July 31, 2013; There are Three Kinds of Lies

Weekly Commentary • Aug 02 2013
July 31, 2013; There are Three Kinds of Lies
David McAlvany Posted on August 2, 2013

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, we’ve talked about the fact that the last few decades Keynesianism has been the golden child of academic economists. Of course, our Federal Reserve Chairmen, right on down the line through the treasury, and then Japan, started saying, “You know what? We want to join the party.” We’ve talked about Abe-nomics and how it is affecting the world right now, but it seems like it might be stumbling a little bit.

David: Today we’re going to talk about a couple of things, Kevin. One, certainly, Japan, and what we see with Abe-nomics. Certainly we are going to review some of the things relating to pension funds, and really, the impact that Federal Reserve policies and Keynesianism are having on those pension problems. I think that is an area where we will spend a little bit of time expanding our minds a bit. And lastly, today, we’ll look at GDP figures, where we are, where we’re going, and some very significant changes that are taking place this week. We had industrial production from Japan, which was announced this week and it declined the most in June since the earthquake and the nuclear reactor meltdown. So, massive decrease in industrial production, not exactly what they were hoping for on the other side of Abe-nomics, and the blitzkrieg, if you will. I guess we’re crossing analogies.

Kevin: And the stock market, the Nikkei, is starting to show disappointment, and that wasn’t expected with all this printing going on.

David: But, when you apply the market logic of the day, bad news, that is, lower industrial production, is causing now a rally in the Nikkei. Again, we’ve seen a 1,000-point decline in the Nikkei over the last 3-4 days. And then we see a rally in the Nikkei. Is it on good news? No, it’s on bad news.

Kevin: Because they might pump some more money.

David: Exactly. And that’s the logic used around the world today, the new logic of the day. You get a rally every time you get bad news because the assumption is the Bank of Japan will redouble its effort, and the Nikkei will recover more than 200 points as a result of this hyper-Keynesian activity.

So if any serious investor is paying attention, Japan is essentially circling the trade.

Again, we talk about hyper-Keynesianism. That is just this massive amount of money printing, low interest rates kept at an extraordinarily low level, too low for too long. All that guarantees is that there is going to be more liquidity going down that hole in the floor. Economic health, when you are talking about sustainable growth, it’s not created by an easy money policy. You can go from easy to easier, you can go from loose to looser, and all you’re going to do is embolden speculators. You are going to allow for greater risk-taking, with a lower real cost to those who are taking the risks, and you are layering in instability into the financial system.

Kevin: David, we certainly have not set a good example on this side of the Pacific Ocean, either. We’ve been teaching the world that you just print money, you go looser and looser, and of course you do embolden the speculator. Talk about preferential treatment, that’s what has happened here in America. We don’t have the middle class growing in strength right now, we have the speculators on Wall Street. It’s no different in Japan.

David: If you roll the clock back, the Japanese failed to allow businesses, which were deserving the death march, which were deserving to go the way of the dodo bird, decades ago, they failed to allow them to fail. You may say, “Failure’s a bad thing.” Well, if you have a bad business plan, then failure’s not a bad thing. It’s a natural course. If you want to call it economic Darwinism, it does happen, and it’s what Joseph Schumpeter talked about greatly in his explanation of creative destruction.

Some things are destroyed so that new things and better things can be created. We don’t second-guess the model T or Henry Ford for what he put in place because somehow it destroyed the buggy whip industry. There was an industry that died, and to the degree that we had held that buggy whip industry up and supported it, it would have been to the detriment of a new and better innovation.

Kevin: You can imagine, too, if they had not convinced the world, and when I say they, the Keynesians, again, that deflation is bad, when people are saying, “You never, ever want the price of something to go lower, we have to be able to print money to keep that from occurring,” of course, all you are really doing is selling them something that will kill them in the end, which is hyperinflation.

David: The Japanese lesson, and that’s the language used today, that we have so much to learn from Japan because of this 20 years of deflation, the Japanese lesson that I think people are ignoring is not deflation, and that deflation is bad, and therefore inflationary monetary policies are a cure-all, that to us is balderdash.

What people are missing is that whenever the state apparatus protects financial and business interests, and supports them, by giving them subsidies, what it does is gut the innovative process in the market system, which is constantly looking to improve and grow. And it is essentially doing that because risk-taking is stripped of the reward in the event that success is found, and frankly, those businesses are unable to compete with entities that don’t have to be the best in class to succeed, again, the ones that are getting a subsidy.

