Beware those slippery statistics

"Lies, damned lies, and statistics," the comment attributed to Mark Twain and Benjamin Disraeli, is typified by today's government economic stats. Some people are shocked when I tell them that the government's “core inflation rate” (also known as the CPI) doesn't include food or energy. And that our economy isn't as good as the government says it is. But such is the case. I'm not being a doom-and-gloomer; there are always opportunities to profit in and successfully navigate any market, if you know how to do it. But this government understatement of inflation overstates our country's GDP, and hence misrepresents current economic conditions. It's also an overlooked reason why Democrats and Republicans have basement-low polling numbers, and why Republicans lost badly in 2006.

Voters don't believe what Washington pols tell them about immigration, Iraq, inflation – and pretty much everything else. GOP candidates who did the best in '06 were the ones with (or perceived to have) the most consistency and credibility on the issues: Namely Tancredo, Coffman, and Hillman (even though he lost by a nose in the state treasurer's race).

Here are a few of my favorite economic whoppers:

Economic Lie #1: “The dollar decline isn't that bad, because it only affects our purchases of imported goods.”

Even if this were true (and it's not), most of the products we buy are imported. We really don't produce or manufacture much in America today. Except for agricultural commodities, YouTube videos, and hot air from so-called business 'gurus' on HeeHaw (CNBC) and Fox Business News.

The declining dollar affects the cost of all products and services. Companies face increased costs for oil and gas, utilities, and other commodities, so they have to pass them along to the end consumer. Gasoline has tripled in the last 5-6 years. Crude oil has quadrupled to almost $100/barrel. Part of this is due to stagnating supplies and increased demand from China and India, along with the increase in monetary inflation.

Economic Lie #2: “You just need consistency with the inflation numbers, not accuracy.”

Huh? This is like fixing the gas gauge on your car to show a full tank, even though it's almost empty. You feel better about it, but doesn't change the reality of your situation. Even though the Fed says the CPI is acceptable, it's not in the 'comfort zone' of American consumers and businesses who have to absorb these costs. Excluding food and energy from inflation numbers is absolutely insane.

Wall Street folks can say that plasma-screen TVs and computers are going down in price, but you only buy these items every one to three years. Americans consume food and energy on a daily basis.

Economic Lie #3: “We want inflation in small doses, it's good for our economy. Deflation gives you scenarios like the Great Depression of the 1930's” (see video here, at the 6:20 mark).

Small doses of inflation eventually turn into big declines in purchasing power, as we've seen over the past few decades. It hits savers and seniors especially hard, who live on a fixed income or rely on their life savings during retirement. Pat Powell has been smoking the Wall Street funny weed, and Peter Schiff delivers a powerful rebuttal to this load of intellectual horse apples.

I'll wrap this up, and resume my Thanksgiving weekend escape out here on the Great Plains with family. Best wishes to you and yours for a happy holiday.

Spooky signs for US economy

Even though the Federal Reserve will probably treat Americans to an interest rate cut on Halloween, the goblins of massive debt -- consumer, corporate, and government -- still loom large over the US economy. So it's flattering when one of my postings here about that scary situation is echoed by a respected economic commentator. Dr. Marc Faber (author of the Gloom, Boom and Doom report, and who correctly predicted the 1987 stock market crash) used the same alcoholic metaphor as yours truly in saying of the Fed's earlier cut in US interest rates:

“Each time you bail out, the problems become bigger and bigger, and the credit problems become much, much larger. The Fed feeds its customers with booze, and when they get totally drunk and fall off their chairs, the bartender gives them more booze to keep them going. One day, it will lead to the ultimate breakdown.”

What that 'ultimate breakdown' will be, I'm not exactly sure – but it probably won't be pretty. I hope I'm wrong that the US won't have to suffer the mother of all economic hangovers; however, I don't see any way around it. No country can have long-term, sustainable economic growth based solely on borrowing, spending and increasing the money supply – and the US is no exception.

