Money and Markets Monday, September 18, 2006
www.MoneyandMarkets.com<http://www.moneyandmarkets.com/>
The Greatest Scam of All Time
Dear Nicolas,
Washington's Enron-style accounting is now so widespread and so deeply
ingrained, the nation could be bankrupt and not even know it.
You go to work. You save and invest. You vote in the November election. And you
assume that everything is business as usual. Then, one day, you wake up to the
shocking discovery that it's not.
Inflation is at least three percentage points worse than what they're telling
you. Unemployment and the budget deficit is over double. The national debt is
at least five times bigger than official tallies.
Almost every number coming out of Washington has been thoroughly massaged and
greatly distorted, almost always with a bias toward sweeping the dirt under the
carpet and sugarcoating the truth.
This is not a conspiracy. It just happens naturally. But that doesn't diminish
the potential impact on your money. It's easily the greatest scam of all time.
Every single administration - from John F. Kennedy to George W. Bush - has
succumbed to the same temptation to "reform" the data collection process ...
"streamline" the reporting procedures ... and continually implement minor,
incremental changes - all to make things look a bit better.
Each new change has been grandfathered in by the next administration.
And the cumulative effect of all these small changes over time adds up to a
gross distortion of reality that could directly threaten your financial future.
Look Back to Recent History,
And You'll See What I Mean.
At Enron, 21,000 employees - and many more investors - assumed that the
company's books were real. Then, one day they discovered it was all a hoax.
And it was over.
We saw the same thing happen at Adelphia Business Solutions, Global Crossing,
Kaiser Aluminum, Kmart, McLeodUSA, National Steel, WorldCom, and scores of
other major, household-name companies. Every one had distorted its numbers.
Every one went bankrupt. Each left a trail of ruined lives in its wake.
The distortions were so bad even many of Wall Street's least biased analysts
missed the boat. Indeed, in a special report I presented to the National Press
Club<http://link.weissinc.com/h/73FE/19IR/SU/ZOTVM>, I demonstrated that ...
Among 50 major Wall Street firms we reviewed, 94% continued to publish "buy" or
"hold" ratings on these failing companies right up to the day the companies
filed for bankruptcy.
Worse, America's largest auditing firms looked the other way, or even directly
assisted in the accounting distortions. In a report I submitted to
Congress<http://link.weissinc.com/h/9U3Q/19IR/SU/ZOTVM>, I showed that ...
Arthur Andersen, America's most prestigious auditors, gave a clean bill of
health to 11 companies involved in accounting irregularities. Deloitte & Touche
and KPMG each gave a clean bill of health to five companies involved in
accounting problems. And overall, the nation's major auditing firms gave a
clean bill of health to 42.1% of the public companies that filed for bankruptcy
soon after their audits. Overall, the auditors failed to warn the public about
companies that were worth a total of $225 billion at their peak. Investors lost
nearly every dime.
Today, Fannie Mae, the company that controls most of America's secondary
mortgage market - a company without which the entire housing industry would
crumble - is also knee-deep in accounting distortions.
Ford, General Motors and Chrysler, which can make or break America's industrial
economy, may or may not have major accounting issues. But their assurances to
shareholders and employees, made just a few months ago, are crumbling just the
same.
And this is in "good times," when the economy is apparently strong, when
inflation and unemployment are supposedly moderate.
Something doesn't fit. Something's terribly wrong with this picture, and it's
this: The government's distorting the real truth about the U.S. economy and its
own books.
How Washington's Enron-Style Accounting Makes
The Great Corporate Scandals of This Decade
Look Like Little White Lies by Comparison
Much like major auditing firms review the books of a GM or IBM, the U.S.
Government Accountability Office (GAO) audits the books of Uncle Sam, including
its departments and agencies.
But in its latest year-end media
advisory<http://link.weissinc.com/h/P7AT/19IR/SU/ZOTVM>, the GAO plainly states
that
"For the ninth straight year, the U.S. Government Accountability Office (GAO)
is unable to provide an opinion as to whether the consolidated financial
statements of the U.S. government are presented fairly, in all material
respects, in conformity with generally accepted accounting principles."
In other words, the same government that is aggressively pursuing corporations
for bad accounting is the most guilty of similar practices.
In an earlier report to
Congress<http://link.weissinc.com/h/QMZC/19IR/SU/ZOTVM>, GAO Director and U.S.
Comptroller General David M. Walker bluntly explained it this way:
"The current system of federal financial reporting provides an unrealistic and
even misleading picture of the government's overall performance and financial
condition ... A key lesson from Enron, WorldCom and other business failures is
that our free-market system depends on public confidence in the accuracy of ...
financial information."
But, unfortunately, Washington has so far failed to learn that lesson.
In several departments of the executive branch, especially Defense,
balance sheets don't balance and taxpayer money disappears. So beyond the
deficit manipulations that we know about, there could be many others that are
unknown, even to the federal auditors.
This is easily one of the greatest scandals of our time, and yet it's rarely
discussed and often forgotten.
Investors and
Taxpayers
Hoodwinked!
One veteran economist, John Williams, is so thoroughly convinced that
government manipulations are hoodwinking taxpayers and investors, he has
devoted his current career to painstakingly documenting the shenanigans at
Shadow Government Statistics<http://link.weissinc.com/h/2SQY/19IR/SU/ZOTVM>
(www.ShadowStats.com<http://link.weissinc.com/h/CT1F/19IR/SU/ZOTVM>).
Technically speaking, these issues are not hidden. The government does tell you
nearly everything it's doing - in a long series of cryptic footnotes. But after
40 years of footnotes, most are long forgotten, even by many of the
government's own economists. Here's a brief rundown of just the most obvious
distortions ...