So the free market system is up-ended, it’s turned over, and turned inside out, when the state chooses winners and losers. This is the lesson of Japan. Japan has a legacy of corporatism, and no amount of free money will reignite the free market and unleash a revolutionary improvement or set of innovations.

Kevin: It’s important to understand corporatism is another word for fascism, and we see it in this country as well. Our easy money policies don’t seem to be really pushing much up any more either. The equity market seems to be stalling here on this shore.

David: Well, we have that; 1700 on the S&P, 15,500 on the Dow, and we have, in the last several weeks, just sort of stalled out. I think it is this: You have institutional holders who are offloading their shares en masse to the general public, and the general public is buying whole-heartedly, what they conceive of as a new and fresh bull market. And basically what you have is flat supply and demand. When supply and demand are in balance, in other words, institutions and insiders are feeding the general public’s appetite, and there are not enough buyers to supersede or press the price higher, but it’s in balance today. I think, actually, we’re in a very dangerous place.

Kevin: And that’s not to mention the insider trading that you’ve been talking about, or the insider selling, which is the corporate bosses who have to report what they are selling. It’s just overwhelming right now, so not only do you have institutional holders who are off-loading en masse, but you also still have the institutional selling.

David: The place where you find the greatest insider selling, of course, is in the NASDAQ shares, the NASDAQ 100. It’s quite interesting, NASDAQ is hitting new highs for this particular move, and lo and behold, insider selling is off the charts. If you are looking at multiples of the shares bought versus sold, you would have a very different story, and this is not just compensation, people garnering compensation and realizing options. The numbers are far bigger than that.

Kevin: One of the things you brought out, too, was margin debt. A lot of these buys are on margin. We had a huge peak in April, but I think it has been dropping off since then, hasn’t it?

David: Fading, and that classic, “sell in May and go away,” I think we will look and say, in retrospect, actually the speculators did begin to sell in May, and they’ve been taking money off the table for the last 6 months. By the time we get to mid fall or even early winter this year, that will be our appraisal. Over the last 6 months, we will have seen the footprints, and I think we already have it now. That margin debt number was 384 in April, and now it’s 376 in June, and it is steadily declining. The speculative juices are beginning to come out of the markets, and I think this is where we are coming close to a cusp event in the equity market.

Kevin: Last week, Dave, the failure in Detroit was new information. But since then we’ve seen The Economist magazine come out and talk about the rest of the states around the country. And of course, then we have national pension plans to look at, when you try to stimulate the economy, to try to get the growth that we had over the last few decades, and it’s just not happening. These pension funds are already underfunded, but they are certainly not getting any gain from the equities market.

David: And here’s the point. It’s not just Detroit-centric. It is a far more pervasive issue. Where are the other pensions in the country? Everywhere. Every state, every teacher’s pension. In every state of the union you have that. There are the commonly made mistakes of over-estimating growth rates on the assets in the pension basket. That’s a common mistake. But the universal curse, and actually, the universal cure, is far more simple.

When interest rates are set below a natural level, income is redistributed, and there are winners and there are losers in the process, and they are selected by someone. This is, again, back to that notion of corporatism and choosing your winners and losers. Japan did it. We are now in the process of doing it. And actually, the Fed is helping promote that by setting rates so low. When you are looking at pension underfunding, you have to consider that ten years ago, the vast majority of pensions were adequately, or close to adequately, funded.

Kevin: Dave, I would hate to be a pension fund manager. Consider the one percent per year gain of the S&P 500 over the last 13 years, and there are no interest rates to speak of. So how do you build anything?

David: That goes back to that estimated growth rate. You are adequately funded as long as your rate of return on the assets under management are growing at the rate they are supposed to, in order to meet their withdrawal expectations in the years ahead. However, if your growth rate fails or slows, if it fails to meet expectations, that’s when you are going to end up with not enough money in the pot to pay out as and when it is needed.

The other element, though, is this. You’re right. Even with a 1% annual gain in the S&P over the last 13 years, there are also the steeply declining revenues from bonds as a consequence of lower rates by the Fed. One loser is the middle class pensioner. Again, who are the winners and who are the losers? We favored the banking sector. We favored a broad-based recovery, or at least that’s the way it’s been sold. But in point of fact, you do have the pensioner in the crosshairs, the middle class pensioner. Do you wish to look any further? I suppose you can, but I don’t think you have to look any further than the Fed for an explanation of broke and underfunded pensions.