My 2007 year-end gold estimate of $818/ounce also looks good. Gold's trading at $783.50 today (10/26) with solid upward momentum. No market goes straight up or straight down, and commodities tend to have some violent swings in both directions. I realize the Dow has gone back over 14,000 recently, but when you look at inflation-adjusted gains of the Dow versus gold, there's no comparison.

The so-called 'barbarous relic' has tripled from its low of $252/ounce in 2000, while the Dow's performance isn't nearly that impressive, even though it's increased in nominal terms from a low of around 7,500 in 2002 to the mid-13,000s. This increase in the Dow index does not correlate to a healthy American economy – no matter what CNBC talking heads or Washington politicians say. Billionaire investor Jim Rogers (former odd-couple investing partner of George Soros, and co-founder of the Quantum Fund), says the US is “undoubtedly in recession.”

And never mind what Larry Kudlow, Dick Cheney, or Mike Rosen may claim, national deficits and debt still matter – now more than ever.

Bastiat he's not

As the prattle in France about consumers’ perceived loss of purchasing power reveals, discredited Keynesian and Marxist economic fallacies die hard in old Europe. Das Kapital still wields more influence than The Law, Frederic Bastiat's classic of liberty written about the same time. This being querulous France, consumers and their media proxies have been bitterly complaining for some time about increases in food prices that are reportedly putting staples like meat, milk and bread beyond the reach of too many pocketbooks.

This being statist France, Mr. Sarkozy’s government took the initiative and ceremoniously convened management representatives and labor unions to a grand conference held on the issue in Paris on October 23.

This being “intellectual-struck” France, the disquisitions had augustly been expected to produce groundbreaking, epoch-making alleviations.

This being socialist France, however, the placebo that eventually hogged the limelight in the media has been that old central-planning chestnut, boosting wages by fiat.

Two things about the whole brouhaha stand out. One is the government’s conflicting signals on the issue of higher wages and its mutually exclusive societal aspirations. The other is the stubborn refusal of self-styled French elites to even consider free-market insights in framing the debate, let alone legislation.

Take productivity. As Mr. Sarkozy rightly pointed out in his presidential campaign earlier this year, the only way for people to earn more money and be able to spend more is to increase their productivity and work longer hours. Sound economics. The snag is that Mr. Sarkozy himself has ruled out abolishing the 35-hour work week, the infamous piece of labor-market legislation that has come to symbolize France’s Malthusian instincts and accounted for stagnant wages since its enactment by a socialist government ten years ago.

There is no denying the fact that the French president has delivered on his campaign pledge to encourage people to work more by implementing his plans for tax-free overtime. However the scheme is so convoluted both technically and bureaucratically that it has so far produced only mixed results. Moreover, as the center-right Le Figaro newspaper explained in a recent editorial, although the government is no longer in the business of setting wages across the board, the impression conveyed by its rhetoric is that it still is.

In the wake of Mr. Sarkozy’s earlier tax cuts aimed at boosting investment and job creation, the whole debate has regrettably been conducted against the ideological backdrop of class antagonisms and worker exploitation. Because of the government’s reluctance to further ruffle union feathers at a time of union opposition to pension reform, one relatively safe prediction is that the government will somehow eventually accede to union demands that wages be raised artificially, blithely setting the nation on the primrose path to higher prices as producers pass higher payroll costs on to consumers. The country would then be back to square one.

What then should the government do instead?

Free-market economics suggests that Mr. Sarkozy should try sharper competition among retailers as a way to bring consumer prices down. After all Draconian zoning laws effectively prevent big chains from setting up new stores anywhere. Something along the lines of less regulation is under consideration but anything meaningful in this area will clash with the government’s pledge to protect small city-center retailers who might be driven out of business by larger stores. Indeed French policy has traditionally been to redistribute income from consumers to small storekeepers in order to "preserve the character" of French villages, towns, and cities.