Distortion #1
The True Unemployment Rate Is Over 12%
One of the first new wrinkles in the unemployment stats was added during the
Kennedy Administration. And it persists to this very day.
Instead of measuring how many people are actually out of work, they figured it
would be easier to simply keep track of how many people are applying for
jobless benefits.
Never mind the fact that the benefits run out after 26 weeks! Never mind the
hundreds of thousands of "discouraged" workers who have stopped collecting
benefits months ago!
The government's unemployment number also excludes millions of part-time
workers who are seeking a full-time job but can't find one ... millions more
who are disabled ... and even the 2.2 million that are in prison.
Make sense? Not quite. If Mr. A loses his job because he's fired, he's
"unemployed." But if Mr. B loses his job because he's thrown in jail, he's not
unemployed!? Give me a break.
So what is the true unemployment rate in the United States including all those
who really want a job but don't have one?
I can assure you it's not the 4.7% that the Bureau of Labor Statistics reported
for August. It's probably closer to 12%, or over two and a half times more than
the official rate.
Distortion #2
The True Inflation Rate Is Over 7%
Probably more so than any other number, the government has a direct, vested
interest in keeping its official inflation numbers low.
Reason: The higher the rate of inflation, the more it has to pay in Cost of
Living Adjustments to Social Security beneficiaries.
The first major push for inflation-distorting reform began with the Clinton
Administration. Until then, the inflation measure was based on an essentially
fixed basket of goods.
Example: The basket included an 8-ounce steak. And no matter what, they tracked
the same steak through time.
The Clinton Administration, however, argued for a variable basket of goods. If
the 8-ounce steak got to too expensive, they argued, the typical consumer would
simply substitute hamburger. So the government should do the same.
That wouldn't be a measure of the cost of living. It would be a measure of the
cost of survival. Yet, according to Williams, a series of complex mathematical
changes in how the Consumer Price Index is calculated - giving less weight to
higher priced items - essentially achieves the same goal as the variable basket
of goods.
Add that to a series of other distortions in the Consumer Price Index .. and
you've got a measure that's so far removed from reality, it's a joke. Instead
of the 3.8% announced last week, the true inflation rate could be well over 7%.
The biggest victims of this hoax: Anyone collecting Social Security benefits.
According to Williams, if the Consumer Price Index were calculated today the
same way it was during the Carter Administration, the payments would be 70%
larger!
Distortion #3
Gross Domestic Product
Greatly Overstated
Back in 1991, the U.S. government stopped focusing on the Gross National
Product (GNP) and started headlining the Gross Domestic Product (GDP). A key
difference: The payments the government must make to service the national debt
are missed in the GDP numbers.
Separately, the government always reports the growth in GDP after subtracting
inflation.
Example: If the GDP growth is 8% and inflation is calculated at 4%, the
government reports that GDP growth is 4%.
But if the true inflation rate is 7%, then guess what: Instead of moving along
at a reasonably healthy clip of 4%, the economy is actually crawling at a
feeble rate of 1%.
Big difference!
No matter what, right now, even the overstated rate is slipping: The government
reports that GDP growth fell to annual rate of just 2.9 percent in the second
quarter of 2006.
Distortion #4
Deficits and Debts
The official 2005 budget listed the U.S. federal deficit at $319 billion.
But according to the GAO, if the government followed the same generally
accepted accounting principles it demands of corporations, the real 2005
deficit would have been $760 billion - or more than DOUBLE the official number.
And that's just one year of new debt the government has to take on to make ends
meet.
If you take a look at the total debts and obligations the government has
accumulated over the years, the picture gets worse, much worse.
At the end of the first quarter, the total federal debt, including government
agencies and government-sponsored enterprises, stood at $10.2 trillion. (In the
Fed's Flow of Funds report of June 8,
2006<http://link.weissinc.com/h/M2C1/19IR/SU/ZOTVM>, see Table L.4. Then sum
lines 4 and 5.)
But if you also include the estimated unfunded liabilities for Social Security,
Medicare and other programs, the total federal debt is at least $54 trillion.
And that's based on three separate studies - by the American Enterprise
Institute (AEI), the National Center for Policy Analysis (NCPA) and the
Brookings Institute.
My Recommendations
First, don't take government stats for granted. If you can't trust Ford and
Fannie Mae, what makes you think you can trust Uncle Sam?
At the very least, recognize that the government has a built-in institutional
and methodological bias in favor of good news. It's simply not prudent to base
your long-term financial future upon them.
Second, take steps to protect your assets from the ravages of inflation,
whether hidden or not. That includes a continuing allocation to gold- and
energy-related investments, despite any temporary ups and downs.
Third, keep a substantial portion of your money as safe as possible to protect
yourself from the day when the truth starts pouring out. It hasn't happened
yet. But just as occurred with Enron and WorldCom, once the bubble of fantasy
bursts, it doesn't take long.
My favorite havens: Treasury-only money market funds such as:
American Century Capital Preservation Fund (800-345-2021),
Dreyfus 100% U.S. Treasury Fund (800-645-6561),
Fidelity Spartan U.S. Treasury Fund (800-544-8888),
USGI U.S. Treasury Securities Cash Fund (800-873-8637),
Vanguard Treasury MMF (800-662-7447), or
Weiss Treasury Only Money Fund (800-430-9617).
Although government officials may distort the numbers, the U.S. Treasury
Department has never failed to meet its obligations for the payment of
principal and interest.
Good luck and God bless!
Martin
--------------------------------------------------------------------------------
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