Tuesday, September 29, 2015

U.S. Economy Is Worse Than Claimed

            Courtesy of ShadowStats.com
The above chart shows a growing divergence between the Consumer Price Index and what it would be if the method of calculation had remained consistent. Beginning in 1983 the government changed its method of calculation to show lower inflation by excluding food and energy, claiming they were too volatile to be reliable indicators. The result is the so-called “core inflation” CPI, which is a favorite of the Federal Reserve. The latest figure for the CPI reported by the Bureau of Labor Statistics is 0.4% (for August and also July), but if calculated by the method used in 1980 the inflation rate would be 7½ percent, as shown by Shadow Government Statistics (ShadowStats.com).

The chart shows the difference in the inflation rate only from the change in 1983. The divergence would be even greater if the effects of several later adjustments were also included. For example, a reconfiguration of this statistic by the 1995/96 Boskin Commission made the CPI an even worse indicator of the cost of living for most Americans. It has been estimated that from 1996 to 2006 this adjustment reduced by over $680 billion what the U.S. Government would have paid in cost-of-living increases in salaries, social security, federal employee pensions, and other benefits.
It seems no one attempted to objectively determine the real cost of living without the influence of the flawed government model. The Chapman Index sought to remedy that. Its founder, Ed Butowsky, said it is “our attempt to help people understand why they feel like they aren’t keeping up and why, as they get older, they feel as though their money does not go as far – even when they’re following the rules, working hard and supposedly beating inflation.”

The Chapman Index 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. The latest average price increase of the 50 cities is 8.9%. Not a single one of the cities was even close to the near zero (0.4%) inflation of the CPI reported by the U.S. Bureau of Labor Statistics. The lowest of the 50 cities in the Chapman survey was Tucson, Arizona, at 5.7%. http://www.chapwoodindex.com/

Butowsky notes that routine salary increases and corporate pensions are often keyed to the CPI. “The middle class has seen its purchasing power decline dramatically in the last three decades, forcing more and more people to seek entitlements when their savings are gone. And as long as pay raises and benefit increases are tied to a false CPI, this trend will continue.” The Chapman Index shows where people actually spend their money. The CPI is not a true indicator of the cost of living since it excludes food and energy, which are not only necessities but for many people their largest expenditures.

Like the inflation numbers, the unemployment statistics have been manipulated by the government to present a more favorable picture.

John Williams, founder of Shadow Government Statistic, says, “The seasonally-adjusted SGS Alternate Unemployment Rate depicts current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers. The U-3 unemployment rate is the monthly headline number [Note that this is the least complete category—has the most exclusions—and thus shows the lowest, most favorable unemployment numbers]. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.”

Notice that the most complete measure of unemployment (SGS) places today's unemployment rate at 23 percent. That is not only worse than in the recession of 2007-09 but comparable to what occurred in the Great Depression of the 1930s. The so-called recovery from our recent recession has been the weakest since World War II despite the most massive effort in history to promote economic growth and employment with the stimulus of “quantitative easing,” which is simply a scholarly-sounding term for printing money. 

In addition to the above charts, there are many other indications that quantitative easing has not benefited the economy. The labor participation rate (those working or looking for work) fell in September 2015 to 62.4%, the lowest level since 1977. Wages have increased by the slowest rate since the 1980s, and median household incomes are still falling, down 1.5% in 2014 from 2013, according to new census data available mid-September 2015.

Small businesses account for most new jobs and employ about half of the private workforce. But small business deaths now exceed births for the first time since the Census Bureau began keeping records more than 30 years ago.

The September jobs report was a jolt. It said only 142,000 new jobs were created, compared to economists' forecast of 206,000. The numbers for August and July were revised downward by 59,000, showing an average of only 167,000 for the third quarter. That's down from the monthly average of 198,000 for all of 2015 so far, which is down from 260,000 a month in 2014. (Previously, April and May were revised downward by 54,000 jobs.) And of the 142,000 jobs created in September, only 118,000 were in the private sector. Some 350,000 Americans left the labor force in September. An all-time record of 94 million people are not employed or actively looking for work.

