. - BBC News Online, 2/1/00

Fed’s own data showed that outstanding consumer credit ballooned $15.6 billion in November as consumers tapped their credit lines to gear up for year-end holiday spending. – Reuters, 2/2/99

November consumer credit expanded by $15.5 billion, versus an estimate of $6.4 billion. This was the largest increase since January and at an annual rate of almost 14%. - David Tice, Prudent Bear Fund, 1/7/00

…there is one major difference between now (yr. 2000) and then (1929). Now, the US is the world’s biggest debtor nation. Back then, the US was the world’s biggest creditor nation. - Paul Kasriel, Northern Trust, 1/24/00

…stripped of the grossly overblown computer component, the true conundrum about the US economy is not the strength but the weakness of its growth in the face of exploding credit. In this light, the thing to explain is why the broad economy is doing so poorly with this tremendous debt accumulation….
…it strikes us again and again that in the ecstasies of the New Economy one word is never, absolutely never touched on. Its name is credit (debt). …After all, credit creation in the US is today in excess of economic activity, measured in GDP, as never before. - Kurt Richebacher, The Richebacher Letter, 12/99

There is no surplus, there is no surplus, there is no surplus…

The latest government numbers show that the nation’s total debt is now $5.72 trillion, compared with $5.619 trillion 12 months ago. Do the subtraction and you’ll see that there isn’t any surplus.
There’s a deficit of $101 billion. … So why are the politicians pretending they have extra money? Because, first and foremost, politicians lie… - John Crudele, NY Post, 1/28/00

CPI, GDP, M1,2 +3. Alphabet soup that could kill you.

Some numbers in the economy are conflicting with what we as consumers know is going on. Are the numbers being cooked? Inflation was only 2.7% in 1999, yet the price of oil doubled. How can that be? Does that mean prices of almost everything else was declining so much, they offset the huge increase in the price of oil? Also, the Fed has pumped a lot of money into the system making the inflation numbers higher than they would normally have been. How low would inflation have been, without the Fed priming the pump? JJR

Having learned nothing from the ‘20s or Tokyo either, the Fed and nearly everyone believes that nothing can be wrong if there is no CPI inflation. – William Fleckenstein, The Contrarian, 9/29/99

There is a story about a first time flyer that as the airplane was landing exclaimed "Boy, you sure have to get pretty close to the ground to land!" No kidding. And inflation has to go pretty low before you slip into deflation. - JJR

By allowing the broad money supply to grow as rapidly as it has in recent years, the Fed has been keeping inflation higher than it otherwise would have been given the pick-up in productivity growth. - Northern Trust – Economic Commentary, 2/8/00

Gradually, over the last several years, the government shifted to what it calls ‘geometric weighting’… That means anything that goes up in price automatically gets a lower weighting in the [inflation] calculation. Anything that goes down in price gets a higher weighting. So you have automatic low inflation. - John Williams, to John Crudele, NY Post, 1/00

Prices for key crops have plunged. Since 1996, the price of corn is down 32%. Soybeans and wheat are off 42%. Deflation’s biggest victim so far is the Farm Belt. Hog prices are so low that 40% of hog farmers are calling it quits… ‘When you’re in the middle of a drought that should be driving ag prices up, yet they’re falling, that’s a pretty darn good signal… And that’s exactly what happened back in the (late) 1920s’ at the start of the Dust Bowl. - Paul Sperry, Investors Business Daily, 8/24/99

For several years we have been warning that deflation posed a greater risk than inflation. – Maureen Allyn, chief economist at Scudder Kemper Investments, IBD, 8/24/99

US manufacturers are finding it more difficult to absorb price increases, according to Norbert Ore, Chair of the National Association of Purchasing Management’s (NAPM) business survey…
With energy prices reaching near $30 a barrel, it’s very difficult to absorb all the increased costs.. - Reuters, 2/1/00

There is a general assumption that as long as inflation rates are low, there is no serious risk to the US economy and markets. It is the enormous and unsustainable imbalances – like near-zero personal savings and the huge trade deficits – that make the economy highly vulnerable. Such imbalances are not the customary route to recession, but the customary route to depression. - Kurt Richebacher, The Richebacher Letter, 12/99

If this is happening during good times…?

A string of recent US bank failures raises troubling questions at a time of unprecedented economic growth… Eight US banks and thrifts went bust last year, the largest number since 1995… - Andrew Clark, Reuters, 2/8/00

The rich are getting richer and the poor are getting poorer… These days the middle class are getting poorer too. …during the 1990s… average real income of high-income families grew by 15% while wages for poor and middle-class families stagnated or actually declined. - Reuters, 1/26/00

The Trade Deficit. Bailing out the world. Burying America.

