Tuesday, August 07, 2007

Is the USA a Giant Enron?

I finally got around to watching the documentary Enron: The Smartest Guys in the Room which is based on the book The Smartest Guys in the Room by Bethany McLean and Peter Elkind.

As a refresher, recall that Enron was the 7th largest corporation in the U.S. (by market cap) in its heyday. From those lofty heights it fell rapidly into bankruptcy in late 2001. Indictments of its top officers were finally issued in 2004, and trials were finally held in 2006 which resulted in long prison sentences for the white-collar perps who destroyed 20,000 jobs, $2 billion in employees' pensions and $60 billion in stock market investors' holdings. While its shenanigans were in full swing behind closed doors and cooked books, Enron was recommended as a "buy" by dozens and dozens of analysts.

Considering the fraud, mismanagement and lies propping up our entire economy and financial system, I wonder if the U.S.A. is more or less a giant Enron, clinging desperately to a precipice of deception which is rapidly crumbling.

The standard media line is that "we've learned from Enron, Worldcom, et. al." I would submit that is true, but not in the way the mainstream media suggests: the financial Powers That Be learned how to lie and deceive from the masters at Enron.

Bottom line: nothing was as it seemed at Enron. How is our entire financial system any different?

There are three trades which assume what is being presented on the surface is either deceptive or distorted by half-truths: marriage counselors, reporters and intelligence officers ( i.e. spies). Perhaps we should take a professional skeptics' view of the "facts" reported by our financial system's handlers.

How is our financial system based on cooked books, lies and deceptions? Let me count the ways:

I. Bogus inflation numbers. I have covered this at length over the past few years; please refer to the links in this entry for more: Inflation/Deflation II: Is The Answer How We Measure? (January 9, 2007)

The best single source for information on the "real" rate of inflation (roughly 6-7%, not the phony 2% cited by our government agencies and the Fed) is John Williams' Shadow Government Statistics Analysis Behind and Beyond Government Economic Reporting.

The site has in-depth analysis of just how the CPI etc. is manipulated: GOVERNMENT ECONOMIC REPORTS: THINGS YOU'VE SUSPECTED BUT WERE AFRAID TO ASK!

A deceptively low rate of inflation is the essential Big Lie behind our economy and financial system. As Fed Chairman Bernanke often reminds us, inflation lies (pun intended) in the mind: once inflationary expectations are built into citizens' minds, inflation becomes a reality. So the key job of the government's "factoid" factories is to create the illusion of low inflation.

How can anyone be foolish enough to doubt their own experience? Hasn't anyone else noticed that gasoline prices that used to start with 2 now start with 3? Has no one else seen the costs of milk, meat, grain, education, medical care, drugs, government fees (hidden taxes) skyrocket, even as the Fed crows about the fake PCE and "core" inflation rates remaining at 1.9%?

Unfortunately, we all have the ability to ignore experience in favor of "official reality." This was starkly and sadly illustrated last year when a techie and his family became lost in the backroads of Oregon. Despite the fact that the road was unlit and unpaved and progressively becoming more primitive, the man continued to place his faith in a map he'd printed off the Web. Thus do we deny the reality in front of our noses because the "official and therefore trusted" Fed claims inflation is minimal.

Of course the deceptive practice of breaking out "core inflation" began in the high-inflation early 70s as a method of masking the inflation everyone was seeing with their own eyes. The deception worked so well that it remains a key tool in the "Emperor has no clothes" toolbox.

Want to keep that pesky entitlement spending down? Make sure the inflation/ cost-of-living adjustment to those millions of checks remains artificially low.

2. The Unemployment rate is also manipulated down. The Big Picture had a good comment on August 6 Closer Look at July NFP (or, true UR = 5.4%) which covers the completely phony "birth death model" which is a "black box" calculation used to create jobs out of thin air. Mish has an excellent account of this chicanery:Martian Economists and BLS Moonbats.

Bottom line: "discouraged workers" are not counted as unemployed. You'd think not having a job when you used to have one would mean you were unemployed. But if you're laid off and don't find work within the 6 months you report to the State Unemployment office, then you cease being unemployed. Is there any possible reason for this other than artificially suppressing the unemployment rate? And the purpose of that, of course, it to fool the people into believing everything is just fine and they can continue to spend money they don't really have.

3. GDP is back-adjusted lower every quarter. This is like a magic trick performed for people with short-term memory loss: we seem to fall for the same trick every 3 months. GDP is announced on page One or as a Yahoo headline as surging, strong, up, etc. and then a few months later, a downward revision is buried on Page C-17.

4. Balance sheets of corporations, pension funds and government agencies massively understate liabilities and overstate assets/future earnings. The Federal Governmewnt alone faces unfunded liabilities of between $49 and $59 trillion which is a heap of cash: cash: How Large Is the Federal Government’s Debt?

Elsewhere, corporate and public pension plans routinely extrapolate the outsized returns of the past 20 years Bull Market in stocks and bonds into the future, as if returns which are historically higher than the norm are sure to continue indefinitely. On what basis are these rosy projections made and swallowed? Pardon my skepticism, but this sounds like Enron announcing its "broadband on demand" business was set to take off. The reality behind the lies was that the company's broadband business was a huge money pit from Day One.

5. Visibly laughable lies are mouthed by top officials with a straight face. Treasury Secretary Paulson never tires, apparently, of announcing that the subprime meltdown is "contained" and won't affect the resilient, stupendous, ever-growing U.S. economy, even as evidence piles up that it is indeed affecting the larger credit markets and thus the economy.

So how is the U.S. financial system any different from Enron? Cooked books, bogus announcements, bald-faced lies offered to calm any public skepticism: welcome to the United States of Enron.

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