The government might also try building up momentum for greater liberalization in world trade talks to expand consumer choice and cut prices, but again protectionist sentiments among French officials coupled with Mr. Sarkozy’s own dirigiste instincts, as exemplified by his opposition to foreign takeovers of French companies, preclude any realistic chance that free-trade correctives might work.

The lesson to be drawn from these schizophrenic impulses is that empirically-proven, commonsensical prescriptions like higher productivity, less regulation, more competition, more supply-side tax cuts and freer trade are too obvious or too messy or too Anglo-Saxon for French Cartesian minds. The country may have been through many more revolutions than any other in the Western world but, as Alphonse Karr, former editor of Le Figaro once pointed out in a famous epigram, in France plus ca change…

If the Justice Department were just

Newspapers have reported on a Justice Department celebration of the recent grievous injustice its prosecutors perpetrated against hero of high technology, world capitalism, and classical American economic opportunity, Joseph P. Nacchio. Below is the full text of an Oct. 2 Denver Post story about this. Following that, my imaginary rewrite showing how it might have read had the Justice Department of the United States of America, under Republican control, not succumbed to the arbitrary forces of central financial planning and economic redistribution, of legal and political hostility to business, wealth creation, and the ingenius innovators who enable them, and of monumental foolishness and petty ambition by government attorneys and bureaucrats who make their living using the power of the state to pillage and destroy what better men have created. So, first the story from our world:

Nacchio prosecutors receive high honor By Andy Vuong The Denver Post Article Last Updated: 10/02/2007 01:38:12 PM MDT (http://www.denverpost.com/ci_7063018)

The team of government attorneys that won an insider trading conviction against former Qwest chief executive Joe Nacchio have received the highest award from the Department of Justice.

Prosecutors Cliff Stricklin, James Hearty, Kevin Traskos, Colleen Conry and Leo Wise — along with more than a 200 other government employees who worked on the case — were honored today at the Justice Department's 55th Annual Awards Ceremony at Constitution Hall in Washington, D.C.

Nacchio was convicted in April on 19 counts of illegal insider trading connected to his sale of $52 million in Qwest stock.

Nacchio was sentenced to 6 years in federal prison, and ordered to pay $19 million in fines and forfeit the $52 million in ill-gotten gains to compensate victims. Nacchio is free on bail pending his appeal. Oral arguments for the appeal are set for December 18.

"Today's award recipients are extraordinarily dedicated and talented men and women," said Peter Keisler, Acting Attorney General, said in a statement. "They've made incredible sacrifices, and achieved great successes, working on the front lines of the Justice Department on behalf of the American people."

In addition to the Attorney General's Award for Distinguished Service for their outstanding work in the Nacchio case, the trial prosecutors also received awards from the FBI Director's Award for Excellence in Criminal Investigations, and the US Postal Inspection Service' Inspector General's Award.

"The Nacchio trial team put their personal lives on hold, working to ensure justice was done on behalf of the many victims who lost money because of the defendant's greed," said U.S. Attorney Troy Eid in a statement.

And now the story from a better world, one in which the Justice Department would actually execute justice:

Nacchio prosecutors arraigned on charges of abuse of power, institutionalized theft, slander By Dave Crater The Justice Post Article Last Updated: 1/01/2008 01:40:12 PM MDT

The team of government attorneys that pursued an “insider trading” conviction against former Qwest chief executive Joe Nacchio have been arraigned in a Washington federal court on charges of abusing their power and using the authority of the federal government to internationally slander and steal from a private citizen and leading captain of American industry and global technology.

Prosecutors Cliff Stricklin, James Hearty, Kevin Traskos, Colleen Conry and Leo Wise — along with more than a 200 other government employees who conspired in the case — were publicly repudiated today at the Justice Department's 55th Annual Awards Ceremony at Constitution Hall in Washington, D.C.

Nacchio was convicted in April on 19 counts of what the disgraced attorneys and bureaucrats at the time called “illegal insider trading” connected to his sale of $52 million in Qwest stock. Just before Christmas, however, Appeals Court Judge Solomon L. Reigns overturned Nacchio’s conviction in a blistering opinion that deprecated the action as “a monstrous crime against ancient principles of justice and against the historic American idea.”

