Hiding A Depression: How The US Government Does It
By Daniel R. Amerman, CFA
The real US unemployment rate is not 9.8% but between 25% and 30%. That is a depression level of job losses - so why doesn't it look like a depression for many people? How can so large of a statistical discrepancy exist, and how is it that holiday shopping malls are so crowded in a depression?
The true devastation is hidden by essentially placing the job losses inside three different "boxes": the official unemployment box, the true full unemployment box, and most importantly, the staggering and persistent private sector job loss box that has been temporarily covered over by a fantastic level of governmental deficit spending. The "recovering and out of the recession" cover story is only plausible when nobody connects the dots and adds all the boxes together.
We will add together the three boxes herein - using US government statistics for all three - and convincingly show that the US economy is in far worse condition than what is presented by the government or by the mainstream media. No, we have not emerged from "recession" and there will be no "double dip" - because the first "dip" was straight down to a depression-level economy in 2008/2009, and we haven't come back up.
Creating artificial "free money" on a massive scale that artificially boosts short-term employment is how you segment depression level unemployment into the separate boxes and hide what is really happening. It is this radical strategy that most distinguishes the current downturn from the 1970s and 1930s. The ultimate source of most of the current "free money" that hides the depression is the government risking the impoverishment of US savers and investors for potentially decades to come, with the worst of the damage concentrated on retirees and Boomers.
To have a chance of defending your hoped-for future lifestyle, there is simply no substitute for seeing the truth clearly. For it is only when we see through the lies with clarity that we can distinguish the false opportunity of manipulated markets from the real opportunities that can be found in unexpected places.
Headline Unemployment (Box 1)
The graph above is our starting point and first "box". It is the "headline" rate of unemployment in the US that is featured in newspaper articles and discussed on the cable business news. As of November 2010 the official US unemployment rate was 9.8%. While that's deeply painful, and unemployment rates since 2008 have been the highest seen since the end of the Great Depression (with the exception of the 10.8% peak in 1982), 9.8% is not a depression level unemployment rate.
Real Unemployment (Box 2)
As economists and political decision makers know quite well, the "official" unemployment rate is not the full rate of US unemployment. The "official" rate is technically known as the U3 rate of unemployment, and it is a politically advantageous partial accounting for the unemployed. The U.S. Bureau of Labor Statistics calculates unemployment 6 different ways, U1-U6, and it is only in the U6 statistic that all the categories of unemployment are added together.
The two biggest differences between the U3 official rate of unemployment and the U6 full rate of unemployment are in the treatment of the long-term unemployed and involuntary part-time workers. If you've been out of work for a long time, you badly want a job, but you know from your long search that nobody in your area is hiring; you already have applications on file at every reasonable prospect, and you haven't filled out a new application recently - then from an official perspective (U3), you are not only no longer unemployed, you just became a non-person altogether. Alternatively, if you have a master's degree in engineering, lost your job, and are working 15 hours a week (the most you can get) in a convenience store at minimum wage to keep a little money coming in, then from an official (U3) perspective you would be fully employed. In contrast, U6 is the most inclusive measure of unemployment, as it includes both the long-term unemployed and the involuntary part-time categories. Thus, individuals in each of the situations described above would be included in the U6 measure.
The green bar segment in the graph above illustrates what happens when we look at the full, U6 measure of unemployment as reported by the U.S. Bureau of Labor Statistics for November of 2010. Our unemployment rate almost doubles, as we go from 9.8% to 17% of the civilian work force being unemployed. The real unemployed go from one in ten workers, to one in six workers. The difference between a just-under-10% unemployment rate and a close to 20% rate of unemployment is the difference between recession and depression.
Unfortunately, there is more in the mix than simple unemployment statistics, and when we look inside the "third box" in the next section, we will see that the economic situation is not a mild depression, but rather a full blown major depression.
(To try to prevent a flood of corrective e-mails from readers, let me state that the challenge I set for myself in writing this article was to illustrate what was happening using only official US government numbers. Meaning, in my opinion, using unreliable and deliberately misleading numbers that have been subjected to increasing degrees of political manipulation over the decades. I have been writing articles for years that have discussed increasing government manipulation of inflation statistics, and am well aware of the work of John Williams and others in trying to independently determine genuine inflation and unemployment rates. I personally believe that the real inflation and unemployment rates are substantively higher that what is being reported to us, and that the real U6 measure is likely 20% or above.
