From Harper's Magazine May 2008

NUMBERS RACKET
Why the economy is worse than we know
By Kevin Phillips

Almost four decades have passed since the United States scrapped its last currency ties to precious metals. Our copper and Nickel coinage still retains some metallic value, but not nearly enough for the purpose of currency tampering - the historic temptation of inflation-plagued or otherwise wayward governments, including, at times, our own. Instead, since the 1960's, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed. If Washington's harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

The corruption has tainted the very measures that most shape public perception of the economy - the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy's overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances - inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences, too. An administration is helped when it can mouth banalities about price levels being "anchored" as food and energy costs begin to soar.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Reader should ask themselves how much angrier the electorate might if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?

Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the political blame for the slow, piecemeal distortion is bipartisan - both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector. To see how, we mist revisit forty years of economic and statistical dissembling.

A SHORT HISTORY OF "POLLYANNA CREEP"

This apt phrase originated with John Williams, a California-based economic analyst and statistician who "shadows," as he puts it, the official Washington numbers. In a 2006 interview, Williams noted that although few Americans ever see the fine print, the government "always footnotes the changes and provides all the fine detail. Nonetheless, some of the changes are nothing short of remarkable, and the pattern over time is what I call Pollyanna Creep." Williams is one of the small group of economists and analysts who have paid any attention to the phenomenon. A few have pointed out the understatement of the Consumer Price Index - the billionaire bond manager, Bill Gross has described it as an "haute con job," and Bloomberg columnist John Wasik has dismissed it as "a testament to the art of spin." In 2003, a University of Chicago economist named Austan Goolsbee (now a senior economic adviser to Barack Obama's presidential campaign) published an op-ed in the New York Times pointing out how the government had minimized the depth of the 2001-2002 U.S. recession, having "cooked the books" to misstate and minimize the unemployment numbers. Unfortunately, the critics have tended to train their axes on a single abuse, missing the broad forest of statistical misinformation that had grown up over the past four decades.

The story starts after the inauguration of of John F. Kennedy in 1961, when high jobless number marred the image of Camelot-on-the-Potomac and the new administration appointed a committee to weigh changes. The result, implemented a few years later, was that out-of-work Americans who had stopped looking for jobs - even if this was because none could be found - were labeled "discouraged workers" and excluded from the ranks of the unemployed, where many, if not most of them had been previously classified. Lyndon Johnson, for his part, was widely rumored to have personally scrutinized and sometimes tweaked Gross National Product numbers before their release; and by the 1969 fiscal year, Johnson had orchestrated a "unified budget" that combined Social Security with the rest of the federal outlays. This innovation allowed the surplus receipts in the former to mask the emerging deficit in the latter.

Richard Nixon, besides continuing the unified budget, developed his own taste for statistical improvement. He proposed - albeit unsuccessfully - that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns, to develop what became an ultimately famous division between "core" inflation and headline inflation. If the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would would simple exclude, because of "volatility," categories that happened to be troublesome at that time, food and energy. Core inflation could be spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholz has joked that core inflation is better called "inflation ex-inflation" -i.e., inflation after the inflation has been excluded.)

In 1983, under the Reagan Administration, inflation was further finagled when the Bureau of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different "Owner Equivalent Rent" measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs. Because low inflation encourages low interest rates, which in turn make it much easier to borrow money, the BLS's decision no doubt encouraged, during the late 1980's, the large and often speculative expansion in private debt - much of which involved real estate, and some of which went spectacularly bad between 1989 and 1992 in the savings-and-loan, real estate, and junk-bond scandals. Also, on the unemployment front, as Austan Goolsbee pointed out in his New York Times op-ed, the Reagan Administration further trimmed the number by reclassifying members of the military as "employed" instead of outside the labor force.

The distortional inclinations of the next president, George H.W. Bush, came into focus in 1990, when Michael Boskin, the chairman of his Council of Economic Advisers, proposed to reorient U.S. economic statistics principally to reduce the measured rate of inflation. His stated grand ambition was to move the calculus away from old industrial-era methodologies toward the emerging services economy and the expanding retail and financial sectors. Skeptics, however, countered that the underlying goal, driven by worry over federal budget deficits, was to reduce federal payments - from interest on the national debt to cost-of-living outlays for government employees, retirees, and Social Security receptients.

It was left to the Clinton Administration to implement these convoluted CPI measurements, which were reiterated in 1996 through a commission headed by Boskin and promoted by Federal Reserve Chairman Alan Greenspan. The Clintonites also extended the Pollyanna Creep of the nation's employment figures. Although expunged from the ranks of the unemployed, discouraged workers had nevertheless been counted in the larger workforce. But in 1994, the Bureau of Labor Statistics redefined the workforce to include only that small percentage of the discouraged who had been seeking work for less than a year. The longer-term discouraged - some 4 million U.S. adults - fell out of the main monthly tally. Some now call the "hidden unemployed." For its last four years, the Clinton Administration also thinned the monthly household economic sampling by one sixth, from 60,000 to 50,000, and a disproportionate number of the dropped households were in the inner cities; the reduced sample (and a new adjustment formula) is believed to have reduced black unemployment estimates and eased worsening poverty figures.

What does "unemployment" mean?