“Mr. Nacchio, like every other owner of American equities, had a moral and legal right to trade his stock at any time and for any reason he wished,” Judge Reigns went on to hold. “The absurd pretense by the government that its agents were heroes for having prosecuted Mr. Nacchio because he so traded at a time and for reasons they could only speculate were at odds with their infinite wisdom reveals an alarming economic illiteracy and moral underdevelopment. These agents have not protected the small investor; they have helped drive a dagger through the heart of the most inspiring hope the small-time investor has had in the history of world commerce: American-style moral capitalism.

"A nation that treats its captains of industry and most productive citizens in this manner will soon find itself financially impoverished, and, more importantly and lastingly, ethically and morally bankrupt. The United States has been the economic and judicial hope of the world for two centuries precisely because it has steadfastly resisted this kind of infiltration of its government, and especially its Justice Department and court system, by small-time, self-serving, public-pandering moral troglodytes posing as pillars of government righteousness.”

Following his trial, Nacchio was sentenced to 6 years in federal prison, and ordered to pay $19 million in fines and forfeit $52 million in allegedly ill-gotten gains to compensate alleged victims. Nacchio was free on bail pending his appeal before Judge Reigns. Oral arguments for the appeal occurred December 18, and Judge Reigns issued his opinion the next day.

"For some years recently, the Justice Department had lost its way, replacing historic and honorable American ideas of justice, private property, and moral right with low, un-American suspicions and resentments toward industry that play on popular jealousies toward the rich," Peter Keisler, Acting Attorney General, said in a statement. "With the President’s support, I am committed to turning this Justice Department ship around. The wealthy are just as entitled to justice and legal protection of their property as the rest of us."

"The corrupt attorneys and bureaucrats we repudiate today acted not on behalf of the Justice Department and the American people," Keisler continued, "but on behalf of themselves, hoping to receive awards, recognition, promotion, and financial incentives for their having taken down an innocent man. I publicly apologize on behalf of the Justice Department not only to Mr. Nacchio and his family for this preposterous action, but to every American entrepreneur and industrialist who has been slandered and robbed by the American legal system over the last twenty years."

In addition to the Attorney General's repudiation for their dishonest work in the Nacchio case, the trial prosecutors also received a public reprimand from the FBI Director's Department for Justice in Criminal Investigations. The US Postal Inspection Service also issued the prosecutors its tongue-in-cheek Inspector General's Award for Most Unethical Government Action This Year.

Mr. Nacchio, on vacation with his wife and two children to celebrate his victory, could not be reached for comment.

And as for Worldcom

"Let justice run down like water, and righteousness like a mighty stream.” [Dave Crater says he thought of those words from the Prophet Amos when a reader of this website wrote that while he may be right in asserting the innocence of Joe Nacchio, he went too far in making the same claim for Bernie Ebbers of Worldcom. Here is Crater's rebuttal. - Editor] The recent white-collar legal lynching that brought down innocent former Qwest Communications CEO Joe Nacchio is only the latest in a string of hostile anti-business rampages conducted by America’s attorneys, judges, and bureaucratic regulators in the wake of the 2001 stock market collapse.

That market collapse brought the Nasdaq composite from over 4500 in the spring of 2000 to under 1500 by the end of 2002 – a loss of over two-thirds of the market’s peak value. This market-wide collapse in the New Economy destroyed billions in stockholder wealth.

There was not a single CEO, accountant, or consultant in America responsible either for this collapse, or for its effects on his or her individual company.

Yet seeing the legal and political opportunity of a lifetime, attorneys, judges, and regulators have waged a full-scale legal assault on prominent members of the American business class over the last five years, positioning themselves in the process as saviors of the public trust and of the nation’s retirement savings against greedy corporate thugs.

The greedy thugs are not in the business community. The greedy thugs are in posh government and law firm offices across the nation.

