Wednesday, January 16, 2008

Recession in real terms

Talk of a US recession is heating up again, and this time it seems people are taking the prospect of a slowdown more seriously.

In fact, most observers seem to have dropped the infantile "r-word" code and are now using the full word "recession". This is a grown-up step for them.

But while the mainstream is only now just catching on to the idea of an "impending" recession, there are some, like Jim Rogers and Marc Faber, who say the US is already in a recession and probably has been for some time.

The problem in identifying the true onset of a recession is that the data which most people use to measure economic growth has been manipulated. Governments routinely massage the data to make things appear better than they actually are.

So, you have unrealistic inflation numbers (especially in view of rampant money supply creation worldwide) and false GDP numbers. As a result, no one relying on fudged data can accurately assess the onset of recession or periods of true economic growth.

Here's how Marc Faber summed it up in a recent interview.

"Well, personally, I think that the US, if you measure economic statistics properly –and the government is lying blatantly – the US went into recession 3 months ago. And I’m saying the government is lying blatantly, because they take nominal GDP and then they fiddle around with inflation figures. I mean none of your listeners have an inflation rate of less than 5 to 6% per annum. You just can’t exclude food and energy prices and healthcare costs from the CPI, from the cost-of-living increases.

So nominally the US economy may still be growing, but inflation adjusted –in other words, in real terms – we’re already in a recession. And most US households, except for the super rich, are today no better off than they were five or seven years ago. Their income gains have all been eaten up by cost increases by inflation."

As Frank Barbera and Peter Schiff pointed out in a recent Financial Sense Newshour broadcast, any argument about whether or not a recession is coming is silly, as economic data from privately gathered sources is totally consistent with recession. Compare this with government data which understates inflation and overstates GDP.

Meanwhile, the banks are acting like they know what's coming. As the Financial Times reports, leading US banks like Citigroup and Merrill Lynch have taken a "$21 billion bail out" from foreign investors.

Follow the money; they're taking these cash infusions because they need to shore up their balance sheets to survive a recession and any further shocks to the financial system.

"Vikram Pandit, Citi's new chief executive, said the size of the fundraising was intended to ensure that the bank remained well capitalised even in the face of a serious US downturn. "There is no doubt we're in the midst of a very challenging environment," he said."

So as I see it, that's where we're headed. What are your thoughts?

If you'd like to know more, check out the links to the recent FSN broadcast and listen to the interview with Marc Faber, if you haven't already. See you Friday.