Kevin: So what you are saying, David, is that we just put the blame on the Federal Reserve, but we should probably try to put the solution on the Federal Reserve, as well, by getting rid of it.

David: Well, that would be a bigger solution for a lot bigger problems, but at least as it concerns the pension issue. As I said, this is a part of the curse, it’s also a part of the cure. Rising rates go a long way toward curing the cash flow requirements of pension managers. Cash flows in, and then cash flows out to the pensioners, but without adequate inflow, you are left to harvest gains from growing assets.

And as we mentioned, the market is just not accommodating that right now. With an average of 1% return over the last 13 years from the S&P, there are simply not enough gains to harvest to make up for the lack of money that is coming in from the assets under management. This is the sad truth. The market is blind to individual needs. The market is blind to an individual pensioner who has waited for, and is now beginning to collect, a pension. The market does what it does, and it does it when it wants to do it. In this case, you have monetary policy which is exaggerating the pension crisis, and I don’t think the treasury is actually blind to this, but I think, frankly, their concerns are bigger. They are focused on larger systemic issues.

Kevin: Okay, but David, not only are they not blind, but who really benefits the most from cheap rates? Let’s face it.

David: You mean other than Wall Street speculators?

Kevin: Right, right.

David: Because here’s the deal. You have well-funded Wall Street speculators. Remember, we are not talking about just individuals any more, where you may have a family that has made a fortune speculating in the equities markets. These are the Wall Street tycoons of old where they started with a very small amount of capital.

Kevin: And they looked for value.

David: And they did, which is essential. Any time you are investing in the stock market, even if you are buying value, you are still a speculator, because it is a speculative notion that somehow you’re finding something that someone else is not finding, in terms of value. You turned over a rock that no one had discovered yet.

Today it’s not just individuals, it is the banks, which are no longer strictly lending institutions. All major banks trade their own investment accounts. This is the kind of sick irony. You have the combination of depositor money, and money that they have received from the Fed at the discount window, and that is what is driving bank profits today.

If you are looking at any of the banks who have been reporting in the last quarter, where have most of them, not all of them, but where have most of them derived their benefits and profit? From trading at their own trade desks. Some of that is fixed income, some of that is equities, some of that is commodities. And here, lo and behold, as we mentioned last week, some of those banks are being put under the microscope for trading in the commodity space. J.P. Morgan just this week got a 400-million-dollar fine.

Kevin: A little slap on the hand.

David: A little slap on the hand for a company that makes 99 billion dollars a year. But 400 million dollars was the fine for manipulating the energy market. Isn’t that interesting, that 13 years have passed, and Enron goes through hell and back, and they no longer exist because they were manipulating the energy market, but if you are J.P. Morgan, again, I think it does come back to, who do you know, and are you in that, sort of, Japanese classic chosen few to survive. Whether or not you are adding real economic value or not, it doesn’t matter. You have been chosen to survive.

And I think, largely, that is the case with J. P. Morgan. 400-million-dollar fine? Sure, okay, we have that, that’s in the press today. Why? Well, they’re not acknowledging or admitting that they manipulated the energy market, but that is what they are paying the fine for.

Kevin: And, they are still getting easy, free money, so the fine doesn’t hurt that badly because the Fed still infuses them with money, but Dave, if it was just our banks it would be bad enough. If it was just on our shores, it would be bad enough.

David: You remember the conversation with Larry Kotlikoff. He wrote the book, Jimmy Stewart is Dead. What he was basically saying is, “The old bank is dead. We don’t know banking as it once was.”

Kevin: They are now our competition. That’s what they are.

David: They are now sophisticated hedge funds, managing money, and guess what? They have an FDIC insurance policy backing them. They also have access to Fed money at basically zero rates.

Kevin: So they don’t take any risks Dave. They take no risk.

David: Why do they need you, the depositor, when they can get money for free at the Fed, and speculate, and when they lose, they have the taxpayer to bail them out? On top of that, if there is any bad press, the FDIC steps in like a knight on a white horse and says, “Don’t worry, the depositor’s safe.” We’re not even dealing with banking and …

Kevin: So it’s just like Dire Straights. “Money for nothin’ and your chicks for free.” (laughter) In this case, it’s money for nothing” and your risks for free.

