The Winds of Empire

by Bill Bonner

It is as if a strong wind blew across the United States early in the last century.Now every flag and opinion points towards empire.Even the national statistics.We have wondered, for example, how it is possible for an economy that spends more than it earns to appear as though it is growing.The imperial race always believes it is the best in the world – that its economy, its system of government, its culture…even its climate…is superior to all others.But how is it possible for Americans to believe their economy is superior?Here we turn to a quotation from an economist who actually knew what he was talking about, F.A. Hayek:

“The economy in its entirety must continue to decline so long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock.”

That sentence describes the current condition of the U.S. economy.It is in decline.The capital value of houses is being mortgaged and consumed.The GDP figures dutifully record the rate at which people put in new granite countertops.Without a proper theory about how economies work, an economist looks at the numbers – as does the Wall Street Journal – and concludes that the United States is growing faster than Europe.The empire is healthy, growing, and strong, the WSJ believes.But both its numbers and its theory have been bent by the winds of empire into a strange, twisted shape.

Nearly half the items in America’s measure of consumer price inflation are “adjusted.”Between 2000 and the end of 2004, for example, spending on computers rose 9.3%.But since computers became more powerful, the number was ‘enhanced’ to 113.4%.Other numbers in the CPI calculation were adjusted by the “substitution effect.”If steak rose in price, the statisticians assumed people switched to mutton, thereby reducing their cost of living.

So did they adjust the price of housing.It costs a lot more to own a house today than it did in the year 2000.But the boys went to work on the numbers with pliers and a torch.Soon they had twisted the cost of actually owning a house into the cost of renting the same house – “owners’ equivalent rent” they called it.And since the imperial central bank has held interest rates below the CPI rate for the last three years, people who previously would have rented now buy.This has reduced rents even while it increased house prices.Voila!The CPI, of which more than a quarter is the cost of housing, was held down.

The credit bubble had a similar consequence for used cars.Zero financing deals turned heads away from used cars and towards new ones.Used car prices fell – and so did this component of the CPI.Together the two items alone – housing and used cars – were responsible for a 1.7% drop in core CPI between November ’01 and December ’03.

While everyone knows it has become much more expensive to make ends meet, these distortions keep the official CPI low…and the GDP figures high.Nominal output is reduced by the official CPI number to give the real GDP figure.The lower the CPI, the higher the resulting GDP figure.

If the numbers were done properly, says Dr. Kurt Richebächer, they would show that the American economy actually grew at the same rate or slower than Europe during this five-year period.What’s more, real incomes in Europe are increasing faster.And so is productivity.

Don’t weep for Europe, dear reader.Buy it.