The Quality of Government-Produced Economic Data

China's economy entered into recession in December 2011.

That's very old news to readers of Political Calculations, a little-read blog that somehow managed to scoop a number of financial institutions and even the New York Times in reporting on the poor health of China's economy back in February 2012.

At least now we know why so many of these organizations were so far behind the curve in understanding that a large-scale slowdown in China's economy has been underway for nearly seven months now - they appear to actually rely upon the Chinese government for their economic data. The New York Times might perhaps be finally recognizing that error in judgment:

HONG KONG — As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.

The article goes on to detail evidence of the slowdown that has shown up in recent months, mostly from an accumulation of stocks of coal, copper and other commodities, including the nation's rates of electricity production and consumption, which had previously been taken as a good measure of China's overall economic health.

But the thing that stands out to us is that they've known for decades that China's economic statistics were less than trustworthy, although for completely predictable reasons, they have become more unreliable during the past year:

Questions about the quality and accuracy of Chinese economic data are longstanding, but the concerns now being raised are unusual. This year is the first time since 1989 that a sharp economic slowdown has coincided with the once-a-decade changeover in the country’s top leadership.

Officials at all levels of government are under pressure to report good economic results to Beijing as they wait for promotions, demotions and transfers to cascade down from Beijing. So narrower and seemingly more obscure measures of economic activity are being falsified, according to the executives and economists.

"The government officials don’t want to see the negative," so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

As a result, a number of global financial institutions, who rely on China's economic data in assessing the potential for their investments in the country, were effectively caught with their pants down earlier this month:

Many Chinese economic indicators already show a slowdown this spring, with fixed-asset investment growing at its weakest pace in May since 2001. The annual growth rate for industrial production has edged below 10 percent, while electricity generation was up only 3.2 percent in May from a year earlier and up only 1.5 percent in April.

The question is whether the actual slowdown is even worse. Skewed government data would help explain why prices for commodities like oil, coal and copper fell heavily this spring even though official Chinese statistics show a more modest deceleration in economic activity.

Manipulation of official statistics would also provide a clue why some wholesalers of consumer goods and construction materials say sales are now as dismal as in early 2009.

Keeping accurate statistics for internal use by policy makers while releasing less grim figures to the public and financial markets may also help explain why China’s central bank suddenly and unexpectedly cut interest rates earlier this month.

Whoops! When the economic tide shifts, the worst thing that anyone in the financial world can be is late. Millions, and perhaps billions, of dollars are lost whenever that happens.

So how did a little-read blog manage to report that China's economy had fallen into recession over five months ago, well ahead of all these other venerable institutions?

Easy. That little read blog didn't use China's statistics to assess that nation's economic health. Instead, we used data collected and reported by the U.S. Census on the monthly value of the international trade between the two nations, which we think would be pretty difficult for Chinese officials to fabricate. As it happens, we've found that the year-over-year growth rate of that trade makes it possible to accurately diagnose the relative economic health of each nation, making this kind of analysis an excellent alternative to China's official government statistics for assessing the actual state of that nation's economy.

Speaking of which, here is what it looks like today:

The U.S. Census will update its foreign trade data through May 2012 on 11 July 2012.

In this chart, assessing China's relative economic health may be done by examining the data series shown with the blue data points, which correspond to the year-over-year growth rate of U.S. exports to China. Here, a national economy will demand more goods and services from outside its borders when it is is experiencing strong economic growth, which shows up as a positive growth rate - the more strongly the economy grows, the higher the positive value.

But when that growth rate turns negative or is near-zero, which we'll define as growing at just single digit rates, that communicates that the national economy in question is experiencing at least a significant economic slowdown.

What we observe in our chart above is that China's economy is trudging along at a very sluggish pace. And for all practical purposes, has been since October 2011.

Meanwhile, the data series shown with the red points, which correspond to the year-over-year growth rates of China's exports to the U.S., indicate that as of April 2012, the U.S. economy has been growing more strongly than the Chinese economy.