Obama's $787 billion (later adjusted to over $800 billion) stimulus program was a failure of the Keynesian idea that government spending produces a multiplier effect as dollars would be spent again and again throughout the economy, multiplying wealth. Franklin Roosevelt tried the same thing. Didn't work then—in fact, prolonged the depression. Didn't work for Obama either. Keynes' biographer Hunter Lewis says, “There is just no evidence” that spending ever cured a recession, and Keynes “wasn't much interested in evidence.” Harvard economics professor Robert Barro has written, “What few people know is that there is no meaningful theoretical or empirical support for the Keynesian position.” I discuss this subject at greater length in my book, but here is a convincing admission about it by Roosevelt's treasury secretary before the House Ways and Means Committee on May 9, 1939: “We are spending more than we have ever spent before and it does not work....After eight years of this Administration we have just as much unemployment as when we started....And an enormous debt to boot.”

Here is a more recent statement, in July 2015, from a paper by Stephen Williamson, economist and vice president of the St. Louis Federal Reserve Bank: "There is no work, to my knowledge, that establishes a link from QE [quantitative easing, i.e., bond-buying to increase the money supply] to the ultimate goal of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation....Indeed, mainstream monetary theory and the experience of Japan for the last 20 years tells us that extended periods of ZIRP [zero-interest-rate policy] lead to low inflation, or even deflation. [emphasis added.]"

Japan is now in its fourth recession since 2008. Annual growth has averaged 0.85% since 1992, and Standard & Poor's just downgraded the ratings on its massive national debt, which the other two major ratings agencies had already downgraded.

Shinzo Abe was elected prime minister by campaigning for a more aggressive version of the monetary stimulus policies that have failed Japan for 20 years. He said, “Countries around the world are printing more money to boost their export competitiveness. Japan must do so too.” That was his prescription for a degree of “needed” inflation to bring the country out of economic stagnation and avoid the growing fear that deflation was now a greater threat than inflation. On October 31, 2014, Japan's central bank and its main government pension fund said they would pump trillions more yen into the long-stagnant economy, now growing at 0.2%. The bank of Japan would expand its asset-buying program by as much as 33 %. It would now buy at the market more than twice the amount of new bonds issued by the government, and it would buy not just government bonds but stocks, ETFs, and real estate funds.

The European Central Bank is engaged in a QE policy of buying 60 billion euros ($67.5 billion) per month in hopes of raising inflation by increasing the money supply and reducing borrowing costs. That program, which amounts to more than a trillion euros ($1.1 trillion), is scheduled to end in September 2016; but on September 3, 2015 ECB President Mario Draghi said he is prepared to expand the program. He previously said he would do “whatever it takes” to save the euro. Deflation could stifle consumer spending and make it more difficult for European governments and businesses to repay debts. In response to Draghi's comments, the euro tumbled 1% against the dollar. Jean-Michel Six, Standard & Poor's chief economist for Europe, said he would not be surprised if the ECB's program extended into 2018 and reached 2.4 trillion euros, twice what was initially committed.

The next stage for both the Bank of Japan and the ECB is more easing; they’re going to keep putting fuel on the fire, but at some point the fire’s big and there’s nothing left to burn -- What do we do?” said Philip Moffitt, the Asia-Pacific head of fixed income at Goldman Sachs Asset Management, which oversees about $1 trillion globally. “So your immediate response to that would be a huge sell-off in risk assets.”

The stock market is poised for a huge sell-off of risk assets.  Stocks are terribly overpriced in view of the economic weaknesses I've cited. 

