Cooking the books

You just can't trust the numbers on the economy, says Bill Bonner.

Get out your chopsticks! Brush up on your sushi!

Yes - we're going to Japan!

The gist of the Japanese situation is this:

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The bubble burst in 1990. But rather than let their big businesses go belly up, the Japanese used every trick in the book. Counter-cyclical deficits up the Shinanho. Zirp (zero interest rate policy). And quantitative easing (QE) too.

The economy didn't grow. It didn't collapse. It just got stuck, like a moth in amber. No new jobs. No new output. And get this, Japan is expected to lose 40% of its working age population by 2050.

But Japan is a leader, not a follower. Over the next 40 years, Germany will lose more than 30% of its working age population too. Russia and Poland will lose even more.

Growth is expected to be negligible over the next 40 years in Japan. But it will be almost nothing in many other countries too, according to an HSBC report. It estimates that the US will grow at around 1.5% annually. France 1.1%. Denmark, Norway, Sweden barely anything at all.

What does this sound like to you, dear reader? It sounds like the whole developed world going Japan's way with low growth and high debts from here to eternity.

As in Japan, so in Europe and America. The European Central Bank is lending the banks as much as they want at low rates. The Fed has its own Zirp... which it says it will keep in place until 2014.

Growth is stalled, debts are mounting up. Hello Tokyo!

But wait. Here's the Congressional Budget Office (CBO) telling us that Congress will have those deficits under control in no time.

"Deficits to fall sharply, US forecast says," reports the International Herald Tribune.

What a relief that is! The CBO has crunched the numbers. It has beaten up the twos. It has punched out the fives. It has pounded the sixes. And now, finally, like prisoners at Guantanamo, the numbers tell us what we want to hear.

US debt is going down!

Wait a minute. Are these the same number crunchers who, at the beginning of the 21st century, forecast federal surpluses as far as the eye could see?

Yes, they are!

But, okay, that didn't work out exactly as planned. They crunched the numbers but then the numbers got un-crunched on their own. Damned numbers! You just can't trust them.

So, how can we trust these numbers?

That's just it, dear reader, we can't. In order to work out as planned, they require:

Congress has to let the Bush tax cuts expire on schedule. Hmmm... Will that happen? Beats us. It probably depends on who wins the elections in November, which probably depends on what the economy does between now and then, which probably depends on more things than we can begin to estimate and compute.

But the central idea of it that Congress will act responsibly seems like something you can't say with a straight face. Will pandas stop eating bamboo? Will teenagers stop slouching? Will liquor stores make free home deliveries? Nope. Everything has a nature of its own. And the nature of Congress is to spend money it doesn't have on things it doesn't need. And then to push the bill onto the next Congress; the next administration and the next generation.

Not only do taxes have to go up, so does economic growth. There's a problem right there. According to prevailing theories, if you increase taxes during a de-leveraging spell, you don't get faster rates of GDP growth. You get slower growth.

The CBO acknowledges this problem, to a degree. It allows as how unemployment may go up, thanks to the tax increases. In fact, they say it will go to 9% in 2013.

How will the president, Congress and the Fed react to rising unemployment? Mightn't it tempt them to engage in a little more counter-cyclical stimulus... at the expense of the tax cuts?

And what happens to growth rates? The CBO figures that growth can outstrip deficits. Maybe. Maybe not. Now, it's not even close. There's a $1.1 trillion deficit this year. Growth? Maybe a fifth of that. In other words, debt is growing five times faster than the economy.

During Mr Obama's first (and maybe last) term, US debt will grow by more than $5 trillion. Another term like that and we'll be over $20 trillion.

And already the weight of debt is pressing down growth rates - and it's getting worse.

And if HSBC is right, US growth will be very slow. Will deficits also be very low? Below 1.5% of GDP? Down from over $1 for the last four years to under $225 billion for the next 40?

Heck, we're a soft-headed as anyone. We'd like to see the whole problem go away too. And maybe it will...

But we wouldn't bet on it...

And more thoughts...

More thoughts? Well, we don't have any more thoughts today. We're off to Florida and Nicaragua tomorrow...

But don't worry, we'll write.

Long-time Daily Reckoning sufferers will get a break soon, however. For the first time in 12 years since we began writing thes articles we're taking an extended vacation, a mini-sabbatical, beginning on 23 February. We tell you now in case you want to take a vacation of your own, or go on a binge.

Yes, dear reader, we're going down to the mountains of Argentina where we're building a retreat. Two sons are joining us, along with three gauchos and a backhoe, to build a solar-heated adobe house with vaulted ceilings and a domed roof.

What do we know about building vaulted ceilings out of adobe bricks? Well, nothing. But we'll know a lot more when we come back in April.

We'll let you know how it turns out.

And if the world goes to hell in the meantime, we won't be back!

In the meantime, we may send some thoughts through as they occur to us. And we'll arrange for our colleagues in London to keep you in the know about what you need to know. And what to watch out for.