The Nightmare Which Keeps Janet Yellen Up at Night has Come True

by John Galt
January 22, 2017 14:40 ET

The American people have been living a hopium induced dream laced with Hollywood special effects and tons of voodoo economics magic tricks initiated under the direction of former President Obama. To understand why there is a nightmare which keeps the academics and Janet Yellen awake at night, one must review the events under the Obama regime which are going to lead to a seminal moment for the American economy and indeed, the very structure of the Federal Reserve Bank’s actions over the last eight years.

In March of 2013, the Obama regime decided to order the government to re-calculate its methodology for Gross Domestic Product (GDP). Included in the revisions for the measurement process were some absurd assumptions as outlined in this excerpt from an article on the subject by the U.K. paper The Guardian:

For the first time, the US is changing the way it measures its economic growth, the measure we call our gross domestic product. Starting in July, the keepers of US economic data at the Bureau of Economic Analysis will stand over the usual cauldron of GDP – a stew that includes how much Americans consume, government spending, investment, exports and imports. They’ll begin to add new ingredients that, in a puff of smoke, will create a more favorable, higher gross domestic product.

The new ingredients include Hollywood royalties from TV, movies and songs – some Tinseltown magic, really – as well as revenues from scientific research and development. Like a feelgood movie, this will make us feel positive, briefly – boosting our GDP by as much as 3% from its currently anemic level of 0.4%.

And indeed, the Obama directive created a boost to his post-Great Recession GDP numbers and making President Bush’s GDP numbers look worse. If that was not a political move, the by God, I don’t know what one is. However there is more to this than meets the eye.

In an excellent review of the changes from Seeking Alpha on April 24, 2013 this key portion of the article highlights the fallacy of the Obama-era changes:

The government made a significant change in the gross investment number (I), which now includes R&D spending, art, music, film royalties, books, theatre. This change in GDP statistics has not been implemented elsewhere in the world. So the U.S. is the first to accomplish this rewriting of the GDP number.

Research and development (R&D) spending, which shouldn’t even be accounted for as investment, adds a significant amount to the U.S. GDP number. It accounts for around 2% of U.S. GDP. Art, music, film royalties, books and theatre add another 0.5% to U.S. GDP. Another adjustment has been made to pension accounting. Previously, pension spending was included in GDP. After this adjustment however, we also look at the “promise” to pay out pensions. So we are talking about imaginary numbers that are now included in GDP. A last example is found in real estate. Commissions, legal bills and expenditures on real estate transactions are included in GDP as “investment.” Obviously these expenditures aren’t associated with real production.

One of the consequences is that comparing the GDP number between other countries and the U.S. is not transparent anymore. It is like comparing apples and oranges. GDP should measure real production (like building a factory) and what the U.S. government added here is not real production. It is a measure of spending in the economy and there are items in the GDP number that don’t add real value to the economy (like writing books).

Second, while the GDP number gets inflated upwards, all macroeconomic indicators that are based on the GDP number will be adjusted with it. For example, the debt to GDP, which is at 105% now (Chart 1), will drop 3% just because of this adjustment to the GDP number. This fictitious drop in debt to GDP will highlight that the U.S. improved its debt load, while it did not. Another example is government spending as a percentage of GDP. By increasing the GDP number, we will get a lower government spending number, which allows the government to increase spending.

The bottom line translation from just those two (among hundreds of others) is obvious:

The American recovery under former President Obama was a fallacy, a dream concocted and supported by the FakeStreamMedia to ensure the propaganda maintained his legacy and policies would profit his sycophantic supporters.

In reality however, in the heartland, small towns, and Rust Belt throughout our land, the truth was that economic growth never returned and what new jobs were created were of the non-career entry level sort, hardly a formula for economic expansion. The truth is that the manipulation of economic data and statistics began mildly under President Clinton, accelerated under George W. Bush, and became outright Soviet style propaganda under Obama. Thus if the numbers can not be trusted how can logical macroeconomic decisions be made by the Federal Reserve unless they were forced to accept the fallacy and attempt to promote it with a ZIRP policy as long as they possibly can.

Zero Hedge posted an article on Saturday from David Rosenberg which had the following statement:

I don’t think we have a productivity problem — in fact, the demise of productivity is vastly overstated and that is because the Bureau of Labor Statistics (BLS) is likely vastly overstating labor input, and I’m talking here about how hours worked are estimated.

But the real travesty, and what I think deserves top priority (but I don’t see it), is that we have, in addition to 7.5 million officially unemployed (a number that is closer to 15 million when all the hidden unemployment is accounted for), 23.5 million Americans aged 25-to-54 who reside outside the confines of the labor force. And at a time when job openings are at record highs.

Here is the chart from the Federal Reserve illustrating his point:

In other words the unemployment data that the Federal Reserve and political elites have touted for the past six years appears, much like GDP to be another piece of propaganda designed to cover for a lack of sustainable economic growth. What makes this deliberate dilution of the report using voodoo mathematics is the illusion that the U.S. is currently in a period of “full employment” even though reality is far from the truth. The calculations that David Rosenberg made above were conservative by any standards and when citizens over the age of 54 are included in the exclusionary count the unemployment rate is probably far higher than the majority of current economists dare to admit. My personal estimations put the real rate closer to the 14.5-14.7% range in reality using an honest U-6 measurement:

It is my belief that when the adjustments to Labor, Commerce, and GDP data reporting was made in 2012 through 2013, the unemployment rate was permanently altered to reflect favorably for Obama’s re-election campaign in 2012 and thus kept in place throughout the end of his term. If honest accounting and statistical analysis is allowed to return to the government departments which includes workers out of the workforce for all reasons except for permanent retirement, the figure of 14% or so might even be a tad more conservative than reality on my part.

This is the nightmare that Janet Yellen faces:

If she starts to raise rates to quickly before the Trump tax revisions and stimulus take effect, she could take a garden variety recession and turn it into something much worse which will incur the wrath of the Donald. If she does nothing and the economy starts to overheat, she could trigger a massive inflationary spike which accelerates beyond the Fed’s control.

Once honest, non-politicized economic statistical reporting returns as part of the government structure, if it returns at all, I’m afraid that any action Yellen takes will be viewed as too little, too late, and the consequences of eight years of smoking the Obama hopium will come back to crush the U.S. economy within two years; especially if the Republican establishment and Democrats successfully dilute or weaken the major tax and regulatory reforms currently being discussed by the majority party.

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