David: Ironically, we’re not talking about just U.S. banks, now, either. We’ve talked about excess reserves held at the Fed. This is money garnered from the Fed, and then those reserves redeposited with the Fed, and they’re earning 25 basis points interest on that money that is not theirs.

Kevin: They get a little bonus. They get money, and then they get 25 basis points on the free money.

David: Curiously, 37% of those assets, held as excess reserves at the Fed, that are earning interest, about 2 billion dollars a year. These are foreign banks, with U.S. branches, that have gone to the Fed, they are getting money from the Fed, redepositing with the Fed, collecting 25 basis points a year on money that is not theirs.

Is that money staying in our economy? Is the Fed promoting health and well being in the U.S. domestic banking arena? Or really, are we talking about something that should drive the average taxpayer wild? The taxpayer, and the U.S. government, are usually compensated with any excess profits from the Fed. At the end of the year, the excess profits at the Fed get paid back to the U.S. government. That’s the tradition. But here we have 25 basis points, which is going to nondomestic banking entities. I’m sorry, this is insane.

Kevin: So we are fueling the world, basically, or since we’re talking about music, we are the world, not only because we have enough excess money, but we’ve got Wall Street, we’ve got the banks, we’ve already talked about what is called moral hazard, when you bail people out and they don’t have any risk. But the real winner in all of this, because the United States government has gone too far, too deep into debt to ever pay it back, and now they can’t see interest rates rise because they can’t afford the interest.

David: And that was your question. Who benefits the most from cheap rates? We’ve got the Wall Street speculator, and as we’ve said, it’s more the institution today than the individual. It’s your bank that’s running itself like a highly leveraged hedge fund, but still gets the FDIC imprimatur and those guarantees, and what not, for the safety of a PR campaign.

You’re right, the big winner here is the treasury. The treasury receives the biggest benefit, and here’s how this works: Via a subsidy to its interest costs. When you bring rates down, the interest component on the national debt all of a sudden begins to shrink, as well. As the interest rate structure is artificially lowered, the rates the U.S. government pays on its debt, they also go down. Thus, we have the highest levels of debt in U.S. history. (laughter) And a very manageable interest payment each year.

Kevin: Right, because we have no interest to pay. Let’s face it, what is it, 1 or 2%? We can deal with that.

David: We’ve been as low as 1.8, if I’m not mistaken, and now we’re just over 2, maybe 2.1%. We’ve averaged 38 billion dollars in interest payments per month over the last nine months, and at that rate, we’ll actually take out the previous highs, and I’m talking about the interest paid on the national debt.

Kevin: In dollars, yes.

David: Previous highs were 454 billion back in 2011, and before that, 451 billion back in 2008, or maybe I’ve reversed those years, but the last time I had checked the numbers on the treasury website, they weren’t actually that troubling. I was incorrectly assuming that we were at a 225-275 billion-dollar run rate.

Actually, you know what? I hadn’t been running on the assumption that the treasury had published those numbers, I was working off of the White House’s number, in terms of their budget, and they were assuming a line item of around 220-240 billion dollars in terms of the interest expense. We’ve blown past that, and we’re going to be twice that.

Kevin: Shame on you for using the White House for your statistics. I’m sorry. (laughter)

David: I should have learned something, but from that standpoint, we should learn something in terms of using anything we get from the BLS, the BEA, or the EEA.

Kevin: Or just the general BS.

David: You’re right. Well, last month we blew these numbers out of the water. We added 93 billion in the month of June. That’s interest for a single month. July? Well, this is going to be a totally confusing month, because you have the Department of Defense, which is doing something with their accounting, and they are going to be allowed to reduce the interest expense by 75 billion dollars for the month of July. I mean, what the heck is that?

So the July numbers are going to be skewed, in part, because of the DOD’s one-off reduction in interest expense by 75 billion. We’re on a 38-billion dollar a month run rate in terms of interest payments, putting us at 459 for this year, 2013. 459 billion. That’s 459 billion dollars, interest only. We’re not paying back principle, here, that’s just interest.