Since 2008 the combined balance sheets of the world's five largest banks have increased by a staggering $9 trillion. This has inflated financial assets just like excess credit inflated the stock market bubble in the 1920s and the housing/mortgage bubble in the 2000s. Today's stock prices have also been inflated by companies buying back their own stocks with near-zero interest rate borrowing. And those same low interest rates have led many people to withdraw from traditional savings and shift to riskier investments such as the stock market in hopes of higher returns—and very likely also because of concern about the future value of the dollar. What is the point of saving for the future when interest on savings is so low and printing vastly more dollars will surely make the currency worth less in the future? If central banks achieve the 2% inflation they now view as optimal, nearly half the principal of today's savings accounts—43%—will disappear in 25 years. Do you want to settle for that or roll the dice for greater return? With those two bad choices, gold becomes more attractive.

With all the fiat money being printed by central banks, it should be no surprise that people all over the world have been turning to gold. As we have pointed out in previous writings, there is a global shift of gold from the West to the East and increased demand for physical possession of gold. The Shanghai Gold Exchange has become the world's largest gold market, and here we are talking about physical delivery. According to the China Gold Association Yearbook, China in 2014 imported at least 1,250 tonnes and domestically mined 452 tonnes, for a total of 1,702 tonnes. In the week ending September 25, 2015, the Shanghai Exchange delivered over 65 tonnes of gold, making a year-to-date total of 1,958.7 tons—an annual rate of nearly 2700 tonnes, which represents about 90 percent of world's gold mine production this year.

The remaining 10 percent cannot possibly meet the demand. Indian demand is conservatively estimated at 950 tonnes, and there is little variation in this since it is determined largely by cultural and religious factors. Some of this demand will no doubt be met by smuggling and recycling of “scrap” gold, but those cannot possibly make up the difference. Nor have we included here any demand from other Asian countries, the Middle East, Europe and the United States, which collectively usually account for up to 50% of global demand. Most likely China has grossly understated the amount of gold it produces domestically, but in any case only a far higher price will determine how newly-mined gold is rationed to world demand. 

President Franklin Roosevelt outlawed private ownership of gold in the 1930s, but there remained one final link between the dollar and gold. Foreign central banks could still exchange dollars for gold until 1971, when President Nixon ended that policy.

When Deng Xiaoping ascended to power in China, he made many far reaching market reforms that transformed the rigid, backward communist nation into an economic powerhouse. Through its exports to the U.S., it accumulated trillions of dollars. Some of these were used to buy U.S. Treasury Bonds—in effect, recycling China's trade-surplus dollars back into the U.S. There were benefits to both sides. China could use the dollars for investment in developing the country and paying wages for its workers, and the U.S. government needed a buyer for its bonds to pay for its huge deficit spending.

It seemed that both sides were “trapped” in a relationship that neither wanted to give up nor could see a way out of. But China grew increasingly uncomfortable about accumulating greater amounts of dollars whose future value would be eroded by the expansion process it was financing. China was fearful that U.S. printing of money would lead to inflation and a hard fall of the dollar, which would seriously reduce the value of China's holding. In 2009 Zhang of the China Gold Association stated: “In view of the declining US dollar value, it is paramount that China steps up gold reserves. How to do this is the only question that China is debating these days. The possible steps include opening up new gold mines, aggressively going for gold mining, buying gold from the open market etc. All said and done, it is imperative that China needs to buy more gold,”

China has done all the things Zhang recommended, and more. For instance, the government takes out ads on television urging people to buy gold. It has established gold stores throughout the country. They look like jewelry stores but exist to sell gold. Any person can walk into any such store or bank and buy gold for cash. No questions asked. It's all part of the goal of “storing wealth among the people.”

Meanwhile, China's currency, the yuan, has climbed in stature. It is now in fourth place as the most-used currency in cross-border payments, having surpassed the Japanese yen in August. As recently as 2012, it was in twelfth place. It is now behind only the U.S. Dollar, the euro, and the British pound. The volume of foreign exchange trades in yuan reached more than a million in a single month in August, rising 50% from the same period last year. More than 1,000 banks in 100 countries can now use the yuan. According to a Bank of England survey, trading in the yuan rose 25% in the six months to April this year while trading in other currencies fell 8% on average.