With the U.S. economy now passing through the equivalent of a microrecession however, we anticipate the May 2012 trade data will fall back toward the zero growth line on the chart.

But then, we didn't rely on the U.S. government's official economic data to work out that the U.S. economy would be struggling at this point of time. We used an alternative data source to first make that call over a year ago....

It's just a good practice to not rely too much on "official" data reports, which can frequently be really off track. That's also a big reason why our readers our rarely surprised by sudden and unexpected economic news.

A very good question!

MONETARY HISTORY CALENDAR June 25 – July 1

JUNE 30

1812 – FIRST US TREASURY NOTES AUTHORIZED BY THE UNITED STATES 
Treasury notes are promise to pay notes to borrowers to raise revenue. The US needed funds to fund the War of 1812. Rather than print US money (such as “Continentals” – an interest- and debt-free money issued by the Continental Congress to pay for the Revolutionary War), the US government followed a different course – to issue notes to borrowers with promises to pay the principal with interest at a later date. The original interest rate was 5.4%. Wars cause indebtedness. Bankers tend to like wars since they tend to create financial dependency of nations to bankers. Thomas Edison would later say about Treasury bonds, “If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good...” 

2005 – PUBLICATION OF "A MATTER OF INTEREST" BY WILLIAM HIXSON, CANADIAN ECONOMIST 
"The very idea of a government that can create money for itself, allowing banks to create money that the government then borrows, and pays interest on, is so preposterous that it staggers the imagination. Either everyone in government in charge of the procedure is lacking in intelligence or they have been bought and paid for by those who profit from their skullduggery and their infidelity to the public interest." 

JULY 1

1818 – SECOND NATIONAL BANK OF US TRIGGERS RECESSION/DEPRESSION
The Second National Bank of the United States (a private financial institution) on this day reversed its financial course from monetary expansion to contraction. They called in loans and cut future loans. They required payments from state banks in gold alone. This caused deflation, leading to a two-year recession/depression – called the “Panic of 1819.” This is what happened time and again when private financial corporations control a nation’s money system instead of We the People through their government. 

1944 – BRETTON WOODS CONFERENCE BEGINS 
The United Nations Monetary and Financial Conference, known as the Bretton Woods Conference was a meeting of 44 Allied nations in New Hampshire, where the International Monetary Fund (IMF) and World Bank were created. Participant nations agreed to fix their currencies to a set value of gold. Debtor nations were to be helped with payments. The actual program was the use of loans (to be paid back with interest) to create political and economic dependence to loaning countries and their bankers. Agreements to receive further loans were often conditioned on “Structural Adjustment Programs” which called for privatization/corporatization of public services, wage cuts, and perversion of economies to service debt payments.

1967 – US POSTAL SAVING SYSTEM ENDS 
Because of opposition from the commercial banks the postal savings system does not develop in a substantial way. The United States Postal Savings System was a postal savings system operated by the United States Postal Service from January 1, 1911 until July 1, 1967 

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NOTE:  Several individuals have inquired about the June 24 posting from last week. On that date in 1996, the US Supreme Court ruled, in Lewis v. United States that federal reserve banks were not federal agencies. Below is background on the case from http://nesara.org/court_summaries/lewis_v_united_states.htm 

John L. Lewis was injured by a vehicle owned and operated by a federal reserve bank, and brought action alleging jurisdiction under the Federal Tort Claims Act. The District Court dismissed the case by ruling that the federal reserve bank was not a federal agency within meaning of the Federal Tort Claims Act and the court therefore lacked subject-matter jurisdiction. The Appeals court affirmed the decision.

The court stated “Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purpose of the FTCA, but are independent, privately owned and locally controlled corporations.”