Like recently and justly disgraced Durham County (NC) District Attorney, Mike Nifong, these greedy thugs have abused their legal and moral authority in order to build ambitious careers for themselves in law, media, and government and to re-distribute the wealth of their victims to people who have no moral right to it. Among the chief offenders is now-governor of the state of New York, Democrat Eliot Spitzer, who between his election as state Attorney General in 1998 and his 2006 election as governor, conducted an arbitrary reign of leftist terror on Wall Street unlike any the nation has ever seen.

The description by the president of the U.S. Chamber of Commerce, Thomas Donohue, of Spitzer’s brazen power-abuse aptly describes the attitude of ambitious prosecuting attorneys everywhere (http://www.iht.com/articles/2005/01/05/business/spitzer.php): "Spitzer's approach is to walk in and say, 'we're going to make a deal, and you're going to pay $600 million to the state, and you're going to get rid of this person and that person, and if you don't do it by tonight, we're going to indict the company,"' Donohue said. "It is the most egregious and unacceptable form of intimidation we've seen in this country in modern times."

Colorado U.S. Attorney Troy Eid – a Republican, showing the intimidation and leftist propaganda justifying the intimidation are a bi-partisan affair – proudly pronounced a few weeks ago that the conviction of Joe Nacchio was the largest for insider trading in the nation’s history. (Mr. Eid was clearly abreast of the current state of the fierce competition transpiring among the nation’s prosecuting attorneys to bring in the largest conviction.) The prosecution and conviction of Bernard J. Ebbers, founder and former CEO of MCI-Worldcom, was the largest fraud and conspiracy conviction in history in terms of the prison sentence it secured. Mr. Ebbers is now serving 25 years in the Oakdale Federal Prison in Oakdale, Louisiana.

Like Mr. Nacchio, Mr. Ebbers was a business phenomenon. And like Mr. Nacchio, Mr. Ebbers is an innocent man.

The son of a traveling Canadian salesman, Ebbers worked as a milkman while bouncing between the University of Alberta, Calvin College, and finally Mississippi College. Ebbers joined a few others to, in the best tradition of American risk-taking entrepreneurship, found Long Distance Discount Services, Inc. in 1983. By 1995, the company had acquired 60 other companies and had changed its name to Worldcom. At his peak in 1999, Ebbers had gone from being the son of a traveling salesman and running college milk routes to being worth $1.4 billion and being listed at number 174 on the Forbes 400.

To many of the nation’s attorneys and judges, and to many in the public, such unbelievable evidence of America’s promise is no longer something to be celebrated. It is something to be abhorred, and its chief incarnations villains to be prosecuted and legally pillaged whenever the political opportunity arises.

Not helping, of course, is the slide, rapid throughout the 20th century, toward a welfare state that arbitrarily, inconsistently, and ever-increasingly regulates every aspect of American business and glorifies the government bureaucrat who produces nothing. Accounting regulations are a constantly-changing circus that increasingly diverges from financial reality and that, when violated in either substantive or cosmetic fashion, calls down in the name of “Accounting irregularities! Control the businessman!”, even more oppressive, arbitrary and wealth-destroying folly such as the Sarbanes-Oxley act of 2002.

And as this folly progresses to greater and greater heights, the integrity and virtue of a government bureaucrat or attorney is only questioned if he files the most absurd rape charges against innocent college lacrosse players who weren’t even at the scene of the crime, or if he carries on a pugnacious rampage on Wall Street against anything with a white collar. And even in the latter case, he still can become governor.

Also not helping things is the long antipathy of America’s legal system toward the historic Christian religion. Attorneys and judges are, by and large, secularists, and many of them aggressively so. Businessmen, on the other hand, earning their wealth by actually producing things and wealth for other people – as opposed to sopping and legally plundering their millions from productive people – tend to believe in God and show it with their lives.

