The Egregious Errors Of Static Statistics

The measure of a man's real character is what he would do if he knew he would never be found out. Lord Macaulay wrote this nearly two hundred years ago. His aphorism is particularly apposite of modern politicians, and also of the modern state itself, which is meant to be selfless in the interest of the common good. We can be certain that when a person moves from outside to inside the machinery of the state, he or she changes from representing the people to representing the state. Presumably there are honourable exceptions to this rule, but offhand, it’s hard to think of any in contemporary politics.

The failure of the test of a politician’s real character goes much deeper. Once he is embraced by the state, he has at his hands the tools of propaganda and disinformation. He can stoke up nationalism to swing a nation behind him. Some of us will have read Machiavelli’s Prince, that masterwork of the political arts, which instructs a politician how to retain and exploit political power. But very few of us are fully aware of the far darker arts of monetary debasement. It is no longer so crude as reducing the silver content of the denarius or issuing notes without the gold to cover it. No, with the panoply of treasuries, central banks and statistical departments, monetary debasement is subtler today, providing cover for the ultimate fraud committed by the state on its population.

It starts with terminological inexactitudes, such as a falling exchange rate is required to stimulate the economy, or put another way, two per cent inflation stimulates spending. This justifies monetary debasement. It continues with denials of everything established and understood before Keynes, particularly Say’s law. And having set the groundwork for the new, state-sponsored economics, we have moved on to doctoring the results.

Most people are aware that statistics can be manipulated to the point where they are meaningless, yet the financial community hangs onto their decimal points as if they were the gospel itself. Computer models also tell us with suspicious precision what increase in GDP (it’s always an increase) we can expect two or three years hence.

It’s all baloney. It’s not just a matter of garbage in, garbage out either. A dynamic, continually evolving economy just cannot be modelled, not even with artificial intelligence, because the model cannot replicate the changing progression of human action. A model cannot know what consumers will actually buy tomorrow. Nor what quantities of any particular product, some not yet even invented, will be desired by consumers in a year’s time. Not even the consumers know.

Yet, the financial community as a whole is seemingly unaware that the econometricians’ static statistics are only a snapshot of a previous point in time and cannot replicate an ever-evolving economy. And those feeding the garbage in are mostly goal-seeking their desired outcomes. Econometricians have also retreated into standardising their computer models. This is designed to add credibility to a false process, but all it means is the errors themselves are now standardised.

A whole industry is not only being paid to model fiction, but economists and econometricians are now little more than latter-day shamans. We, members of the ordinary population, are the mugs.

At the centre of all this statistical nonsense is GDP. It is no more than a money total, which is the quantity of money recorded as spent by consumers on the products included in it over a given period. It excludes items, which according to our static statisticians, must be excluded. It is sometimes rebalanced, always with hindsight. Furthermore, as a measure of economic production GDP is far from being a gross number, because it excludes the production of the goods and services, such as the components, machinery and transport used in the production of final products.

This point has been partly conceded by America’s Bureau of Labor Statistics, which now estimates gross output (GO) quarterly, to include recorded business-to-business transactions. The effect is to more than double the US’s GDP figure. So, even if we did live in the static world that accords with statistical analysis, GDP fails to capture economic activity.

The underlying mistake in the construction of GDP is to confuse accounting with economics. Maintaining accounts allows a business to measure its profits, estimate its due taxes and assess the value of its assets. Everything the company does is included. Therefore, its returns on capital employed can be calculated, and compared with alternative capital investments. But no businessman on day one of a new financial year blithely assumes sales will grow by x% over the course of the new year. He may set targets for his employees, but that is not the same. He has to evolve his product or service to satisfy his customers, whose needs and wants are liable to change, and his sales will depend on his success. He controls his costs, markets his products, and hopes for sales.

The state’s statisticians are fundamentally wrong to project GDP as if it were some sort of collective business plan. It is just a partial picture and is used for attempting projections no business would attempt.