The London Metal Exchange, the oldest futures exchange in the world, in now owned by the Hong Kong Exchanges and Clearing Ltd., which has launched yuan-denominated futures contracts for some industrial metals.

China is no longer “trapped” into buying U.S. treasuries to finance U.S. profligate spending. Although China and other countries can no longer exchange dollars for U.S. Treasury gold, they can instead exchange their dollars for gold on the Shanghai Gold Exchange and other exchanges.

The New York Comex is the leader in gold futures contracts, accounting for 82% of the world trade in them. But the overwhelming majority of these do not involve any physical exchange of the metal. They are simply paper trades because most positions are closed out before the delivery date. A buyer will almost always sell his contract before delivery is due, and a short seller will do just the opposite. Neither trader will see the gold, and the Comex will have exactly the same amount of gold in storage as before those traders participated. The Comex warehouses gold to provide a delivery option, but historically most participants haven't used it. That has changed in the last few years.

Recently the website zerohedge.com, a highly respected observer and analyst of monetary happenings, noted that the Comex supply of deliverable gold had declined to barely 10 tons, its lowest ever, resulting in a record-high ratio of 124 ounces of outstanding open interest for every physical ounce of gold in storage. Fears of default were quickly calmed by the Comexboosting its eligible gold by a whopping 78% overnight, from 362K ounces to 643K,...However, this was not achieved with an infusion of actual new gold into the Comex, but thanks to JPM [J.P. Morgan] reclassifying 276K ounces of gold from the Eligible into the Registered category, even as actual eligible gold continues quietly hemorrhaging out of the Comex.”

Delivery troubles on the Comex and increased demand for delivery by buyers, fearing they may have problems doing so later, point to a higher gold price. That does not augur well for the dollar, but another trend is developing that is also negative for the dollar. In an article headlined “Central Banks Dump U.S. Debt,” the Wall Street Journal stated: “Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.

Sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.”

Monday, August 31, 2015

Why Laws Fail To Make Us Healthier

Why do so many laws passed with good intentions and seemingly desirable goals so often fail? And why do they so often worsen the problems they are supposed to solve—and hurt people they are supposed to help? In previous postings we noted: 1) government programs to reduce intake of fats in the name of lessening heart disease actually led to weight gains and increased danger of diabetes and heart disease, 2) government efforts to improve the federal school lunch program by increasing consumption of milk, fruit and vegetables led to fewer students drinking milk, many skipping meals entirely, more “junk” food snacks being eaten, and vast quantities of fruits and vegetables being thrown away, and 3) government policies to reduce salt consumption are more dangerous than the salt Americans devour. The government recommendation for daily sodium intake is 1,500 to 2,300 milligrams or fewer. But people consuming fewer than 3,000 milligrams of sodium were found to have a 27% higher risk of heart problems, stroke or death than those consuming 3,000 to 6,000 milligrams.

Now the issue is banning plastic bags in grocery stores and other retail establishments. More than a hundred cities and counties have already done so, and others are considering it to reduce litter, disposal in landfills, and other environmental concerns. The bans are done with the implied or expressed intent that consumers will switch to reusable bags.

The effects of the bans, however, have not been what the advocates expected. A study from the Institute of Law and Economics of the University of Pennsylvania Law School found reusable grocery bags contained potentially harmful bacteria. Examining hospital emergency room admissions related to these bacteria, Professors Jonathan Klick and Joshua D. Wright found emergency room visits spiked when the ban went into effect. “Relative to other counties, ER admissions increased by at least one fourth, and deaths exhibit a similar increase.” Using standard statistical estimates, they found the associated health costs “swamp any budgetary savings from reduced litter. This assessment is unlikely to be reversed even if fairly liberal estimates of the other environmental benefits are included.”

In May 2013 the Los Angesles Times reported, “A reusable grocery bag left in a hotel bathroom caused an outbreak of norovirus-induced diarrhea and nausea that struck nine of 13 members of a girls’ soccer team in October.”