Kevin: David, we’ve been talking about interest on the debt, but actually, the real outlay that we are talking about is things that we can never really recover from or scale back. You talked about, in The Fuse Is Lit, this year’s DVD, that Medicare, Medicaid, and Social Security account for 81% of what’s coming in right now in revenues. So we can afford a little bit of interest as long as interest rates stay low. But that’s not going to change. The Medicare, Medicaid and Social Security just get larger.

David: Right. These are all sorts of tedious numbers. If you are listening and trying to contain all of them in your brain, you might have to listen twice. 81% of current tax receipts – that’s a dangerous territory to be in when you are talking about just the mandatory payments of Medicare, Medicaid, and Social Security.

Kevin: And you weren’t even counting defense.

David: We left out defense in the film as a major line item, not because we are dismissing it, but because we can cut that to the bone if need be, whereas, there are some political ramifications to cutting Medicare, Medicaid, Social Security, which are too grave for politicians to ever consider. You are probably going to create some job losses, you are going to offend a few very well politically connected people who have government contracts, when you start cutting the defense budget, but it can be cut in an emergency, and may be. There is some flexibility, that’s what I am saying, with defense spending, and it arguably could be reduced to balance a budget.

The key point that we were trying to make in The Fuse Is Lit, specifically the segment on An American Reckoning, is that the uncontrolled variable was the interest payments on the national debt. And again, just like those mandatory payments, this one is a tough one to get around.

Kevin: Why don’t we put this in perspective, Dave? Sometimes you have to go back and say, “Okay, where did we start, where have we come from?” Let’s just go back to the year 2000.

David: We could go back 30, 40, 50 years, and people would say that we didn’t have Ataris at that point, let alone Play Station 3s. The world is a radically different and improved place. You can’t compare today to that period in time, 2000 – this is still the modern era, if you will. Our economy was, in the year 2000, about a 10 trillion dollar economy then, that was our GDP. Our government debt at that point was around 5.6 trillion. Our revenue was pretty decent – 2.15 trillion. Keep in mind, this was the end of the Clinton era. We were running surpluses, not deficits, and revenues were as good as they had been in a long time. Interest on the national debt was around 362 billion. When you compare the interest component to our revenue, the interest component was around 16.8% of our total revenue in the year 2000.

Kevin: Let’s put that into 2013 terms. Let’s fast forward to now and try to compare the two.

David: The economy, that’s the total GDP figure, we know quarter 1 showed growth of 1.8%, well below the estimates. We’ve just had quarter 2 released in the last week and it is 0.6. That’s 6/10 of a percent growth. Very disappointing to all the economists and now they are looking for a year-end recovery. We’ll get to how they are assuming a year-end recovery here in a minute. But 16.33 trillion is roughly where we should finish the year.

Kevin: In comparison to 10 trillion back in the year 2000.

David: Yes. And with that in mind, we have total government debt, which is now 17.15 trillion.

Kevin: Now, let’s go ahead and put that in perspective, because that’s larger than the GDP, whereas back in the year 2000 our total government debt was 5.6.

David: And actually, officially, we are still under the debt limit by about 25 billion. If you look at any government website it will still say we are in the 16 trillion dollar range in terms of debt, as opposed to 17.15. But this is really interesting. They are pilfering the government retiree benefits to keep up the façade of staying below the debt ceiling.

Kevin: And that was not happening back in the year 2000.

David: No. Reuter’s reported – Jack Lew said this in May. He started shifting cash flow away from the G fund to pay bills. In other words, they quit funding government retiree pensions in order to pay our bills, and that’s how we’ve stayed under the debt ceiling the last three months, and that’s why we’re not cracking the debt ceiling until we open up that discussion. But until we open up that discussion and that wrangling back on the hill, as to what the new debt ceiling will need to be, basically, government retiree pensions are not being funded. (laughter)

Kevin: So for all you government workers out there who have been looking toward retirement…

David: Oh so sweet is the irony.

Kevin: You might want to pay attention there. It’s a little bit like being in Detroit ten years ago. Maybe we need to watch what’s going on inside the pension…

David: But to my point, 2013, you have interest payments on the national debt today. We’re at that annual run rate of 459 billion. As a percentage of expected revenue, again, using the White House’s numbers, roughly 2.7 trillion, you have about 16.9% of revenues going to the interest component.

Kevin: So the two most important facts that you are talking about, our debt over the last 13 years is triple what it was back in the year 2000.

