August 03, 2012

Dissing Price Discovery

How the feds are subverting Mr. Market’s best efforts
Joel Bowman, reckoning today from Paris, France...

Joel Bowman Da-da, da-da, da-data... What, if anything, does it all mean?

Dow down 92...Crude holding tight at $88...Gold hovering around just below $1,600 an ounce...Ten-year Treasuries retesting historical lows, at 1.46%...Dollar index up half a smidge, to 83.5...

Muddle along...muddle along...muddle along...

What are the markets telling us, Fellow Reckoner?

In a word: Nothing.

As investors are fast coming to realize, the markets couldn’t tell us anything even if they wanted to. Mr. Market has a gag in his mouth, his voice muffled by the price fixers. And we don’t just mean LIBOR-rigging bankers in The City. We’re wagging fingers at the real fixers...the Feds.

It’s something we heard again and again at last week’s AF investment symposium in Vancouver. “Prices are broken,” noted Dan Denning, the big, bright mind behind the Aussie Daily Reckoning. “They are not to be trusted.”

Dan spoke candidly about the mechanisms behind the curtain:

“How can anyone possibly take Ben Bernanke seriously? He told the Senate Banking Committee that the Fed's unconventional policies have been, ‘effective in easing financial conditions and promoting strength in the economy,’ and that, 'Large-scale asset purchases have also contributed to economic growth.’ He added that the Fed is ‘prepared to take further action as appropriate to promote a stronger economic recovery.’

More action. More fiddling. More distortion. And more restraints on Mr. Market’s ability to communicate real world prices, real world information, real world demand. So, where do we go from here?

“We are at the absolute frontier of monetary policy,” wrote Dan in a recent Aussie DR. “The Fed can't 'promote growth' when households are reducing debt. It's telling that Bernanke said the government needs to get fiscal policy in order (spending), in order for consumers and businesses to be more confident about taking risk. But it's as if the Fed and its mainstream lapdogs are completely unable to imagine their set of tools not working on the economy.

“Bernanke said the Fed has three tools left in the box to promote growth. He can reduce the rate the Fed pays on reserves banks deposit overnight with the Fed. He said the Fed can communicate its intentions differently. And he said further asset purchases could happen.”

Da-da, da-da, da-data...

Continued Dan: “Does anyone really think the US and world economies aren’t growing because the Federal Reserve isn’t communicating effectively? Maybe it’s because the Fed has destroyed rational decision making by wrecking the system of price discovery through the manipulation of money.”

The Dow is up over 600 points year-to-date. But 600 points of what? Thanks to their ongoing commitment to institutional-level counterfeiting, money just ain’t what it used to be. How, then, can we measure what it buys? Simply, we can’t. Not honestly anyway.

“The Fed IS the problem,” concluded Dan, “not the solution.”

Unfortunately, the financial markets are not the only sector of society laboring under the crushing weight of the state. As Jeffrey Tucker, executive publisher of Laissez-Faire Books, explains in today’s guest column, the Leviathan is growing both in measurable...and, more frighteningly, immeasurable...ways. Look out below...

The Daily Reckoning Presents
Government Is Shrinking?

Jeffrey Tucker In today’s political climate, the more implausible the claim, the more likely it is to stick. One that seems to be sticking now is that government today is small by historical standards and constantly shrinking.

Run that one by the man on the street -- looted by the tax man, harassed by police, hounded by regulators -- and he will scoff. Now comes the highbrow journalist with a nuanced view to correct him, citing all kinds of complex data.

The highbrow in this case is Catherine Rampell, writing in The New York Times. Her claim seems apodictically certain. “Government has been shrinking steadily for two years,” she says, “and compared to the size of the overall economy, government is actually slightly smaller today than it has been on average in the postwar era.”

Huh? Well, she provides data of “the percentage change in total government spending and investment” as compared with the change in the GDP. She shows GDP rises and government falls. Wow, amazing.

Not so fast. You can always know that when people claim that government is small, it will always appear small by comparison to the GDP, which is to say that anything looks small by comparison to anything (in the words of economist Roger Garrison).

Moreover, it is a peculiar presumption that government should always grow in proportion to the wealth of society (presuming that GDP does measure that). Why? If government is providing essential and minimal functions only, it should get smaller in proportion to economic growth. Should the thief keep coming back for more when his victim grows wealthier?

Also, shrinking by comparison to everything else doesn’t mean that it literally gets smaller. It should only constitute a smaller portion of the total.

But that’s only the beginning of Rampell’s statistical antics. If you compare federal government spending as a percentage of GDP, it comes in at 24.3%, which is the highest in postwar history. In fact, it is the same as 1942, the year American troops landed in Europe.

So what is she talking about? Is she just making stuff up? Not exactly. She carefully says that she is looking at “the percentage change in total government spending and investment.” More precisely, she is examining something called “government consumption expenditures and total investment,” one of the ways that you can slice and dice national income accounting. This is the figure among many options that best makes her case. Piles of data had to be thrown in the trash can to generate the result she wanted.

As AmosWEB points out, this figure is the only one that completely excludes transfer payments, which are defined (arbitrarily) as not investment and not consumption, and includes all those things that (arbitrarily) fall into a specific category.

It’s a bit like saying that a giraffe is a horse if you exclude the neck.

Rampell even took the manipulation one step further to look at quarterly change in the data, and not the actual figure. Therefore, if government spends a trillion on a stimulus now and that stimulus runs out next year, it would seem to show a crash in spending. Surprise, that’s exactly what happened!

Despite her rhetoric, then, we can see that she had to engage in three levels of distortion to come up with the claim that government is shrinking.

Let’s say that we look at what most normal people would consider government spending, by which I mean... the dollar figures on how much government actually spends. And let’s add a column on debt so we can see the total unfulfilled commitments in the year in question too. There is nothing fancy pants here, just the raw truth, year by year.

Now, I ask you: Does this look like steady shrinking to you?

In other words, the man of the street is exactly right. Think about these numbers when you hear pundits and politicians over the next months tell you how dramatically government is shrinking.

Of course, spending alone doesn’t measure government size. If your front door is being broken down by feds, if you are jailed for violating regulations, if you are prevented from starting a business or if you can’t hire new workers because of the high costs, government is effectively totalitarian from your point of view. In the last 10 years, this is the largest change we’ve seen, from big government to police state. In the end, this is a change that no data set can quite capture.


Jeffrey Tucker,
for The Daily Reckoning

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