These are both generalizations, of course, carrying obvious exceptions. But this is one of those obvious things that is true but not really worth saying. The generalizations are accurate, and Ebbers at the time of his prosecution was a member of Easthaven Baptist Church in Brookhaven, Mississippi, regularly teaching Sunday school and attending Sunday morning worship. When the allegations against him were first brought to light, Ebbers addressed the congregation and, like Joe Nacchio, Charles Keating, Martha Stewart, and a host of other business victims of recent legal outrages, insisted on his innocence. “I just want you to know you aren’t going to church with a crook,” he said. “No one will find me to have knowingly committed fraud."

Well-said. Ebbers said “knowingly” because he knows how this game is played. Keating, who also demonstrated classic religious sensibility in using his wealth to donate millions to Mother Theresa, was convicted in 1992 of committing fraud unknowingly – an impossible crime. The conviction was overturned by the 9th Circuit Court of Appeals, which informed the lower judge, none other than Lance Ito of O.J. Simpson fame, that fraud requires intent. But only after Keating had done four and a half years of hard time.

Another important strategy of the game is to threaten and intimidate with potential charges in an attempt to get the victim to admit guilt. If the victim does “confess,” send him/her to prison, levy heavy fines, and hold a press conference pronouncing to the world that justice has been done. If the victim does not admit guilt, try to get the victim to make some statement that can be turned into a charge of lying to regulators. Then drop the original charges (Martha Stewart) or greatly reduce them (Ebbers), and make the main force of your prosecution that they – horror of horrors – lied to you in an effort to avoid your witch hunt. And bump up the sentence to show them the mistake they made in not admitting their guilt in the first place.

Stewart was originally hit with charges of insider trading in ImClone stock. She was convicted on zero counts of insider trading, but on four counts of lying to investigators and obstructing “justice.” Ebbers was originally hit with a 15-count indictment. Those charges were then dropped and replaced with one count each of fraud and conspiracy and seven counts of making false statements about the original counts.

Keating’s conviction was overturned and Stewart, not seeing the point in fighting with legal agents who don’t care about justice, did 6 months voluntarily, paid fines, and acquiesced to regulation of her business involvement so she could be done with it. Ebbers was not so fortunate. He received a sentence, affirmed by the 2nd Circuit Court of Appeals, that, in the words of the judge who wrote for the court, was “longer than the sentences routinely imposed by many states for violent crimes, including murder." A law-abiding Southern Baptist, Ebbers drove himself to prison.

There is no other name for this but moral and legal corruption. The people who have perpetrated it are themselves criminals. In addition to destroying the lives of innocent people whose only crime was being a wealthy executive at the time of a stock market collapse, it is transforming America from a nation of wealthy entrepreneurs in big skyscrapers and country clubs into a nation of wealthy attorneys and bureaucrats in big skyscrapers and country clubs. We are a wealthy nation, and unless we want to be a poor nation, that wealth must be possessed by wealthy people.

The only question is whether we will be a nation that resents having that wealth in the hands of people who have made many others wealthy by creating jobs and producing things large numbers of people want and need – and who cannot control when the entire economy tanks – or whether we will be a nation of institutionalized envy that presumes the wealthy businessman guilty until proven innocent and uses the power of its legal system to plunder the most productive and re-distribute their wealth to everyone else every time the market crashes.

The verse from the Old Testament prophet at the top is no mere rhetorical device. It is a reminder that a God exists who cares about justice, knowledge of Whom prevents the poles of our minds from becoming reversed and the resulting moral current that powers our lives from running backward. When the current runs backward, we call the guilty innocent and the innocent guilty. But there is a Day coming soon when the poles will be restored, and justice will flow down like water and righteousness like a mighty stream. In that hour, if not before, naked legal ambition and self-serving public prosecutions that use the power of the state to condemn the innocent will no longer play in the court of public opinion. For the court of public opinion will no longer be one governed by stock market losses, the vagaries of economic fortune, and widespread cultural envy. It will be governed by justice, and by the people in this life who stood for it and who contended for the innocent – even the rich innocent – in their hour of trouble.

Which side will you be on?