David: Right, and then the second point is that interest rates have been set artificially low, subsidizing this debt and allowing us to keep our fiscal house in order.

Kevin: What a sword of Damocles is hanging over our debt. On a thin, thin thread of low interest rates.

David: Looking forward, they seem to be worrying particularly on the point of unbound interest payments. Today we’re at 16.9% of revenues being paid out, roughly where we were in the year 2000. Remember, at the end of the Clinton era, we were at 16.8%. We just looked at those numbers, and that was in a time where revenues were reasonably high, and we were running a surplus, not an annual deficit. So you have to assume that that 17 trillion dollar number is going to be added to next year, and the next year, and the next year.

So you do have an increasing burden, even without interest rates on the rise. But today, the tripling of our total debt, the ongoing annual budget deficits, the specter of rising rates, it makes the prospects of financial disaster a real threat. The bottom line is that if Ben and company, Ben Bernanke, that is, and the Fed, walk away from manipulating the yield curve and setting rates at abnormally low levels, we are likely to see the interest component on the national debt go from that 16.9% number to 25%, 35%, even 50% of our revenues.

But wait a minute, if 81% is going to mandatory payments, we’re at about 17% now that is going to the interest component, basic math, we’re already at 97%, and we haven’t even paid for government operations. That’s just interest components and your mandatory payments, Social Security, Medicare, Medicaid. We haven’t even run the government, and we only have 2% left. Do you see why I’m concerned?

Kevin: David, if that wasn’t depressing enough, we have 10,000 baby boomers a day launching into retirement. We’re just adding to this massive sand pile.

David: That’s why we’ve been highlighting the issue. If you haven’t viewed the video, The Fuse Is Lit, do so. You can watch it online, request a hard copy.

Kevin: Yes, give us a call.

David: Give us a call, give a couple of hard copies to friends and family members. Something tangible in their hand is often a more effective way for them to remember to do it rather than it being stuck in their inbox, as a forwarded message from you.

I know the numbers can be a bit mind-numbing, so I’m not going to go into all the details, but there is one other issue I want to talk about today, and it does relate to GDP. This is sort of a monumental event that is occurring this Wednesday, and I think it is worth discussing.

Kevin: David, I know what you are talking about. It’s an ominous feeling to see it happen again, but each time they stop liking the GDP number, they just go ahead and change it, I think back to 1999 when they started adding things that were expenses and turned them into actual assets.

David: I think what’s really important as people are educating themselves is to understand that they’ve got to think outside the box, and they have to see that things are changing all the time. CPI is not counted the way it used to be counted.

Kevin: Unemployment…

David: Unemployment not counted the way it used to be counted.

So if you are assuming these fixed things and say, “Oh, well, the 1970s only had this kind of employment rate and today it’s so much better,” these are the issues. GDP is now a statistic which is back again, the Commerce Department, the Bureau of Economic Analysis as a subset to the Commerce Department, is doing a major overhaul of the way they classify components in GDP, and that is happening this week.

The last time this was done, you mentioned 1999, that’s when software was converted from a company expense to an investment, and thus, it created a boost to GDP, categorized as an investment. Again, it goosed the GDP statistic higher. Now, there is going to be a host of new “investments” which were previously counted as expenses, and this is so critical, with the net effect being an improvement in GDP by as much as 3%.

Kevin: Wow, that will be a nice little boost.

David: Yes.

Kevin: And I don’t know where it’s coming from.

David: I’m flabbergasted. This is really what’s scary. All our GDP stats will be adjusted going back to 1929, with many of the previously documented recessions simply disappearing, because again, if there is a larger economy, things appear to be growing instead of contracting in certain years, the improvement to the GDP statistic is something that will literally cause a softening of all those past blows. You may have remembered recessions in the 1970s, or in earlier periods in U.S. history. Guess what? In the light of history, they won’t be as severe. Why? Because we will see in these new components, which were a part of the economy, as it is retold. This is such revisionist history, but because of the improvements discovered and implied retroactively, back to that timeframe, I kid you not, this week marks a massive revision in economic history.

Kevin: You know what it reminds me of, if I had to take $5,000 out of the bank to take the family on a cruise, let’s say, normally I would have to say that $5,000 came out of the bank. That affects the actual bottom line of my savings. But that added $5,000 may not show up in the bank account…

David: It’s no longer an expense, it’s an investment.