That said, I wanted to separate the concept of the three boxes from the concepts of statistical manipulation, so there were no distractions for a reader who was skeptical about manipulations, i.e. whether the US government would abuse the fine print of economic statistics to mislead its citizens for political purposes. If you have no trouble accepting that the government manipulates statistics for political advantage, then understand that the situation is significantly worse than what is illustrated herein.)
The Gaping Hole In The Economy
To see what a real depression looks like, take a long look at the graph below, which shows what happened to the US economy between 2007 and 2009. As shown with the blue bars and the chart below the graph, the size of the US private sector economy plunged by $1.3 trillion - and it hasn't come back.
Yet, we don't see the full extent of this plunge around us on the streets or in the headlines. Indeed, despite this ongoing, gaping hole in the US economy, the official story is that the US isn't even in a recession. What happened to all of the job losses from this rapid and persistent collapse of a large section of the US private economy?
The answers can be found in the red and yellow bars above, representing Federal government spending and state and local government spending. Federal spending rose by $700 billion, and state and local government spending rose by $300 billion. (With the state and local spending being funded by Federal government transfers that have been netted out, so it is really almost all growth in Federal spending.) The private economy plummeted by $1.3 trillion while the government economy soared by $1 trillion, and we were left with what looks like a much more manageable $300 billion shrinkage, the kind of economic change that might be associated with a 9.8% official unemployment rate. In other words, a little over 75% of the collapse in the private economy was (and is) being covered by increased government spending.
As shown in the graph above, there has been a radical shift in the composition of the US economy with the government share of the economy leaping from 35% to 43%. This is perhaps the most rapid and greatest change in the fundamental nature of the US economy since World War II - yet there has been remarkably little discussion of the full consequences.
The US government has fantastically increased its spending relative to the overall economy, but the government's sources of revenues haven't increased. The target of this spending has been the "Third Box" - the covering over of real, persistent and massive private sector job losses through creating what are effectively artificial short-term jobs, originally paid for by ramping up the deficit at a fantastic rate, with the covering over now being funded by the creation of new money from thin air.
The Third Box: Artificial Employment
What happens if we add the real, full U6 unemployment rate of 17% to the hole in the private economy that is currently being covered by the government's spending money it doesn't have? The simplest approach is to say that 9% of the US economy is manufactured money that's funding government deficits, and if we didn't create artificial money to fund artificial jobs, then that 9% of the economy implodes. If 9% of the economy abruptly disappears, there goes 9% of the jobs as well, so the unemployment rate would immediately jump by another 9%. There are a staggering number of simplifications involved in this approach, but it's not a bad approximation for illustration and discussion purposes within a short article.
Add 17% and 9%, from two different US government sources, and we have 26% real unemployment right there. That is, if the Federal Reserve were not manufacturing money out of the nothingness to fund government spending without limits – at grave peril to all savers and investors – then it would be fair to say that the US would be at a 26% unemployment rate. This is slightly higher than the peak 25% unemployment rate in 1933, during the worst part of the US Great Depression.
Unfortunately, it is likely worse than even that. There is a multiplier effect when it comes to employment, and if we drop 9% of the economy, the support jobs that are created to serve the people who make up that 9% go away as well. We also need to allow for more government manipulation of inflation statistics, which creates a little greater economic loss picture, and in total, arguably, if we look at the real private sector right now, and we set aside jobs funded by monetization, we're at a real unemployment rate of over 30%. And if we were to end the deficits and the assault on the value of the US dollar, and the US government only spends what it could take in – we would be at that 30%+ level almost instantaneously.
Hiding The Depression Through Impoverishing Boomers, Retirees & Other Savers
Many people, looking at what has just been presented, would see this as being a major reason to keep that deficit spending right up there and maybe even get more aggressive about it. This is indeed the position of many politicians and pundits, as well as a number of mainstream economists. Unfortunately, there is a double problem with this approach: there's no indication that it's working other than as a short term band-aid, and the cost of the "band-aid" risks wiping out the value of money, savings and investment on a nationwide basis.
Fundamentally, we haven't seen the benefits to the private sector of the economy that pays for everything else, including the real US standard of living. Oh, there are a lot of claims floating around that the private economy is rebounding fast, and in some individual sectors, that is true. But there is an elementary reasonableness check that we can use to see if this is true for the nation as a whole.
