Manipulation of Government Data

The Manipulation of Government Data

As humans, we innocently grow up in a society that is controlled by some form of government. We tend to trust the government and go along with statements from our elected leaders until we dig deeper and try to hold them accountable and realize that it is an impossible task as most of the time they fail to deliver on the promises given during election speeches. Sadly, our politicians for the most part are more like cheer-leaders than any other form of a leader.

We cannot trust the government when it comes to providing us with reliable and accurate economic data. For example, last week’s economic data of US GDP and unemployment reports have been statistically manipulated to show numbers that are supposed to make us feel confident about the so-called economic recovery when in reality, the economy is unstable. What we as a society need is the truth in order to analyze the real problems and once they are identified come up with an effective solution. Instead, I sadly see that we tend to kick the can down the road each time we have a problem rather than owe up to the problem and fix it.

At least it appears that Mervyn King, the Chief Central Banker of the UK is willing to look his country in the eye and admit that there is nothing he can do to stop the deterioration of his country’s financial system. He was quoted during a speech last week saying that,

“The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.”

GDP

The GDP data that came out for the 4th quarter of the US economy states that it supposedly expanded by 3.2% during that period. If we dig a little deeper into the calculation of the GDP growth, we can see that the Bureau of Economic Analysis decided to change the GDP deflator, which is a reflection of inflation in the economy. They changed it from 2% inflation to 0.3% for the 4th quarter; this means that the US government is trying to tell us that there was almost no inflation during that period. Just to remind you that oil went from $75 to $90 per barrel, while food inflation and most other commodity prices have been skyrocketing.

The reason for the manipulation of the GDP deflator is clear, because without changing it from 2.0% to 0.3% would mean that the GDP growth of 3.2% was actually closer to 1.5%during the 4th quarter. Let’s assume for a second that the Consumer Price Index (CPI) for the 4th quarter of 1.3% is correct (which as we know is also understated), then the GDP data understates inflation by 1% and thus GPD growth based on the CPI was at best 2.2%. Most people put a lot of trust in the government to tell them the truth about the state of the economy so that each individual can properly prepare for what is to come, but when data is manipulated to give people a false feeling that everything is alright while it clearly isn’t, is a crime. These results all should be audited by third party auditors in order to keep the bureaucrats at least to some degree honest.

Unemployment

The unemployment report for the US that came out this last Friday has also been heavily manipulated as the numbers clearly show. The first issue I have with the data is that the unemployment rate supposedly dropped from 9.4% to 9.0% while it was forecast to grow to 9.5%, which according to the job growth figures would be more accurate. The in previous posts mentioned non-farm payrolls grew only by a meager of 36,000 jobs, so how could the unemployment rate drop so dramatically with such little job growth? The answer is…manipulation of statistical data by leaving out 753,000 people that were part of the labor-force 2 months ago, with the assumption that these people stopped looking for work and will go on welfare instead. The January progress is the slowest in almost a year for the private sector as this graph clearly shows.

Another form of unemployment data manipulation is reflected in the form of revisions of data from previous years such as 2009 and 2010. The latest revisions show that in reality 536,000 LESS jobs were created than was originally stated in the unemployment reports during those two years. That means that more than half a million less jobs exist in the economy than stated, but yet we are told that the unemployment rate supposedly dropped to 9.0%. I think that the unemployment rate will be revised again in the future which will illustrate a much different picture than the latest report shows.

Federal Reserve Bank Accounting: Negative Liabilities

Last week, the Fed passed a change in Fed accounting rules which were not picked up by analysts and journalists until days later, because the new rules were released in a standard weekly report. Basically, the Fed does not have to account for losses on assets anymore with an accounting trick called negative liability. This allows the Fed to effectively transfer its assets if they lose in value to the Treasury and then pay it off with future earnings. The new rules give the Fed protection from insolvency due to future interest rate hikes and minimize the impact on its massive bond holdings. Effectively the changes will let the Fed move junk securities off balance sheet, therefore letting it incur substantial losses without impacting its capital.

This accounting change by the Fed does not resolve a major problem because the Fed will have negative cash flow when it has to raise interest rates in order to slow down inflation. At some point when rates are raised, the Fed will have to pay out more in interest payments on reserves held by banks than the income producing debt it holds. Since that problem has not been resolved yet, we can expect future accounting changes that help the Fed hide the truth about the economy and stability of the financial system.

As a society we need to demand the truth and should be able to hold our politicians and central bankers accountable and fire them if they fail to deliver on their promises. Instead, they manipulate data to pretend what they promise us is happening while in reality the truth looks much different. We need to deal with the brutal facts in order to move forward and to build a system that is sustainable and works for many future generations. But unless we deal with these problems and just keep kicking the can one more time down the road, we will eventually come to the end of the road at which time a massive correction of the system is the only solution.