Kevin: Wow.

David: And you know what? If you want to play the semantics game, that’s fine. But let’s not lose track of reality.

Kevin: Yes, but they’re doing it with math, Dave. They’re not just doing it semantically.

David: One of the many absurdities is the new treatment of pensions. Here again, it’s this issue of, “pensions, pensions, pensions. We’ve got problems. Well not anymore! Here’s how we’re solving one of the many pension issues.” I call this an absurdity because I just can’t wrap my mind around it. They’re going to count pensions as they are accrued, rather than when they are paid out, which will do a couple of things. Number one, it will alter the government consumption number positively by about 30 billion dollars in any given year. And then it’s going to boost the savings rate for individuals, specifically, the savings rate and personal income, because this is going to be counted as a current income issue. And this is just as pensions are accrued, not as they are paid out. I think to myself, “What else can you do to fabricate reality?”

Kevin: It’s insane, Dave. If you think about it, they’re just adding numbers that really are a subtraction. They’re taking it from one column to the other. Like you said, it will change history. The problem is, for a person who wants to accurately look at these numbers, you have to subscribe to a newsletter like John Williams’, or you have to go to an alternative source, because there is no real reporting anymore.

David: And I’m not saying this doesn’t make sense to someone, if you have a Ph.D. in economics.

Kevin: From Princeton, maybe.

David: Sure. Or Berkeley. Then certainly, with your head in the clouds, you can believe this makes sense. But for those of us living in the real world, we say, wait a minute, a pension obligation, someone putting it into a fund, it’s not going to the pensioner yet, they haven’t gotten that cash flow, it’s not going to be spent in the economy. How exactly is that being counted as an improvement to GDP? It makes all the sense in the world that as it is paid out you would count it as a part of GDP, but now, as it is accrued? And then you have the ancillary effect into personal income and the savings rate. These things are mind-boggling, but we live in a world today where truth is stranger than fiction.

Kevin: And truth isn’t reported, either. The truth that is reported is stranger than fiction. The truth, itself, is so hard to come by. Listening to podcasts like this, subscribing to various newsletters. A lot of the people we interview provide the information at great cost of their time and efforts, like John Williams, I’m thinking of.

If you don’t have someone who can actually alert you to those things, what happens is that you just open up the paper and you say, “Wow, there’s been a huge increase in personal savings. There’s been a huge increase in GDP. It’s amazing.” And yet, it’s not an increase, it’s just a fabrication. You have to understand beyond the headlines. We’ve passed the transitional phase where individuals were thinking for themselves.

Today, we are spoon-fed garbage ideas, garbage data points which are used to support those ideas, and we’re heading toward another transition, and unfortunately, a painful one, where individuals awake to the reality of being misled, of being lied to, and I think in that moment, not knowing where to turn, there will be a lot of social and political confusion.

Where do they turn for answers? Where do they turn to for the truth? I think also, from a hopeful standpoint, there is the opportunity for us as individuals to have a greater influence and to make a mark, whether it is in our community, whether it is with our family, to provide answers, to provide some degree of sanity, and say, “You know what? Here is how things have changed through time.

This is why the inflation of yesteryear is not the inflation that you see reported today. This is why the unemployment statistics of yesteryear are not the unemployment statistics of today. This is why GDP, even though you think you are dealing with constant economic variables, has changed from yesterday to today. And we’re talking about this week, this week, that this number is being changed.

It brings me back to the issue that if individuals are not thinking for themselves, they have to. If individuals are not endeavoring to step outside the mainstream of pabulum information, and frankly, deceitful information, they will be at a disadvantage. And as, and when, we go through periods of major change, and we are talking about social and political change, not just economic and financial change, there will be so many people confused and unable to right themselves, unable to orient themselves. And then there will be that remnant that is able, that is very keenly aware of reality as it is, not as others have proffered it, or pretended it should be, and they will be leaders. They will be those who offer guidance, consolation, and an ability to navigate those difficult waters.

We are in a period of transition. We’ve seen the dumbing down of America. We are going to see the blinders removed at some point, and then a mass panic, and that mass panic will have unfortunate ramifications. Those ramifications don’t have to engulf us. They don’t have to sweep us up with them. There are things that we can do, there are things that we must do to protect our families. And those things, I think, we’ve made very clear on this program.

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