There Are No Markets, Only Manipulations

Yesterday is was reported that GDP beat estimates. As Mish highlights, the devil is always in the detail – especially with the always predictable “revision game”. The bigger news beyond the fact that the first quarter growth was revised down over 35% to 1.15, is the fact the govt changed the way it will calculate GDP.

If you can’t increase GDP by increasing actual business, then simply change the rules. Starting on July 31st, R&D spending, which is normally classified as an expense, will be counted as a revenue for GDP purposes. This creative accounting is expected to increase GDP by 3%; and as Eric illustrates, will reduce personal consumption expenditures as a percentage of GDP to 68.8% from 71% in Q1 of 2013.

Companies would normally expect some percentage of their R&D work to produce revenue some day. However, in the perverted world of govt statistics, not only do they assume every R&D project produces revenue, but they count it twice – once when they incur the R&D expense and once when the project produces revenue.

For a govt that already manipulates CPI by assuming you will replace steak with hamburger if the price of steak rises too much (know as hedonic adjustments), and manipulates unemployment by eliminating long-term unemployed and part-timers, it should not be surprising to see them manipulate GDP. Afterall, they already do things like count automobile sales as soon as they ship to dealer lots, even if they sit on the lot for years. BTW, this is what China is famous for doing – ordering mountains of copper and concrete to build empty cities and count it toward GDP. The media and politicians call the Chinese “manipulators”. Where do you think China learned to cook the books?

Even with all their manipulations, govt was still having trouble keeping GDP growth positive, thus the new “creative accounting”. Remember, two consecutive quarters of negative GDP growth is the govt’s “official” definition of a recession. We were nose diving into negative territory, and that would not be good for the MOPE pushers. BTW, we’ve never actually gotten out of the recession if you subtract out the debt injections. Too bad we can’t increase our income by just adding another credit card (I hope the NSA doesn’t pass this idea on to the IRS, or we may see our credit card balances taxed as income).

GDP without debt

This process of manipulating economic numbers has been a govt tactic for a while. It’s formally called MOPE (Management of Perspective Economics). When you have a currency and economy based on trust & confidence in govt, instead of gold backed money and real capital, then what else could one expect? This New Normal assumes that nothing ever has to pass the math test – that what ever the Almighty Govt deems to be so, will be reality. This is the hubris of the protected class that never has to live in the real world. fortunately, math will always strip the Emperor down to his birthday suit.

The first market-based glimpse under the robe is revealing a very unpleasant site. You see, govt can lie and manipulate the numbers, but they can’t force business owners to invest and they can’t force countries to buy our debt, which has been declining quite rapidly since the Fed showed its money-printing hand after the 08′ collapse.

The mere hint of “tampering”, reducing QE (bond purchases), caused rates to spike, and they still remain at the top of the range, even after the Fed said they would maintain their $85 billion per month in money printing. The Fed cannot control longer term rates, and when they lose control, it’s game over. Not only will housing and auto sales collapse, but the reality that the Fed’s money printing is unable contain rates will send bond owners rushing to dump their holdings. This will not only make it abundantly clear that the 30-year bull market in bonds is over, but the interest payments on the debt will explode, rendering it impossible to payoff old debt with new debt; and the $QUADRILLION derivative market, most of which is interest rate hedges, will implode the financial system. I would advise you to keep an eye on the 10-year, which is staying above 2.5%. When it goes through 3%, the “fun” will begin.

10-year

The other thing the govt cannot stop (yet), although the Indian govt is trying its best to do at the arm twisting of the U.S., is to stop people from buying gold. The physical gold market is beyond tight, and the top is about to blow, which is why pressure has been put on India to curb their citizens gold purchases. I will provide the details over the weekend. In the meantime, this post from Jesse, which contains Max Keiser’s interview with whistleblower Andrew McGuire, will provide a good summary.

Comes total gold

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