The total economy is the sum of the private and public sectors. If the private sector were indeed recovering rapidly, and recapturing much of the lost "real" private jobs (not dependent on government spending), while government spending didn't change, then the overall size of the economy should be soaring when we add private and public sectors together. That isn't happening, however. Now, if government stimulus efforts were truly working and this was leading to snowballing growth in the private economy, which then allowed the government "Keynesian" stimulus to be gradually withdrawn, then the size of the economy would remain roughly the same, while government deficits and the government share of the economy would be falling rapidly, dollar for dollar with the rise of the private economy. But that isn't happening either. The deficits are larger than ever, and the government share of the economy isn't shrinking.
If we pull away all of the massive government spending that has funded the "Third Box" of containing unemployment, then as the walls fall down and the Third Box collapses, all the newly unemployed flow over to the 1st and 2nd boxes, true comparability with the 1970s and 1930s is restored, and we have an obvious depression-era level of unemployment all around us. So with two years of extraordinary government deficits representing almost 10% of the US economy per year - we still haven't solved the problem, and we get the same dismal outcome if the emergency measures were to be withdrawn.
The problem with this seemingly endless supply of "free money" is that there truly is no such thing as free money, as responsible economists have understood for many centuries. If you could just create trillions out thin air and pass it around to politically favored special interests like it was candy – common sense would indicate that every government in the world would be doing it as a matter of official policy. If governments could skip the unpleasantness of having to pay for spending through taxation, and instead just spend free money at will with no devastating side effects - then every government on the planet would have been doing this exact program for centuries. The fact that responsible governments don't do this is a very simple reality check on the irresponsibility of the Federal Reserve and the US government's attempts to hide the true state of the economy through deficit spending that is funded by the reckless creation of vast amounts of new money.
In pursuing this process however, we have passed the point where it is reasonable for the free market to support the US government's endless spending - at least, at current interest rate levels. So the federal government, in a move that has the convenient side effect of dropping the value of the US dollar and making the US economy more competitive (at great cost for older Americans), is currently manufacturing about thousand dollars per month, per American household, directly out of the nothingness and injecting it into the US economy to try to cover this gap. As I cover in detail in my article "Bullets In The Back: How Boomers & Retirees Will Become Bailout, Stimulus & Currency War Casualties", the direct cost of this strategy of masking the hole in the real economy for a few years is the annihilation of the value of decades of earnings for tens of millions of good hard-working Americans, who have done nothing wrong.
Cover-Ups & The Perils Of Artificial Employment
The current economic situation in the United States is a fantastic one. The "respectable" mainstream economists, politicians and journalists not only failed to see this coming - but would have ridiculed the very idea that something like this could happen. Yet, here we are. The US government is covering up a gaping hole in the private economy by having the Federal Reserve manufacture money out of thin air at a rate of over $100 billion a month, so that Congress can pass that money out to favored political interests on a congressional district basis. Thirteen percent of the US private sector economy collapsed in a matter of months - and it hasn't come back. This is covered over by the Federal Reserve creating about as much new money every six months, as total US physical dollars in circulation after 230 years (roughly $700 billion). The possibility is raised by rating agencies and the International Monetary Fund of the US government defaulting on its soaring debts. (Though payment by inflation is far more likely than actual default.)
Yet, these same mainstream economists, politicians and journalists insist there is nothing extraordinary going on, that this is just another economic rebound from yet another recession. There is support for this viewpoint, not just in carefully selected official economic statistics, but in the real world bottom line of holiday shopping and sales. Depressions evoke images of bread lines, not circling the mall and following other shoppers out to their cars, hoping to snag a parking spot. So, from the perspective of the average American (at least the purported five of six who are still employed) this doesn't look like a depression at all.
Creating a plausible surface that is different from the fundamental underlying reality requires splitting this extraordinary state of affairs into separate boxes, and stating that by definition the boxes are independent of one another. There are "lies, damn lies & statistics", and statistical manipulation allows the widespread reporting to the minority of the population who reads the paper and watches the news, that unemployment is still just under 10%. Sure, the well informed know better - but what percentage of the general population understands the difference between the U3 and U6 measures of unemployment, and why the true rate is closer to 20%?
However, the very heart of the intellectual deception is to take the fantastic and unprecedented, government actions we have never seen before in our lives, and use these actions on a massive scale to create a third box: the artificially employed. By definition, any reasonable person knows that an employed person is not an unemployed person, so this split into the third box, would seem eminently rational and even a very good idea, almost unassailable from a conventional perspective.
Until we remove the fantastic and unprecedented. Without the step of using the massive and direct creation of money to support government deficits to artificially create jobs - the third box of artificial employment collapses. We go from 1 in 10 workers unemployed (1st box), to 1 in 6 (2nd box) to 1 in 4 (3rd box), and it is straight-up depression level unemployment in a matter of weeks or months.
