However, the infomercials that I just do not understand are the ones that try to cover something up. Like the one that puts some kind of liquid on an old beat up car's scratched headlights and miraculously the headlights turn into shiny clear plastic that looks brand new. Seriously? Just like putting lipstick on a pig.
Folks who know me will tell you that I have never been one to gloss over the truth just to make things look better. This is why I am constantly challenged when I read the government-issued reports on Gross Domestic Product (GDP), inflation, and unemployment. These numbers are usually the important ones that guide many when making financial decisions. But just think about this for a secondthe numbers are always adjusted in ways that are unclear to most of us. Why? Because the government wants inflation low and GDP high. And you know what? We don't need to look too deep into the reports to begin to doubt the results.
Let me explain. The Bureau of Economic Analysis (BEA) of the United States Department of Commerce calculates the Gross Domestic Product (GDP). This should be a relatively straight-forward calculation. You take the value of goods and services produced in the US over a specific period of time, and adjust it for inflation to get the real rate of growth. Simple right? Not for the government.
Let me introduce to you a term called hedonically adjustment. The price of goods are hedonically adjusted when pricing takes into account both the internal characteristics of the good being sold and external factors that may affect the price. Here is an example, computers are hedonically adjusted to account for the idea that because they are faster and more feature rich than in past years, they must be more additive to our economic output. So, if I buy a $1,000 computer, Uncle Sam records the transaction as more than a thousand bucks contributed to the GDP. Of course, that extra money is not real; in fact, it never even traded hands. It simply does not exist. Just brilliant.
Anything to make GDP look better... kind of like lipstick on a pig.
They do it to inflation as well, but just the opposite. Let me give you an example. The Consumer Price Index (CPI), which measures inflation, includes an odd adjustment in my opinion, Owners' Equivalent Rent (OER). Stay with me here; this is a good one. The OER is one of the two main components used to evaluate housing and shelter for purposes of the CPI. The OER reflects what a homeowner could rent his house for if he or she chose to do so. This number is included in the cost of shelter in the inflation calculation. Wouldn't it make more sense to simply survey home prices to get a better estimate of housing costs?
Hmm, of course it would. Heck, that is what the government used to do.
Here is why that changed. Historically, rents have been slower to rise than home prices, so when inflation was on the rise, to make that number look better, the Wizards in Washington decided to simply adjust the cost of shelter to reflect rent, instead of what it actually takes to buy a house. Anything to make that pig look better.
Let's talk about my favorite economic measureunemployment. Does anyone really think that the unemployment rate is under 6 percent, like they tell us? I bet no Rick's Family Finance readers think so.
The Bureau of Labor Statistics each month calls about 60,000 folks across America to ask them a few questions about their work situation. To you and me there are really only two important questions to ask. First, do you have a job? And second, if you don't have a job, do you want one? Simple, right? Nope, the Wizards of Washington follow up with one more question: how long have you been out of work? If you have been out of work for longer than four weeks and you have not filled out an application for a job, then you are no longer part of the unemployment number. Poof. Gone! You no longer exist for purposes of unemployment.
Folks, here is my point. When building your retirement system and making investment decisions that are going to impact you and your family's future and legacy, don't just accept the government's statistics at face value. GDP, inflation and unemployment are all factors that move markets and can sway our opinions about the health of our economy. But these numbers include all sorts of mathematical tweaking that make things appear more attractive than they actually are. If you are a retail investor with no downside risk management built into your investment system, you must do your homework. You must whittle through the threads of misinformation to get to the relevant information. Markets can be very unforgiving, especially to that buy-and-hold retail investor.
With accurate information, by getting the facts, you can make sound financial decisions that are right for you and your family. You must take control. Yes, it takes a lot of research, but aren't you worth it?
I think so.
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