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 March 13, 2012  Posted by at 11:01 pm Finance
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Detroit Publishing Co. Beantown 1906 “Boston, Washington Street. On your left: National Fireworks”

 

A universal strategy of large institutions is the manipulation of their “books & records” in a positive direction – i.e. one suggesting high levels of current performance and future growth. We see this happen time and again across institutions in all sectors of developed societies, private and public. Large corporations, for example, extensively use off balance sheet vehicles riddled with leveraged products to hide their exposure to risk, or various other accounting tricks to over-state their revenues/profits and under-state their costs/liabilities.

However, this manipulative strategy is even easier to identify in the governing institutions of “democratic” nations. While the phenomenon is certainly not limited to one country (the governments of the European periphery come to mind), it is perhaps most evident and widespread in the U.S. Indeed, the structures and culture of American society can almost be defined solely in terms of data manipulation for the sake of appearances, a.k.a. “public relations” or perception management. The sheer pervasiveness and momentum of these practices has made them an integral part of what it means to be a competitive institution in America.

Beat cops and detectives in your typical American city may refer to this strategy as “juking the stats”, while Lieutenants on up would probably call it something along the lines of “criminal statistics management”. When the order comes down from the bosses at the top, the “primaries” at a crime scene could be forced to conduct their investigations and label the crimes in the least publicly embarrassing manner. If the Mayor wants to run for office in a few months on a “reduced crime rate” platform (and which mayor doesn’t?), then anything but the most obvious murders may be lightly investigated and ultimately classified as “unknown deaths” or suicides. Perhaps a few bodies near the city limits will be dumped on the neighboring county.

It’s the same thing with the less than obvious rapes (already an under-reported crime), which may end up being simple assaults or no crime at all. At the same time, if the Mayor wants to appear “tough on crime” (and which mayor doesn’t?), the cops will be instructed to make arrests for offenses that usually go ignored, such as “loitering”, “public intoxication” or “public indecency”. If the city politicians want to look “tough on drugs”, then they go hard after street-level offenders with buy/bust strategies so they can put cash and drugs “on the table” (in front of the legislators and media cameras).

A very similar dynamic also occurs at the public schools districts across the U.S, and especially the relatively poor ones. The state and city officials put pressure on administrators and teachers to prepare their students for various standardized tests scheduled every year, or “teach to the test”. What that amounts to is interrupting regular lesson plans to force students into memorizing specific methods of answering multiple choice questions, so the district can put up decent numbers that save face and qualify it for some level of wasteful funding, while the students simply lose a few months of their lives each year.

 

 

All the while, city/state governments are borrowing truck loads of money to paper over any issues they can’t hide with data manipulation. When they can no longer hide the outrageous budget deficits by rolling over debt and using customized financial instruments, such as interest rate swaps, they simply shift money around from one pocket to another and hope no one takes notice. Just take some money allocated to schools in the budget and shift it to the police department, or vice versa. That’s why states like New Jersey and New York feel that they can get away with borrowing money from their pension funds to pay out pension benefits. It’s a practice that is deeply ingrained in the political culture.

What’s done in the way of data manipulation at the city or state level, however, is child’s play when compared to what is being done at the level of national governments and their administrative agencies. This manipulation is occurring with full force now because, without it, the dismal state of the global economic system would be revealed and, ultimately, almost none of these institutions would survive the ensuing “creative destruction”. They are caught in a self-reinforcing and self-defeating cycle in which the culture of manipulation takes center stage and shines.

Perhaps the most obvious example is the BLS and its monthly reports on jobs data. People who have given up looking for jobs that don’t exist are taken out of the labor force and therefore do not count towards the unemployment rate. Other people who have managed to pick up a few hours a week doing some low-wage work are counted as fully employed individuals and new additions to the economic “recovery” myth. No differentiation is made between the rate of long-term, structural unemployment, which remains a stubbornly high percentage of the total unemployed, and the people perilously bouncing back and forth between temp jobs.

 

 

Meanwhile, people continue to lose their former jobs/salaries, the economy continues to contract and tax revenues dwindle (2012 has already seen a decline in YTD federal tax revenues of ~$2bn from the same period last year). That, in turn, begets the need for more data manipulation by the U.S. government. Public debt and deficits are drastically under-stated by keeping the debt of government-sponsored enterprises, such as Fannie and Freddie, and under-funded entitlement obligations, such as Social Security and Medicare, off of the official balance sheet.

These are, of course, just a few examples of how our culture of manipulation works, and how it has been ramped into high-gear in recent years. It is not an over-statement to say that almost every piece of official data presented to the public at the state and federal level is massaged and manipulated. In the private sector, any such manipulation that is not technically illegal is taken for granted by most people; indeed, it is basically required of large corporations that must remain competitive and act in the best interests of their shareholders. People are much more willing to take heart in the public statistics, though.

