Vern Gowdie – Markets and Money (Australia) –
‘How do you know when a politician is lying?’
‘When their lips are moving.’
Many a true word is said in jest.
The political class and the truth are, at best, distant relations.
It was British Prime Minister Benjamin Disraeli who is credited with saying: ‘There are three kinds of lies: lies, damned lies, and statistics.’
Statistics used for political purposes are another sort of lie…propaganda.
On Wednesday, The Guardian published an article on the crime statistics in my home town:
‘Gold Coast police officers are trying to paint a better picture of the official crime rate by “soliciting” victims to withdraw complaints, a damning report has found.
‘The Queensland auditor general’s report also warns crime statistics collated and released by the state’s police service should be “treated with caution”.
‘“The Queensland Police Service has an unacceptable amount of crime data across the state that is incomplete, inaccurate, and wrongly classified,” it reads.
‘Tabled in parliament on Wednesday, the report found an unhealthy focus on achieving performance targets on the tourist strip over quality data.’
Could there have been a political directive to police hierarchy to window-dress the crime stats prior to the Commonwealth Games?
Would we ever get a truthful answer to that question? Probably not.
Take a look at the following chart on global unemployment in the 1930s.
In 1932, during the Great Depression, Australia’s unemployment rate peaked at 29%. Over the next six years, the rate fell to 8.7%.
Source: New Deal or Raw Deal?
[Click to open in a new window]
However, the real standout is Germany. Unemployment fell from 30.1% to just 2.1%. For observers at that time, this was a truly remarkable statistical result.
History tells us the data was more heavily doctored than a Real Housewives’ face.
Laws were introduced that made it effectively illegal for Jews to work…’approved’ Germans took their jobs.
Women were excluded from areas of work due to Hitler’s belief that they should be at home caring for the family.
Anyone who was ‘work shy’ was sent to concentration camps. Removed from the statistical data.
Finally, compulsory military conscription boosted the employment numbers.
On the economic front, according to the Institute for Historical Review: ‘Between 1933 and 1938, notes historian Niall Ferguson, Germany’s “gross domestic product grew, on average, by a remarkable eleven percent a year”.’
How did Germany achieve this astonishing growth rate? Military spending went from 3% of GDP to 32%. And we know how that ended.
Hitler’s ‘miracle’ economy was nothing more than a statistical mirage.
In a recent issue of The Gowdie Letter, I wrote about the CPI calculation that incorporates the ‘hedonic quality adjustment’. Never heard of it?
Here’s an extract from the letter:
‘This is a direct quote from the BLS [US Bureau of Labor Statistics] site:
‘“Hedonic quality adjustment is one of the techniques the CPI uses to account for changing product quality within some CPI item samples. Hedonic quality adjustment refers to a method of adjusting prices whenever the characteristics of the products included in the CPI change due to innovation or the introduction of completely new products.”’
‘To spare you the agony of deciphering the entire definition, this is only the first paragraph.
‘None the wiser?
‘Many years ago, economists decided that you cannot compare “apples with apples” to accurately calculate CPI. Ironically, for CPI purposes, you can actually compare the price of a real apple with a real apple, but what about a TV?
‘Surely a TV is a TV is a TV?
‘To calculate the “hedonic quality adjustment” for a TV (and other select items), those clever economists came up with a not-so-simple formula.
‘You ready for this?
‘This is directly from the BLS site (emphasis mine):
‘“To illustrate the mechanics of a hedonic quality adjustment, it helps to begin with the generalized form of the hedonic regression equation…”
‘Yes, folks — this equation is the generalised form.
‘Wait — it gets better.
‘“Where the dependent variable, lnP, is the natural log of price, ß are the coefficients estimates of the independent variables (Xk), and e is the error term. The coefficients are a measure of the percentage change in price associated with a unit change in the characteristic. If the item being modeled is men’s shirts, the independent variables might be sleeve length and fiber composition; a simplified version of a hedonic model for men’s shirts might be…”’
‘Are you still with me?
‘For the 99.99% of us who have absolutely no idea what these calculations mean, the good folks at the BLS have been kind enough to give us an example of how the hedonic quality adjustment is applied to TVs.
‘Why a $250 TV is more expensive than a $1,250 one
‘This is a screenshot of the BLS calculation:
Source: US Bureau of Labor Statistics
[Click to enlarge]
‘Look at the bottom figure… Through the magic of the hedonic quality adjustment formula, that $250 TV is adjusted to a value of $1,345.02.
‘For CPI purposes, this quote is directly from the BLS: “The resulting price change is -7.1 percent after the quality adjustment is applied.”
‘There you have it. For official CPI purposes, the $1,250 TV is actually 7.1% lower in value than the $250 one.
‘I kid you not. This information is all sourced directly from a US government website.’
Statistics, like creative accounting, are used to create illusions.
Politicians and their loyal bureaucrats feed the public mushroom whatever BS is needed to propagate the belief that they are capable stewards.
Unemployment data and CPI numbers bear little resemblance to reality. Statistical ‘soft lighting and makeup’ are used to make these numbers far more attractive than what they really are.
However, the statistical pig with the most lipstick, rouge, plastic surgery and mood lighting in our economic history is the GDP data.
Officially, the Australian Bureau of Statistics tell us our nation has been recession-free since 1991…closing in on a world record of unbroken economic growth.
Aussies bask in the glow of this economic success. How good are we? Punching above our weight on the global stage, yet again.
The problem with prolonged success is the risk of complacency and hubris setting in.
The belief we are bulletproof.
What has been will continue to be so.
What the ABS data doesn’t show — like Germany’s ‘remarkable’ reduction in its unemployment rate — is how our economic ‘miracle’ has been achieved.
According to the ABS: ‘At September 1990 the level of household debt was almost $190 billion’.
Today, household debt is around $2,000 billion…a tenfold increase. All these borrowed dollars that have gone into the economy have been recorded by the ABS as GDP ‘growth’.
Dear reader, the reason behind our so-called economic success is that we are hopelessly addicted to debt. In truth, we should be ashamed of ourselves. Yet, the propaganda turns fact into fiction, and we are indoctrinated into believing this ‘success’ is cause for celebration and pride.
As they say, pride comes before a fall.
And the fall we are being set up for is certain to create hardship for many Australian households.
We have been living a life of ‘Yes, you can live beyond your means indefinitely…all you need is more credit.’
More than a quarter of a century of genuine belief and statistical support has converted this blatant untruth into an unquestioned truth.
People blindly following a false doctrine takes us to a very dangerous place.
The recent news of higher levels of hidden mortgage stress within households comes as no surprise.
Eventually, even after 25 years, the truth wins out over the lie.
Our ‘beautiful’ Aussie economic success is a big, fat lie.
The truth is this falsified growth cannot, and will not, be sustained.
When the lights go on and the makeup is removed, the outcome is going to be pig ugly.
Editor, Markets & Money