Prosperity created by consuming more than one produces is worth noting. Until one realizes that in the annals of economic history, it has not been done before. – Anthony Deden, Sage Capital Zurich AG, 1/1/00

The trade deficit widened to $26.5 billion – a new record – in November. The trade deficit in the first eleven months of 1999 sums up to $244.6 billion, a sharp increase from a trade gap of $164.3 billion in 1998. – Paul Kasriel, Northern Trust, 1/20/00

The US trade deficit rose a staggering 65% last year to an all-time high of $271.31 billion… …a booming US economy drew in a flood of imports from Japan, China, Europe and Canada… The resulting gap of $271.31 compared with a $164.28 billion deficit in 1998. - Reuters, 2/18/00

1 + 1 = 11

Computers are a hot sector, the government numbers make them hotter…

…the one GDP component which alone has been responsible for the acceleration both in real GDP and productivity growth since 1995-96… is computers, more precisely business investment in computers. Within just two to three years it has ballooned from a minor item to the dominating item in the US GDP statistics.

Peel off the computer component and you find the tale of a totally different economy with slow and slowing growth. - - Kurt Richebacher, The Richebacher Letter, 12/99

The rest of the story…

The computer component is not what it seems. The growth of computers, while very good, was not as good as the government numbers showed. –JJR

...the computer share of real GDP growth has over these few years more than quadrupled, from 15% in 1996 to some 54% in 1998 and 78.5% in the first half of 1999.

…During the first half of 1999, computer equipment, measured in current dollars, rose $7.6 billion to $105.8 billion, accounting for 2.3% of nominal GDP growth. This is peanuts. But the change in computer measurement (by the government) transformed these peanuts into a super-investment boom of $87.6 billion, providing 78% of real GDP growth in this half-year.

Due to the governments’ view that an increase in computer power has some "extra" value, the $7.6 billion was transformed into $87.6 billion of GDP growth. Nice trick. – JJR

What if a car firm doubles the horsepower of a car and sells it… Does the increase in horsepower and fall in price add to economic activity and GDP growth? Everybody would regard this as ludicrous. But that is what is being done with computers.

GDP is supposed to measure economic activity. …To be economically relevant, it requires a related income flow. But except for the $7.6 billion in current dollars, by which spending on computers actually increased, those $87.6 billion which the computer component added to US real GDP growth in the first half of 1999 are purely statistical fiction. It suggests "real" growth that has in no way taken place. All this is so absurd that we can’t help but to think of it as statistical fraud. - Kurt Richebacher, The Richebacher Letter, 12/99

Why doesn’t anybody else know this?

That so many economic and financial experts let themselves be fooled by such plainly ludicrous statistics is hard to believe. Yet there are two obvious reasons: general ignorance of the actual facts and an overwhelming prejudice and wishful thinking.

As to ignorance, it has to be realized that the reported computer data are, in general, virtually unknown. To find them, [analysts] need availability and study of the Commerce Department’s quarterly GDP reports in full detail of which… hardly any economist can be bothered. Most are satisfied to glance over the brief extracts offered by various financial services (Bloomberg, Reuters, Datastream) or at athe sparse numbers published by the media. …What are the famous words of Keynes? "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." - Kurt Richebacher, The Richebacher Letter, 12/99

Other numbers the Feds fudge…

The CPI, (the inflation rate), is a formula that very few know and fewer really understand. Simply put, the Fed follows a basket of goods and services, and the price changes are translated into the inflation rate. Not exactly. They actually fudge the numbers. If one item in the basket goes up in price, they reduce the weighting - how much it counts toward the inflation rate. The more the price goes up, the lower the weighting. The formula? Who knows! It also seems that the Fed may have dropped some items (like oil) altogether. - JJR

"Effective with the calculation of the seasonal factors for 1990, the BLS has used an enhanced seasonal adjustment procedure called Intervention Analysis Seasonal Adjustment for the CPI series… For fuel oil and the motor fuels indexes, this procedure was used (in January) to offset the effects that extreme price volatility would otherwise have had on the estimates of seasonal adjusted data for the series." If this footnote really means what it seems to say, this disclosure is astounding. Washington has been assuring us that inflation is under control, but it has been reducing – and maybe even eliminating – the impact of the rising price of oil in its calculations. - John Crudele, NY Post, quoting a footnote at the bottom of the CPI report.

The rest of the footnote …states that "extreme values and/or sharp movements which might distort the seasonal pattern are estimated and removed from the data prior to calculation of seasonal factors." - John Crudele, NY Post, quoting a footnote at the bottom of the CPI report.

.

.

.

.

Right Links

.

Right Links

.