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Economics / Recession 2008 - 2010 Apr 10, 2009 - 03:57 AM GMT

By: Money_and_Markets

Economics Best Financial Markets Analysis ArticleMartin Weiss writes: Many years ago, when Dad and I used to look at official data and analysis, we knew they were flawed. So we developed our own. That's how we figured out that the capital of savings and loans was grossly overstated and that thousands of S&Ls were headed for a massive bust.


Our awareness of the flaws was also a key factor in helping us warn consumers prior to the failures of giant insurance companies during the 1990s. (See the review of our work by U.S. Government Accountability Office GAO .)

It was critical to helping us warn you of nearly every major financial failure in the debt crisis that began more than two years ago. (See my blog for our forecast track record .)

Plus, it's one of the main reasons I believe the government's efforts to bail out Citigroup, AIG, and other financial institutions are doomed to failure: Their numbers are wrong, their theories are upside down, and they're fighting the wrong war. (For the full exposé I presented at the National Press Club last month, see my white paper, “ Dangerous Unintended Consequences: How Banking Bailouts, Buyouts and Nationalization Can Only Prolong America's Second Great Depression and Weaken Any Subsequent Recovery .”)

But we're not the only ones finding fatal flaws in official numbers and conclusions. John Williams of ShadowStats.com has been persistently doing so with the government's official data on inflation and unemployment, among other key measures.

His latest estimate of the true March unemployment rate in the United States: 19.8 percent!

Hard to believe? Then consider the facts:

Broad unemployment rate surges to 15.6%!

Fact #1. Fatally Flawed Official Unemployment Number

The U.S. government's Bureau of Labor Statistics (BLS) shocked the world Friday with the release of its official, headline unemployment number: A surge from 8.1 percent to 8.5 percent.

But it's really a lot worse. This number (called “U-3″), although invariably cited by the press in the headlines, is the narrowest, most sugarcoated measure of U.S. joblessness:

  • It excludes workers seeking full-time jobs, failing to find them, and then accepting part-time work that almost invariably pays far less.
  • It excludes discouraged workers who have given up looking for jobs because they can't find any.
  • And, as if that wasn't enough to color the truth, the BLS has been consistently and grossly understating the current unemployment numbers, not revising them until months later when fewer people are paying attention.

Williams points out that:

“The pattern of impossible biases being built into the headline monthly payroll employment continued with March 2009 reporting. Instead of the headline jobs loss of 663,000, consistent application of seasonal-adjustment factors would have shown a more-severe monthly jobs loss of about 750,000. This upside reporting bias has been seen in 11 of the last 12 months, with a rolling 12-month total upside headline-number bias of 1,345,000.”

The proof: In every single one of its six most recent monthly payroll reports, the BLS has announced massive upward revisions in prior months' job loss numbers — with five of those even exceeding its own guidelines for the acceptable margin of error (plus or minus 5 percent).

Fact #2. Government Admits Some of the Flaws

The government also publishes a broader measure of unemployment (”U-6″), which corrects some — but not all — of the above flaws.

This measure includes many discouraged and part-time workers, as it should. And, lo and behold, those adjustments alone add more than seven full percentage points to the unemployment rate!

Instead of 8.5 percent unemployment, suddenly we see that we have 15.6 percent unemployment , according the government's own admission.

Instead of a recession, suddenly we see that we are already in a depression.

Most importantly, rather than a government that recognizes the fundamental failure of its efforts over the years to pump-prime the economy — with abundant cheap money, huge federal deficits, and financial bailouts — we have a government that continues to pursue this same folly with ever greater zeal.

It's the epitome of self-deception, leading to misguided policy and, ultimately, causing extreme hardships for nearly everyone, including unemployed officials themselves.

Fact #3. Government Still Fails to Admit ALL of the Flaws

Not only has the government excluded discouraged workers from its headline number, manipulating the public's perception … it also distorts the way it measures discouraged workers. It's a manipulation within a manipulation , which Williams explains as follows:

“During the Clinton Administration, ‘discouraged workers' — those who had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been ‘discouraged' for less than a year. This … defined away the bulk of the discouraged workers.”