The compilation of official statistics always serves to support the government’s own objectives, which are not the same as that of society, not even the same as an always ill-defined national interest. For example, the desire to reduce the officially-recorded rate of inflation to the lowest possible level is surely connected to the desire to minimise inflation-adjusted payments, defrauding those previously promised protection from the price effects of currency debasement.

GDP really is the cruellest trick played on society. It poses as the yardstick for our collective prospects, but it is a statistical imposter. It is a feint to distract us from what it really is used for, and that is to provide funds for its creator and manager. Yes, the state, wittingly or unwittingly, uses GDP to raise money for itself.

Imagine, for a moment, an economy where the state controls the issue of money. That is not too hard, being the current situation. Now let us assume that the state through its central bank issues a further tranche of the money in circulation. With all the quantitative easing of recent years, which is simply the government’s central bank issuing more money, this is easy to imagine as well. What we have imagined, nay, defined, is a source of income for the state. Not only that, but the extra money injected into the economy increases, other things being equal, the money-total of GDP.

The amount it increases by is not difficult, in principle, to guesstimate. If in the prior year, GDP is a hundred monetary units, which is the total money spent by all consumers in that year, representing their income after money put by as savings. It the state issues a further ten monetary units, that can be added to the consumers’ total income, less the sums that go into the B2B chain (which is only captured in GO), less the sums that go into financial and other activities excluded from GDP, and less any increase in savings. Furthermore, some of those extra ten monetary units will probably be spent abroad, reflected in an increase in the trade deficit. Perhaps our recorded GDP has increased from 100 monetary units, after these adjustments are subtracted, to 103.

As if by magic, the economy has grown three per cent, and we all believe it.

Let us look in more detail at where this extra money goes, in order to assess the tax benefits to the state, starting with all those intermediate business activities in the B2B chain. This, broadly speaking, is the difference between GO and GDP. It absorbs government spending on the infrastructure and maintenance of government property by non-government entities, as well as defence spending. In theory, all of the government’s supplies of goods and services from the private sector are provided within the B2B chain, with only the salaries of the suppliers’ employees, net of income and employment taxes, recorded as consumer spending in GDP.

The finance for this spending is provided by the expansion of bank credit in the first instance, and government payments for work done in the second. Given that an expansion of bank credit works as a multiplier of that portion of the extra ten monetary units allocated through the financial system for the purpose, the tax benefits to the state from corporation tax and on the extra salaries paid as a result are substantial. 

Employees in the whole B2B chain, including myriad subcontractors, have income tax deducted from their salaries. They spend most, if not all of their salaries on goods and services, yielding sales taxes. The application of some of our extra ten monetary units on the finance sector also yields further profits for the government. Banks can create extra credit money on the back of it, so if five of the new monetary units are taken up by the banks, they can create a further forty or fifty. Asset prices inflate, yielding tax on capital gains. Other taxes yielded on the deployment of this further expanded bank credit are substantial, particularly when the banks also face excess profit taxes and are forced to pay penalties for past misdemeanours, not against the state, but against their customers.

The tax benefits of the expansion of state-issued currency are different on the extra money that finds its way abroad. This money pays for extra imports, the inevitable consequence of the increased quantity of money not being spent on domestic products, in short supply as a result of monetary inflation.

There is a risk that foreign manufacturers will sell the currency gained for their own state-issued currencies. This way, an increased trade deficit puts downwards pressure on the exchange rate, raising input costs and therefore prices for all goods and services. Of course, rather than lose the new money by having the central bank buy it in return for foreign currency, the government can always borrow back the money it created, so it can spend it all again. And tariffs imposed on imports recovers tax on this element of monetary expansion, as do other sales taxes.