The current government approach is a lose-lose proposition that temporarily covers up failure at the cost of impoverishing tens of millions of Americans over the long term, particularly retirees and Boomers. The danger is that the value of the dollar plummets, wiping out the value of a lifetime of savings and investment for most of the nation, but the hole in the economy will still be there, the "third box" will still collapse, and unemployment will still surge.
We go from having jobs and savings, to temporarily covering up job losses by setting in motion a process that destroys the value of savings, and then we end with having neither jobs nor savings.
It is only real fundamental growth and real fundamental change that will bring the US private economy out of that hole. The worst of the current policy is that it provides political cover for extending failed policies, which gives little incentive for finding the desperately needed alternative policies that might actually work. It has been more than two years - and the hole in the economy is still there. The distribution of borrowed and/or manufactured money by the leaderships of both major US parties to politically favored special interest groups on a congressional district basis - is demonstrably not growing the real economy.
The Personal Challenge
The first step to finding personal solutions is acceptance. Do you accept that there has been a $1.3 trillion collapse of the US private economy?
Do you accept that this hole is being covered through the creation of money on a massive basis by the US government?
Do you believe that funding an economy through the government manufacturing money without end is unsustainable?
Do you see the very real consequences for the value of your savings and investments?
It is essential for investors to not only see the truth of what is happening, but to see the implications. Unfortunately it appears quite likely that there will be a crash in the value of money itself. This is likely to be accompanied by a crash in the purchasing power of financial assets. The stock market may collapse in a way we haven't seen since the last time we saw this level of depression, that being the 1930s. We are likely to see a tremendous bond market crash as US government monetary creation and manipulation is eventually overwhelmed by reality.
So the lynch pins of investments for US retirees, US boomers – and virtually all US pension funds – are likely to be collapsing in real terms. However, something really interesting (and terrifying) happens when you combine monetary inflation with asset deflation in real terms (meaning the purchasing power of assets is plummeting). As the dollar price of the assets in ever-more-worthless dollars climbs higher and higher, the purchasing power of those assets drops lower and lower. This generates very high taxable profits that are then taken by an increasingly desperate federal government. A very simple two-minute illustration of this can be found in the video linked below, "Deadly Dow 50,000".
Gold would seem to be the answer, but the world is more complex in its unfairness than the average gold investor is aware. The good news for gold investors is that they are likely to do much better in a monetary meltdown than a stock investor or a bond investor. But nonetheless, as illustrated in the article "Hidden Gold Taxes, The Secret Weapon Of Bankrupt Governments" linked here, a simple approach of buy-and-hold gold is also likely to lead to a devastating reduction in the purchasing power of your savings due to the one-two combination of inflation and inflation taxes.
Let me suggest an alternative approach, which is to study, learn and reposition. To have a chance, you must learn not just how inflation will redistribute wealth, but also how unfair government tax policies (that can be relied upon to increase in unfairness) will cripple most simple methods of attempting to survive inflation.
Then, yes – buying gold (and perhaps a lot of it) can be one key component of a portfolio approach, as discussed in my Gold Out-Of-The-Box DVD set. Use multiple components, each doing what they do best, shift the components in a dynamic strategy over time, and position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy. So that instead of paying real taxes on illusionary income, you're paying illusory taxes on real income. And the higher the rate of inflation and the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.
What you have just read is an "eye-opener" about just one of the ways in which a rapidly shifting world is removing the foundations beneath conventional investing - even while most investors continue to follow the traditional strategies, unware of just how much the financial playing field has changed.
A personal retirement "eye-opener" linked here shows how the government's actions to reduce interest payments on the national debt can reduce retirement investment wealth accumulation by 95% over thirty years, and how the government is reducing standards of living for those already retired by almost 50%.
An "eye-opener" tutorial of a quite different kind is linked here, and it shows how governments use inflation and the tax code to take wealth from unknowing precious metals investors, so that the higher inflation goes, and the higher precious metals prices climb - the more of the investor's net worth ends up with the government.
Another "eye-opener" tutorial is linked here, and it shows how governments can use the 1-2 combination of their control over both interest rates and inflation to take wealth from unsuspecting private savers in order to pay down massive public debts.
If you find these "eye-openers" to be interesting and useful, there is an entire free book of them available here, including many that are only in the book. The advantage to the book is that the tutorials can build on each other, so that in combination we can find ways of defending ourselves, and even learn how to position ourselves to benefit from the hidden redistributions of wealth.