In other words, if you've been a discouraged worker for less than a year, you are among those counted in the broader 15.6 percent unemployment rate the government revealed on Friday.

But if you've been discouraged for more than a year, suddenly and magically, the government says you're not “discouraged” any more. In BLS newspeak, you're a non-discouraged, non-unemployed non-person. You don't exist. Or maybe you just don't get what the real definition of “is” is.

By Williams' and any reasonable person's definition, though, you're still unemployed. You still need a place to live and food to eat. And for Washington to make reasoned decisions, you still need to be counted.

Result: Even the government's broadest measure of unemployment — now at 15.6 percent — is grossly understated. The real figure, Williams estimates, is 19.8 percent.

Depression-Level Unemployment! And We're Still Far From the Bottom!

The peak unemployment rate in America's First Great Depression was 25 percent. Trouble is, it's hard to pinpoint how the measurements back then correspond to the various measures today.

My view: Although the tools of official deception may have been less developed, the real unemployment rate in the 1930s was probably higher in those days as well — with many among the unemployed falling through the cracks and simply never counted.

No matter what, the inescapable conclusions for today should be evident:

  • We are already in a depression. Based on the government's own admission, we have high, double-digit unemployment. That clinches it.
  • The economy's decline still has a long way to go. Yes, on the eve of the BLS release last Friday, some people were starting to talk about a “possible bottom” in the economy — “maybe.” But that talk ended abruptly as soon as economists took one look at the release and realized the utter speed of the decline. As The New York Times explained on Saturday,

    “The severity and breadth of the job losses in March — which afflicted nearly every industry outside of health care — prompted economists to conclude that an agonizing plunge in employment prospects was still unfolding.”

  • The Obama stimulus package is too little, too late for the economy. “When drafting plans in January to spend roughly $800 billion to stimulate the deteriorating economy,” continues The New York Times , “the Obama administration operated on the assumption that the unemployment rate would reach 8.9 percent by the end of the year — without the extra federal spending. Three months into the year, the unemployment rate has already soared to 8.5 percent, from 7.6 percent, the highest level in more than a quarter-century.”
  • The Obama stimulus package is too much, too soon for the bond market. With the economy weaker than expected, you'd think bond investors, who traditionally see a falling economy as the best antidote to inflation, would rejoice. Instead, they're doing precisely the opposite. They know that the stimulus package is driving the federal deficit to an unheard-of $2 trillion. They know the Fed cannot cut rates below zero. And so they're using every opportunity to sell. Result: Even Friday, when the shocking jobless release hit the newswires, bond investors dumped bonds, driving prices lower and yields higher.
  • Government bonds are the next big shoe to fall in this giant debt crisis. I don't mean the government will default on its debt. What I'm referring to is the market prices of medium- and long-term government bonds. They're already falling sharply, driving long-term rates higher. As the Treasury rushes to finance its recent bailout frenzy, expect that trend to accelerate.

My Recommendations

First of all , take official information with a grain of salt … plus some hot jalapeños, horse radish, and wasabi.

Don't rely on government numbers and Wall Street ratings — let alone pronouncements from on high that “our capital is strong,” “the crisis is contained,” “the market has turned,” or “the recovery is near.”

You've heard all that same happy talk once too often. You know what the final outcome was. You also know the dangers of believing it.

Second, it's OK to look at government data, provided you weigh it against objective, independent sources outside of the government.

If you're serious about tracking unemployment, inflation, the money supply, and other critical numbers, subscribe to www.ShadowStats.com . John Williams and I have no business relationship, and he doesn't even know I'm recommending him to you. But every time you get a government release on these critical numbers, you had better also get Williams' monthly issues and flash alerts with his estimates of the real numbers.

Third , don't miss today's deadline to register for my big event tomorrow at noon Eastern Time.

In this one-hour video briefing online, I will give you the tools to help you erase your debt, secure your income, insulate your investment portfolio, sell or keep your home, and then use this crisis as an opportunity to actually build your wealth.

And due to some unusual steps I will announce then, this event will be a seminal moment in my life, in the life of my company, and, possibly, yours as well. I hope and trust you can be there with me.

For more info, click here . Or to activate your free registration — before our registration page shuts down for good later today — click here .

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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