Researchers at the University of Arizona and the Loma Linda University School of Public Heath randomly tested reusable grocery bags carried by shoppers in Tucson, Los Angeles and San Francisco. They reported, “Bacteria levels found in reusable bags were significant enough to cause a wide range of serious health problems....Bacteria was found in 99 percent of the tested bags, nearly all of which were made of woven polypropylene. Half carried coliform bacteria; eight percent carried E. coli.”

Various studies state that nearly all dangerous bacteria in reusable bags can be removed by washing them, but 97 percent of the people using them don't wash them. The San Francisco ordinance states that reusable bags must have a usable life greater than 125 uses and, furthermore, must be durable enough to be washed and disinfected at least 100 times. Because the usable life requirement exceeds the number of washes requirement, the ordinance assumes the bag will not be washed after every use. The Klick and Wright study notes that “washing such bags will itself have negative environmental consequences through excess water use. Further, the detergents necessary to clean the bags add to the environmental costs, as does the use of water hot enough to kill the bacteria.” Kofi Aidoo, Professor of Food Science at Glasgow Caledonian University, is a leading expert on bacterial toxins and food-borne diseases. He says, “If people are going to have to pay for bags and re-use them my concern is we're creating a high risk of food poisoning. At the very least people have to be given advice to clean these bags every time they use them." 

Common plastic bags are environmentally superior to reusable ones in many ways. Manufacturing them requires less than half the energy needed for compostable plastic or cloth bags and less than a third of what's required for paper bags. A higher percentage of energy can be recovered (through combustion) from the single-use plastic bags than from the other two types. Making plastic bags requires less than 6 percent of the water needed to make paper bags. And cloth bags are much more challenging to recycle since they contain a combination of materials including metal, cotton and other fabrics.

In a comparison of quantities of municipal waste by weight, the production, use and disposal of single-use plastic bags produced a net 15.51 pounds of municipal solid waste; compostable plastic bags, 42.32 pounds; paper bags, nearly 75 pounds.

A report from the National Center for Policy Analysis states, Studies show that plastic bags represent a tiny portion of litter and that banning them has not reduced the amount....According to the Keep America Beautiful campaign, plastic bags are not one of the top 10 sources of litter nationwide.” In Austin, Texas, plastic comprised 0.6 percent of the city's total litter—but that is high because it included other types of plastic, not just plastic bags. A statewide study in California found plastic bags were only 0.3 percent of the waste. In San Francisco, plastic bags accounted for 0.6 percent of the city's litter before the ban—and 0.64 percent after the ban. 
The United Kingdom’s Environmental Agency found paper bags were more environmentally harmful than plastic bags in every category: global warming potential, abiotic depletion, acidification, eutrophication, human toxicity, fresh water aquatic ecotoxicity, marine aquatic ecotoxicity, terrestrial ecotoxicity and photochemical oxidation. It also found plastic bags were environmentally superior to reusable cloth bags. It said cloth bags would have to be used 104 times to surpass the environmental performance of plastic bags.

The campaign to outlaw plastic bags in the name of improving the environment is based on ignorance and misinformation. It will do the exact opposite. It will waste energy, water, and money. It will create inconvenience, waste people's time, and impose health risks. It will deprive people of the liberty to exercise choice which has produced a more efficient, economical and safer product—and with less residual municipal waste—than alternatives favored by the ban. Banning plastic bags is an attempt to achieve by political means what cannot be achieved by economic means, because it is unrealistic. It means government against the economy! Which means government against reality. There is nothing government can do to make an economic function more efficient than a free market; its only power is to make it less efficient and more costly—and, yes, environmentally inferior.

If government sacrifices even small measures of individual liberty in hope of some small economic gain deemed more important, the liberty disappears but the gain proves illusive. If government instead regards safeguarding liberty and individual rights as preeminent—not to be sacrificed to anything—the result is a free market that provides economic benefitsincluding environmental and health benefits— unattainable by political action.