Economy

This blog post is an example of the daily writing I do for enrolled members in the In Session forum area.  I wanted to get this one out to everyone because it deserves to be widely read and discussed.  If you are interested in reading and discussing news in real-time, I invite you to consider enrolling.

GDP:  More fuzzy numbers

The GDP report was released this morning and it was a compendium of incomprehensible and illogical numbers and, worse, it is just plain wrong.

Of course, since so much rides on an accurate assessment of our true economic state of affairs, it behooves us to make sense of it as best we can, understanding that the GDP report is less than perfect and riddled with difficult-to-rationalize statistical manipulations and quirky additions.

For example, the imputed value of "owner occupied housing" is a non-cash ‘addition’ to GDP meant to capture the value that people derive from their houses, due to the fact that they own them and do not pay rent to themselves in order to live there.  If this does not make sense to you, that means you are normal.

So we gamely march off into the most current GDP report, which came out this morning (Friday, July 31, 2009), mostly to expose just how wrong it is.

I originally wrote about this unpleasant fact back in 2006 in a Martenson Report entitled The United States Is Insolvent.  And today, unfortunately, the situation has only deteriorated. I want to revisit that topic because there is really nothing more onerous to the future prosperity of a country than going bankrupt. If you care about the future prosperity of the US, you need to understand this situation.

Yesterday, my jaw literally dropped when I read this statement made by Vice President Joe Biden:

From a recent In Session post:

This week, the big news is the trouble brewing at CIT group.  If you don’t know them, they are a large financial services firm, mainly providing loans and financing to mid-sized companies.

Their business model involves lending at one rate, then selling the loans to the market at a slightly lower rate and pocketing the difference.  Something like a bank, but they do not leverage their loans off of deposits.  Of course, I am simplifying the business model of a very large and diversified company.  Suffice it to say that the way the securitization market has been operating, and with the cost of capital climbing the way it has, their business model has gone to heaven.  It has shuffled off the mortal coil. 

At any rate, things have not looked good for a while.  This is one of the more horrid-looking charts you will ever see…

Link to Inflation vs. Deflation – What You Need to Know (Part II)

A snippet:

Executive Summary

• Inflation or deflation? – the most important question of our day
• Vast disagreements exist
• Timing
• Inflation = persistent increase in money and credit
• Inflation Myths
• What you can do

There is simply no more contentious or important issue sitting before everyone these days than resolving the question of whether deflation or inflation lies before us. Sides have been drawn, opinions hardened, and camps formed.

When I write these reports, I do my best to peer just a bit further down the road than most. I study and analyze and write because I have found great value in being ahead of the curve. Illuminating the path a bit further out can provide an enormous benefit, especially if actionable ideas are the result.

So let’s clear something up right away: Unless the economy collapses into a smoking deflationary ruin, there’s another business cycle in front of us. Nothing ever goes straight to zero, and the most probable outcome for the future involves a whole series of wiggles going up and down. While I am confident that the distant future most likely consists of a world of less, not more, I expect we will not get there in a straight line. My belief is that there’s a business cycle or two in front of us.

Below are some thoughts that I originally posted in a recent In Session thread.

Here’s a short collection of items I am reading about bonds, which is a subject at the top of my watch list right now.

US Treasury Bloodbath Soaks Fund Managers
By: Reuters | 05 Jun 2009 | 04:38 PM ET

Link to:  Inflation vs. Deflation – What Comes Next?

Here’s a snippet:

One of the key questions of our day, especially for those who have wealth to protect, is, “What’s going to happen to the dollar?”  More specifically, do we foresee an increase in the value of money going forward (deflation), or a decrease in the value of money (inflation)? Should we reserve a small amount of concern for the possibility of hyperinflation, which means the rapid and often total destruction of a currency?

There happens to be a lot of discussion around this topic these days. Unfortunately, much of it is confusing and contradictory, because far too much misinformation is included in the mix. So let’s begin by getting ourselves on firm footing before we look at the data.

(…)

Inflation correlates poorly with growth in the monetary base, making that statistic relatively useless as a predictor of inflation. However, inflation correlates extremely well with growth in government spending, meaning that we’d do well to track that statistic closely.

The current economic crisis is being fought tooth and nail by a determined Federal Reserve (in the role of the "enabler") and an equally-determined US government (in the role of the heavy-lifter, assuming all the lion’s share of the long-term debt and risk). Together, these institutions have virtually consigned future generations to the enormous challenge of wrestling with bloated budgets in desperate need of trimming, further compounded by coinciding with periods of high inflation.