Today, we were surprised with the early release of results from yet another “stress test” of the U.S. financial system conducted by the Federal Reserve. Unlike the previous tests in the U.S. and Europe, which had used extremely over-optimistic assumptions about the economy and asset valuations in their worst-case scenarios, this current one is being billed as much more realistic. It is obviously meant to soothe all of those people who are highly critical of the lack of transparency in our culture of manipulation, such as myself, as well as investors that have their money parked in the markets and financials in particular.

The Fed’s version of a standardized test looked at how the 19 biggest U.S. banks would perform in a “severe” downturn, including a peak unemployment rate of 13%, a 50% drop in equity prices and a 21% decline in housing prices. According to its results, total losses (loan, trading, counterparty credit and investment) for these banks would hit at least $534bn over this two year rough patch, and four banks would have “one or more projected regulatory capital ratios that fall below regulatory minimum levels at some point over the stress scenario horizon” (Citigroup, SunTrust, Ally and MetLife).

The price action in these financial stocks after the institutions decided to prematurely release the results would suggest that investors were thrilled with only half a trillion in losses and four banks failing. Indeed, that is a huge factor in the culture of manipulation – the ones being manipulated are eager to be told what they want to hear, or hear what they want to hear regardless of what they are told. The larger and more audacious the manipulation is, the more they are willing to believe it. Otherwise, they would be forced to confront some very inconvenient truths about their society and their roles in it.

Nevermind that these “stress tests” can’t possibly capture the various losses that would stem from their own moderately negative assumptions (peak unemployment rate isn’t much worse than it is now), let alone more realistic ones that capture a drastic economic/financial slowdown in the Eurozone, the U.K., Japan and across emerging economies. People want to feel that the state of their world at every scale can be summed up with statistics, so they are given ones that have been juked into oblivion to mold a pre-conceived narrative. The open question here is how long before the discrepancy between reality and the massaged stats overwhelms the otherwise embedded culture of the manipulated masses.

Home Forums Juking the Stats: Our Culture of Manipulation

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March 13, 2012 at 11:01 pm #8590

ashvin

Detroit Publishing Co. Beantown 1906 “Boston, Washington Street. On your left: National Fireworks”   A universal strategy of large institutions i
[See the full post at: Juking the Stats: Our Culture of Manipulation]

March 14, 2012 at 12:58 am #1642

YesMaybe

I don’t know, I think those assumptions are pretty severe (consider than in the aftermath of the 2008 crisis unemployment increased from 5% to 10%, which is comparable to if it were now to increase from 8% to 13%, and we can all agree the 2008 crisis and its fallout were severe). That said, it can and probably will be a lot worse next time. And I agree with you completely that the stress tests can’t suitably account for the losses which would occur even under their own scenario, and are not really intended to anyway since they’re just PR work. Nice article! I often find myself thinking about Obama that everything he says and every policy decision he makes has as its primary purpose ‘perception management’.

March 14, 2012 at 3:46 am #1643

buddha

The Fed is reportedly “Juking” the stock market to “manage” consumer optimism…..I believe that is true. What troubles me is Stoneleigh has said that the equities markets topped out on May 7. But now the major indices have moved above the May 7 “top”. Does this alter her economic prognosis? Does she still consider this to be a sucker’s rally?

March 14, 2012 at 5:26 am #1645

YesMaybe

Of course it’s a sucker’s rally. What’s the alternative: some kind of economic renaissance involving China, Angry Birds, and cold fusion? There’s no question the stock market–and pretty much everything else–is going down, the only question is how long until the next leg down. But maybe not everyone would agree. ;-)

March 14, 2012 at 7:03 am #1647

Golden Oxen

The stock market rally could be seen as people fleeing non yielding savings instruments into something with a higher yield and perceived inflation protection. Especially with the spin doctors screaming higher employment and happy days are here again. Would seem doubtful that it has long term economic meaning behind it; but it could take on a life of its own and we start hearing the wealth effect song again. ???

