Jim's Blog

The BLS is arguably understating inflation and unemployment. According to Shadowstats, the real rate of inflation is more than two percent higher than reported, and the real rate of GDP decline more than than two percent a year worse than reported.

There really is no such thing as the real rate of inflation. To estimate inflation, you need to compare apples with oranges, which requires a judgment call. Increasingly, the BLS has been making judgment calls in the direction that will flatter its masters – which does not, however, prove those judgment calls are false.

The amount of computing power that an hour’s work will buy has gone up an astonishing amount, and continues to rise rapidly. Televisions are cheaper by this metric and considerably better. Unfortunately the amount of food, housing, healthcare, energy and education that an hour’s work will buy has fallen, and continues to fall.

It has been falling for a long time, at first slowly, and now, faster and faster.

Once again, I repeat, the last man left the moon in 1972, the tallest buildings in the US were completed in 1972, and the coolest cars built in 1972.

If you cannot afford to feed, house, and educate your children, if driving to work gets a bigger problem every day and you cannot casually go and see your relatives, the falling cost and improved quality of smartphones is small consolation.

If we go by Shadowstats value judgments, then we see that GDP has been falling, the US has been in economic decline ever since Bush the elder replaced Ronald Reagan.

Shadowstats figures, like the government’s figures, show a boom from 2001 to 2005 November, but everyone now knows this boom was fake. Manifestly, whether the Austrian theory of booms and busts is true in general, it has been true of recent events. People invested in housing, bankers supposedly created value through borrowing and lending, real estate agents supposedly created value by getting people in houses, and builders created value by building and improving houses, but obviously the builders were creating considerably less value than was believed, and the bankers and real estate agents were subtracting rather than creating value.

The boom was what the Austrian economic school calls malinvestment. People invest in the wrong things, so prices are wrong, so people do the wrong things, subtracting value, but getting paid as if they are creating value. Then, subsequently there is correction, which correction unavoidably makes people feel bad. Printing money to make people feel good just makes things worse.

People thought that housing would have more value than it did, because they thought that genetically low IQ Mexican immigrants were going to be magically affirmative actioned into successfully performing the middle class lifestyle, that in the near future they would have nice houses in suburbia, and in the near future they would be able to pay for nice houses in suburbia, so there would be the need for a lot more nice houses in suburbia, and a payment stream making those houses valuable.

This fantasy fell apart, though no one can speak about it, and mentioning it, even on supposedly right wing and libertarian blogs, is apt to result in being called a white nationalist, a hateful racist, and getting banned from that blog.

If we adjust for the fake boom and subsequent correction, we see not an abrupt decline starting in 2009, but rather a long arch, with growth slowing in the 1970s, the economy peaking soon after Reagan, and decline slowly and steadily accelerating since then.

So what is causing the decline?

If we look at the areas where we are declining, and where we are not, the answer is pretty obvious: Computers are pretty much unregulated. Every piece of software and hardware comes with a de riguer disclaimer that it is not promised to do anything useful, and may well do you great harm, and if so, not the manufacturers fault. Strangely, government, courts, and regulators have let them get away with it, probably because they are not quite sure what computers are or what they do.

Housing, health, energy, food, finance, and education, on the other hand, are massively regulated, and are largely managed by government or quasi government institutions.

Government is simply failing economically, and is taking with it major and vital parts of the economy.

The cure is going to be illegal health care, illegal finance, illegal food, and illegal housing, all of which is apt to create a demand for the illegal provision of defense and contract enforcement services, assuming we don’t get conquered by hostile outsiders in the process, or, like the Roman Republic, switch to military despotism, a despotism that might, with painful slowness, eventually become monarchy.

In its death throes, government is taking over and destroying every part of the economy, and will probably reach computing soon enough. I have often mentioned Sarbannes Oxley as the height of far left madness, for it makes the foundation of the modern corporation, accounting, pretty much illegal, leaving investors in the dark. Sarbanes-Oxley accounts don’t mean much.

Lately the government has been directly intervening into the management of companies, with cataclysmic results.

All these interventions have the effect that investment, instead of being directed at making money, is instead directed to political goals – spent on the underclass, and on professional left wing activists.

Sarbanes–Oxley theoretically dictated how accounting should be done, so that people could not cook their books. But no one knows how to comply with Sarbanes–Oxley, or what compliance with Sarbanes–Oxley would constitute, so they just hire someone sufficiently influential that whatever he does is likely to be deemed compliance with Sarbanes–Oxley.

Which means that no one knows what, if anything, the accounts mean. Observe that in the recent financial failures, everyone was working in the dark. The accounts failed to provide any sign that the money was running out until the checks started bouncing and people discovered that everything was gone.

Now on top of Sarbanes–Oxley, we have the Dodd–Frank Wall Street Reform and Consumer Protection Act, which turns all major financial institutions into quasi government enterprises, like Fannie and Freddy.

Such enterprises have no incentive to perform, and are above the law, making it likely they will act criminally.

This is already happening: A major part of Dodd–Frank was regulating derivatives. The big derivatives that scare people are bets on credit events, where a financier promises to pay if someone does not pay his debts. So if you lend to Greece, and are worried that Greece will not pay its debts, you buy a bet from a bank that Greece will pay its debts. If Greece stiffs you, the bank will pay you.

Before Dodd-Frank, when such bets were unregulated, those who lost the bet always paid up, or themselves went broke. Recent Greece failed to make payments on its government debt, and lo and behold, those who were stiffed by Greece, were stiffed a second time by Goldman Sachs which had made big bets that Greece would pay its debts, but now that finance is regulated by the wise and the benevolent, they wisely and benevolently deemed that the bet would not be paid.

Thus the practical effect of Sarbanes–Oxley is cargo cult accounting, and to criminalize real accounting, and the way the wind is blowing, the practical effect of Dodd–Frank will be cargo cult finance, and to criminalize real finance. The true nature of Sarbanes–Oxley is shown by MF Global, and the true nature of Dodd–Frank is shown by derivatives of Greek debt.

Anyone who offers investments through United States brokers has to comply with Sarbanes–Oxley, which means that US citizens are forbidden world wide to invest in anything with real accounting. You can bypass this, but it is not trivial.  If you go with the flow, you wind up investing on the basis of Sarbanes–Oxley numbers.

Supposedly Sarbanes–Oxley has produced “better earnings quality” – but one would not expect Sarbanes–Oxley to produce better earnings, that not being the purpose of Sarbanes–Oxley. It is more likely that Sarbanes–Oxley has produced reported better earnings. The purpose of Sarbanes–Oxley was to produce truth, and it has not produced truth. On the contrary, whereas Enron’s accounts, read carefully, revealed that Enron had been losing money for some time, and was broke, nothing in MF Global’s accounts revealed that.

Enron went under because people stopped selling it stuff on credit, and stopped paying for stuff in advance. People were depositing money and gold in MF Global right up the last minute.

Enron went under because the truth in its accounts meant it could no longer suck in other people’s money. MF Global went under because it was losing more money than it could suck in. Accounting did not fail for Enron. It failed for MF Global. Enron failed because people got wind it was in trouble. No one got wind that MF Global was in trouble.

This entry was posted on Wednesday, January 11th, 2012 at 20:05 and is filed under economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.