IN AN unsettling development that may speak volumes about the true level of confidence underlying the “green shoots” economic recovery story, many professional traders have begun to doubt the veracity of the US government’s economic reports.
Recently, most new releases of economic data have been accompanied by negative revisions of prior reports, and this is causing many to question whether the public is receiving the total, unvarnished truth.
Conspiracy theorists abound on Wall Street, and the current theory holds that a desire to unlock consumer spending is causing the government to intentionally skew the numbers. If that belief were to spread, the very difficult task of restoring confidence would be made much harder.
I can already hear some of you scoffing at the idea. After all, the government does not lie, does it?
Rumblings of this sort began to surface a few years ago when traders questioned economic data from Beijing. After investigating government claims of astounding growth, some academics concluded that reported growth in Chinese gross domestic product might have been inflated by up to 200 per cent.
Belief that Chinese officials doctor the data persists, and not just among traders. The Paris-based International Energy Agency recently released a report, Another Chinese Riddle: How Reliable Are GDP Figures?, in which the intergovernmental organisation cited research that China’s first-quarter GDP growth, announced as 6.1 per cent, was most likely flat to negative. As a result of such reports, public trust is eroding, and not just in China.
Confidence is elusive. Once started down the slippery slope of doubt, investors stop taking things at face value and start looking for reasons not to believe.
Think back to the CNBC appearance last spring of Alan Schwartz, Bear Stearns chairman, in which he maintained that everything at the bank was fine just before the Federal Reserve forced the firm’s sale to JPMorgan. The scene brought to mind a uniformed Kevin Bacon urging the stampeding parade spectators in Animal House to “Remain calm! All is well!” just before they trampled on him.
Meanwhile, take time to recall the reassurances given before the disasters that befell Lehman Brothers, AIG, Fannie Mae and Freddie Mac.
The internet has disseminated feelings of doubt. Websites such as shadowstats.com shriek things such as: “Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences? The problem lies in biased and often manipulated government reporting.”
The blogosphere offers wilder variations on the theme. After two Japanese men were apprehended allegedly trying to transport $134 billion (€95 billion) in counterfeit US bearer bonds across the Italian-Swiss border, the magnitude of the cache led bloggers to speculate that either the US Treasury had been “surreptitiously” issuing bonds to fund secret deficit spending, or that a panicked Japanese government was desperately trying to dump the bonds at a deep discount to Swiss interests.
The subsequent story that they were merely incompetent forgers didn’t gain a fraction of the blog attention.
When previously unthinkable events challenge our most basic assumptions, we have a tendency to question those assumptions, and the current crisis is no exception. People recognise that governments have an incredibly strong incentive to release encouraging economic statistics, while their confidence in our bedrock institutions is weaker than ever.
Statements from Washington, London, Brussels and Tokyo have not helped. We have heard our leaders give voice to visions of apocalyptic collapse and “glimmers of hope”, sometimes within the same week.
Are official economic statistics being manipulated? I suspect not. But people aren’t stupid.
Savvy investors are seeing through official efforts to talk up the economy. Why not get the numbers straight and let them speak for themselves? If it takes a few more weeks to get things right, so be it.
While we await recovery, let us hope that our leaders resist the temptation to spin data to paint a rosy picture. A tempered public discourse along with objectively accurate economic reports may lead to a recovery in public trust. If that translates to confidence, we might even see a few “green shoots” take root and flower into prosperity.
The writer is senior vice-president of strategic initiatives at Cuttone Company