March 14, 2012 at 12:58 pm #1650

Don Levit

One of the more egregious manipulations is the accounting for Social Security. The surplus FICA and SECA taxes were supposed to be invested in nonmarketable Treasury securities, dedicated exclusively for Social Security beneficiaries. Instead of being a store of wealth, these real dollars were borrowed by the Treasury to pay real current expenses, and lower the deficits.
All that remains is a hollowed artifact of wealth, collateral due by the full faith and credit of the U.S. Government.
The actuary of the SS trust fund, Stephen Goss, implies in a recent trustees report that all is well until the trust fund is exhausted. Long before that occurs, we are already seeing the trust fund interest being used to make up for the cash shortfalls. This has the same financial effect when the trust fund is exhausted: the use of general revenues to pay for the trust fund interest, the same way we pay all government expenses, either from a trust fund or from a general appropriation.
Don Levit

March 14, 2012 at 1:09 pm #1651

ashvin

YesMaybe wrote: I don’t know, I think those assumptions are pretty severe (consider than in the aftermath of the 2008 crisis unemployment increased from 5% to 10%, which is comparable to if it were now to increase from 8% to 13%, and we can all agree the 2008 crisis and its fallout were severe)

The equity price decline is pretty severe, housing as well – although nothing close to what would have happened without massive intervention in 2008-09. And $540bn in losses along with 4 banks going under is something to write home about. I’d say the real unemployment rate when factoring in the true size of the labor force is closer to 11-12% right now, and when including under-employment were are talking closer to 20%. How the Fed decides to apply these assumptions to calculate losses across the banks (especially the unemployment increase) is another story.

The fact that markets rallied on the back of these results just indicates to me that, even now, some investors are more than willing to be manipulated, as long as they get a measure of statistical certainty about the future that is really impossible to have. Although, all of these people and robots are only in it for very short-term profits. Whatever medium to long-term suckers are still left will be squeezed out shortly. I don’t think any of the big players are actually buying into the story of a global or U.S.-decoupled recovery.

March 14, 2012 at 2:04 pm #1652

Ken Barrows

If everyone underwater on his mortgage decided to leave the property, most banks in the U.S. would go belly up. Maybe the stress tests should include more assumptions.

March 14, 2012 at 3:17 pm #1654

YesMaybe

Ashvin:

Good point: U-6 rose from a low of 8% to a high of 17.2%, 4% more than the 5.5% change in U-3.

March 14, 2012 at 4:12 pm #1656

el gallinazo

One thing that U-6 or even Shadowstats adjusted U-6 doesn’t include is the wages and salaries of new employment. According to the Bureau of Lying Statistics, losing a 50,000 a year UAW job and picking up a $15,000 Micky D job is a push (in Vegas jargon).

March 14, 2012 at 5:14 pm #1660

Golden Oxen

Speaking of Vegas e g the handle on the strip has been rising rather impressively of late. One of the more reliable statistics IMHO since the states tax revenue is dependent on it. I suppose it could be foreigners, but something is fishy about an improving Vegas handle and the unemployment picture.

March 14, 2012 at 6:38 pm #1665

el gallinazo

Golden Oxen

Probably the Boyz behind the supercomputers at the NY Fed looking for new markets :-)

March 15, 2012 at 12:25 am #1681

mrawlings

Must be required reading for the Lords and Ladies of high finance and low national politics: http://www.amazon.com/How-Lie-Statistics-Darrell-Huff/dp/0393310728

As Kevin Phillips and Shadowstats have pointed out, tweaking some calculations can have a huge effect on how reality is percieved by the masses. Inflation calculations are foremost among the “juked” stats. Hide the real (higher) rate of inflation and you cover a multitude of sins: cost-of-living adjustments, rates of median wage growth, GDP, some really important ways we deal with spending, budgets and the measures by which we judge the health and fairness of our economy.

But there are also those data points that hide the truth in plain sight such as labor participation rate (and who know’s how much this one is “juked”). When falls in the rate of unemployment are matched by falls in the labor participation rate, that doesn’t exactly qualify as good news, though you wouldn’t know it from listening to the MSM blather on about “job growth”.

The music is bound to stop again soon and lots of people are going to be surprised to find that the chair they thought they had has been snatched up by JPMorgan.

March 15, 2012 at 9:40 am #1694

davefairtex

The stress tests most certainly COULD HAVE included sovereign defaults in them, but didn’t. Yet another triumph of clever test construction, the only casualty being truth.

An MSM article from a few months back makes this point:

http://finance.fortune.cnn.com/2011/12/01/bank-stress-tests-europe/

By next month, 31 banks must show the Federal Reserve plans for how they would withstand some pretty dire economic scenarios. They include: an 8% contraction in GDP, the Dow Jones Industrial Average collapsing to 5,700 points by the middle of next year, and an unemployment rate rising from the current 9.1% to 13% by 2013.

But it seems the test isn’t factoring in one of investors’ biggest worries: Debt defaults in the euro zone.

March 15, 2012 at 2:51 pm #1697

ashvin

Prices paid by manufacturers in NY has done a complete 180 from those paid in Philly and soared by record amounts, while the latter plummeted into a deflationary abyss. Perhaps the Empire State went back to colonial scrip without telling anyone else?

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