However, this does not imply, as so many wrongly interpret, that private individuals own the banks for the court also stated “Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank’s nine member board of directors. The remaining three directors are appointed by the Federal Reserve Board. The Federal Reserve Board regulates the Reserve Banks, but direct supervision and control of each Bank is exercised by its board of directors. 12 U.S.C. Sect. 301. The directors enact by-laws regulating the manner of conducting general Bank business, 12 U.S.C. Sect. 341, and appoint officers to implement and supervise daily Bank activities. These activities include collecting and clearing checks, making advances to private and commercial entities, holding reserves for member banks, discounting the notes of member banks, and buying and selling securities on the open market. See 12 U.S.C. Sub-Sect. 341–361. 

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Why this calendar? Many people have questions about the root causes of our economic problems. Some questions involve money, banks and debt. How is money created? Why do banks control its quantity? How has the money system been used to liberate (not often) and oppress (most often) us? And how can the money system be “democratized” to rebuild our economy and society, create jobs and reduce debt?
Our goal is to inform, intrigue and inspire through bite size weekly postings listing important events and quotes from prominent individuals (both past and present) on money, banking and how the money system can help people and the planet. We hope the sharing of bits of buried history will illuminate monetary and banking issues and empower you with others to create real economic and political justice.
This calendar is a project of the Northeast Ohio American Friends Service Committee. Adele Looney, Phyllis Titus, Donna Schall, Leah Davis, Alice Francini and Greg Coleridge helped in its development.
Please forward this to others and encourage them to subscribe. To subscribe/unsubscribe or to comment on any entry, contact monetarycalendar@yahoo.com  For more information, visit http://www.afsc.net/economiccrisis.html

U.S. Gasoline Prices Fall Below the Magic Threshold

With the national average price of gasoline in the U.S. officially set to fall below $3.50 per gallon during this week, we have discontinued running our "Good Morning, White House Staffer" feature at the top of our site, as we promised last week - we've attached it for reference to the end of this post.

With that improvement in the average gasoline price, we anticipate that the reported pace of layoffs in the United States will change somewhat for the better within the next two to three weeks, as employers adjust their employee retention plans during their next pay cycle. Here, the employer reaction will be driving by the combination of their lower cost of doing business and an effective increase in the discretionary disposable income of Americans, who will increasingly have more money to spend on things other than gasoline.

We have previously observed that the $3.50 per gallon mark in the national average price of gasoline, as measured in terms of 2012 U.S. dollars, seems to be the magic threshold at which new jobless benefit claim filings reported by the U.S. Department of Labor are affected by gasoline prices.

In practical terms, we should see the trend in the number of new jobless claims shift to a less negative trajectory, as gasoline prices will have fallen to a level where they will stop having a direct impact upon the rate at which Americans file for first-time unemployment insurance benefits.

We say "less negative" instead of "positive" because other factors will dominate the overall trend. Namely, the failing economies in both Europe and Asia, where the falling relative demand for oil expected in the future is the principal reason why global oil and gasoline prices are now falling. We anticipate that the economic situation in these nations will increasingly and negatively affect the U.S. economy into 2013.

In the short term however, we anticipate that the U.S. economy will see a bit of improvement from the current quarter, which we've previously described as effectively being in a microrecession.

Enjoy it while you can!

Good Morning, White House Staffer!...

The Future Unemployment Rate Enter: Today's Average USA Gasoline Price U.S. Unemployment Rate In Two Years* * If High Gas Prices Are Sustained.... See you tomorrow!

Average Gasoline Price Trends for Washington D.C. and USA Washington D.C. Gas Prices Provided by GasBuddy.com

"Good Morning, White House Staffer" is a special feature we run whenever the average U.S. national retail price for gasoline rises above $3.50 per gallon!

The Future Changes Back for the S&P 500

All noise events end. It's only ever a question of when.

For the U.S. stock market, the noise event that began on 6 June 2012 came to a sudden end on 21 June 2012, as investors suddenly realized that the window of time in which effective central bank and government-backed actions to bail out out ailing financial institutions and troubled national economies had closed, as signs of a global economic slowdown could no longer be ignored. Even CNBC's Jim Cramer noticed:

Interestingly enough, though, the market didn't fall Wednesday even though Fed Chairman Ben Bernanke said the economy is much slower-than-expected. The stock market seemed to ignore that commentary, Cramer noted. It reacted with the vengeance to every bit of bad news released Thrusday, though, and Cramer said he understands why.