While we can debate the amounts, we can see there are major tax benefits to state finances from expanding the quantity of base money. The state is ten monetary units richer, taxes are generated in excess of the currency created, and GDP has increased by three per cent. And so long as government statisticians under-record price inflation, financial markets and the general public are duped into believing the economy has grown. It is a marvellous trick to steal ten per cent of everyone’s money, more than double it with taxes, and convince the hapless victims that they are considerably better off.

Stopping the stimulus

We have described the effects of only a one-off expansion of base money, and the benefits it generates for the state. So, what happens if the stimulus stops, and the initial effects wear off? We are then on the dark side of the moon.

The Keynesians told us that the stimulative effects of an expansion of money from deficit financing would lead to economic recovery and a return of confidence, such that the stimulus could be halted, and the government budget returned to surplus. This view represents the height of naivety.

If the government stops increasing the quantity of base money, the first thing that happens is the commercial banks begin to become overstretched, because all that B2B stuff and consumer borrowing continues, rather like the cartoon coyote unaware it’s just run over the cliff. Inevitably, borrowing costs rise having been suppressed at the time of monetary expansion, and the credit cycle threatens to enter the crisis stage.

The extra money the state generates by currency debasement and the associated extra tax gained disappear as well. It is the nature of things that governments get used to spending ever-increasing amounts, so their costs will have risen, partly due to the earlier debasement, and partly in expectation of funding continuity. But worst of all, even if we assume the banks only stop expanding credit in an orderly fashion, GDP growth becomes zero, because GDP is only a money total and there’s no extra money.

In our example, GDP is now stuck at 103 monetary units for the second year, which is zero growth. It is obviously more complicated than that, because money can flow from the unrecorded financial economy into recorded GDP. Initially, bank credit is likely to be redirected from the former to the latter, reflected in falling asset prices and improving business conditions. But when that stops, lending reverses and the crash is upon us.

For this reason, it is impossible to remove the monetary stimulus of an ever-increasing, ever-accelerating quantity of base money without adverse consequences for the sham statistic of GDP. Then the problem is that the continuing transfer of wealth to the state through debasement of the currency impoverishes the population. The longer it goes on, the more wealth is destroyed, until there’s nothing left for the state to pillage.

This truth transcends even the credit cycle. If anything, the crisis stage of the credit cycle kicks off a new sequence of even greater monetary debasement, as central banks ensure there are no bank failures. Furthermore, in the wake of a credit crisis, tax receipts fall, and government liabilities rise. Governments need more money. The answer, always, is to issue more, much more new currency than last time around.

It takes a combination of public desperation and statesmanship to stop it. But once tempted away from the path of sound money, it is very difficult to get back on it. It takes courage to tell the truth about how the state has cheated its people, and to tell them that all those promises of welfare, health and education cannot be fulfilled. Telling them, after the state has robbed them of their wealth, that people will have to stand on their own feet is not what modern politicians are elected to do.

The solution is made even more difficult, because none of the experts realise why it is all goning wrong. For the truth is they are not evil conspirators trying to rob people for the benefit of the state, they are believers in a common socialising ideal.

The reluctance to accept that the cause of economic misery is unsound money leads people to try to find other solutions, usually a retreat into more authoritarianism as Hayek described so lucidly in his Road to Serfdom.

Hayek’s warning ended with discipline being planned in front of a firing squad. It was meant as a wake-up call for those moving from soft socialism towards fascism in 1940. One hopes in the next few years something materialises to stop the today’s democratic states robbing their populations before it goes that far. But, reading Hayek’s warning should already ring alarm bells about the loss of personal freedom today. 

Macaulay certainly had a point in his observation of human character, particularly with respect to contemporary politicians, who think they won’t be found out. And until we are properly aware that those we have elected no longer represent the interests of the population, but of the state itself, politicians will continue to behave as if their electorates are merely a source of funds to pay for the state’s objectives. Until, that is, they finally run out of our money.

Alasdair Macleod

HEAD OF RESEARCH• GOLDMONEY

 Twitter: @MacleodFinance

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