"It's in a sour mood about this country where, despite Ben Bernanke's best efforts, Washington is doing nothing to create jobs, build new buildings, or even give us clarity on taxes for next year," Cramer said. "The mood is justified."

After all, the stock market had been going up on the belief that policymakers would take action to fix the economy. If they aren't doing anything, then Cramer thinks the market is in trouble.

But then, that's not a surprise, is it?

The final note on our chart above is significant, because as of 6 June 2012, the level of noise in the stock market has significantly spiked upward, largely on the combined speculation that the European Central Bank will act to bail out Spain's failing banking institutions, and that the Federal Reserve in the U.S. will attempt to shore up the U.S. economy, which has fallen into something of a microrecession (side note: as expected) in the second quarter of 2012.

And today, China's central bank has announced a surprise interest rate cut, which stands to further boost the central bank intervention-driven noise event that succeeded in pushing stock prices up so dramatically on 6 June 2012, as the markets recorded their best day to date in 2012.

We should note that these events are not taking place in a vacuum - the actions described are being coordinated among the world's major central banks and financial institutions, largely because they perceive that the global economy is nearing the event horizon of a global depression. They are considering these steps and taking action now largely out of that fear.

What we will see then in the market are stock prices being elevated far above where their expected future dividends per share would place them, as the market enters into a phase where noise, rather than fundamentals, drives it.

Unfortunately, all noise events end - it's only ever a question of when.

As we saw, when turned out to be 21 June 2012, as the latest short-lived noise event in the stock market came to its inevitable end. Without the noise from the world's central banks to distract from the market's underlying fundamentals, stock prices had only one place to go - back to where those fundamentals would have set them in the first place, as the future changed back to what it was, and really has been all along.

The only real question now is the reason why the central banks didn't act more effectively when the market was signaling that their actions would be welcome - is it because they've chosen not to act, or is it because they can't?

Explain This Chart!

Why does the following chart, which spans 50 years of data for the United States in the post World War 2 era, look the way it does?

In this chart, we observe that the ratio of the U.S. National Average Wage Index starts off at a level 127.3% of the U.S.' GDP per Capita in 1951, slowly rises to peak at 137.8% of GDP per Capita ten years later in 1961, then falls steadily for the next three decades until 1994 when it flattened out at around 88.3% of the U.S.' GDP per Capita.

Since then, it has been as high as 91.3% of GDP per Capita in 2001, and as low as 86.2% of GDP per Capita in 2006. In 2010, the ratio of the U.S. National Average Wage Index to GDP per Capita is 88.6%.

What we can't explain is why these patterns exist. How can the average wage earned by individuals in the U.S. go from being as much as 37.8% higher than the U.S.' GDP per Capita over forty years ago to being steadily 11.4% below that quantity three decades later. What factors caused this ratio to first rise, then fall, then stabilize?

Our next two charts visualize the source data behind our ratio calculation. The first shows the National Average Wage Index, as reported by the U.S. Social Security Administration, which at this writing, only covers the years from 1951 through 2010 (they will add the data for 2011 sometime in October 2012):

The second shows our calculation of the U.S.' GDP per Capita, where we've extracted the data for the years of 1951 through 2010 from our tool, The U.S. Economy at Your Fingertips:

For us, the best part is that we have absolutely no idea what the answer(s) are. We have some hypotheses based upon other patterns or trends that have taken place over the years, but need to put together the data to put them to the test.

In the meantime, you're more than welcome to beat us to the punch - we don't have a timetable for coming up with a coherent explanation that accounts for all that's going on in that first chart. Just drop us a line with a link to what you find and can back with hard data, and we'll be happy to point our readers in your direction!