It depends on who is counted:

On a graph with an "x" time line in years from 1994 to 2008, and a "y" percentage scale from 4 percent to 12 percent

12 percent to 9 percent - including workers who are part-time for "economic reasons."
8 percent to 7 percent - including other "marginally attached" workers.
6 percent to 5 percent - including "discouraged" workers.
6.5 percent to 5.5 percent - The official "unemployment rate."
Source: U.S. Bureau of Labor Statistics

Despite the present Bush Administration's overall penchant for manipulating data (e.g., Iraq, climate change), it has yet to match its predecessor in economic revisions. In 2002, the administration did, however, for two months fail to publish the Mass Layoff Statistics report, because of its embarrassing nature after the 2001 recession had supposedly ended; it introduced, that same year, an "experimental" new CPI calculation (the C-CPI-U), which shaved another 0.3 percent off the official CPI; and since 2006 it has stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus from bank credit activity. In 2005, Bush proposed, but Congress shunned, a new, narrower historical wage basis for calculating future retiree Social Security benefits.

By late last year, the Gallup Poll reported that public faith in the federal government had sunk below even post-Watergate levels. Whether statistical deceit played any direct role is unclear, but it does seem that citizens have got the right general idea. After forty years of manipulation, more than a few measurements of the U.S. economy have been distorted beyond recognition.

AMERICA'S "OPACITY" CRISIS

Last year, the word "opacity," hitherto reserved for Scrabble games, became a mainstay of the financial press. A credit market panic had been triggered by something called collateralized debt obligations (CDOs), which in some cases were too complicated to be fathomed even by the experts. The packagers and marketers of CDOs were forced to acknowledge that their hypertechnical securities were fraught with "opacity" - a convenient, ethically and legally judgment-free word for lack of honest labeling. And far from being rare, opacity is commonplace in contemporary finance. Intricacy has become a conduit for deception. Exotic derivative [my emphasis, TM] instruments with alphabet-soup initials command notional values in the hundreds of trillions of dollars, but nobody knows what they are really worth. Some days, half of the trades on major stock exchanges come from so-called black boxes programmed with everything from binomial trees to algorithms; most federal securities regulators couldn't explain them, much less monitor them.

Transparency is the hallmark of democracy. but we now find ourselves with economic statistics every bit as opaque - and as vulnerable to double-dealing - as subprime CDO. Of the "big three" statistics, let us start with unemployment. Most of the people tired of looking for work, as mentioned above, are no longer counted in the workforce, though they do still show up in one of the auxiliary unemployment numbers. The BLS has six different regular jobless measurements - U-1, U-2, U-3 (the one routinely cited), U-4, U-5, and U-6. In January 2008, the U-4 to U-6 series produced unemployment numbers ranging from 5.2 percent to 9.0 percent, all above the "official" number. The series nearest to real-world conditions is, not surprisingly, the highest: U-6, which includes part-timers looking for full-time employment as well as other members of the "marginally attached," a new catchall meaning those not looking for a job but who say they want one. Yet this does not even include the Americans who (as Austan Goolsbee puts it) have been "bought off the unemployment rolls" by government programs such as Social Security disability, whose recipients are classified as outside the labor force.

Second, is the Gross Domestic Product, which in itself represents something of a fudge: federal economists used the Gross National Product until 1991, when rising U.S. international debt costs made the narrower GDP assessment more palatable. The GDP has been subject to many further fiddles, the most manipulatable of which are the adjustments made for the presumed starting up and ending of businesses (the "birth/death of businesses" equation) and the amounts that the Bureau of Economic Analysis "imputes" to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in one's own home, or the benefit once receives from a free checking account, or the value of employer-paid health- and life-insurance premiums). During 2007, believe it or not, imputed income accounted for some 15 percent of the GDP. John Williams, the economic statistician, is briskly contemptuous of GDP numbers over the past quarter century. "Upward growth biases built into GDP modeling since the early 1980s have rendered this important series nearly worthless," he wrote in 2004. [T]he recessions of 1990/1991 and 2001 were much longer and deeper than currently reported [and] lesser downturns in 1986 and 1995 were missed completely."

Nothing, however, can match the tortured evolution of the third key number, the somewhat misnamed Consumer Price Index. Government economists themselves admit that the revisions during the Clinton years worked to reduce the current inflation figures by more than a percentage point, but the overall distortion had been considerably more severe. Just the 1983 manipulation, which substituted "owner equivalent rent" for home-ownership costs, served to understate or reduce inflation during the recent housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and servicesin which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely, hedonic adjustment, an unusual computation by which additional quality is attributed to a product or service.

The hedonic adjustment, in particular, is as hard to estimate as it is to take seriously. (That it was launched during the tenure of the Oval Office's preeminent hedonist, William Jefferson Clinton, only adds to the absurdity.) No small part of the condemnation must lie in the timing. If quality improvements are to be counted, that count should have begun in the 1950s and 1960s, when such products and services as air-conditioning, air travel, and automatic transmissions - and these are just the A's! - improved consumer satisfaction to a comparable or greater degree than have more recent innovations. That the change was made only in the late Nineties shrieks of politics and opportunism, not integrity of measurement. Most of the time, hedonic adjustment is used to reduce the effective cost of goods, which in turn reduces the stated rate of inflation. Reversing the theory, however, the declining quality of goods or services should adjust effective prices and thereby add to inflation, that side of the equation generally goes missing. "All in all," Williams points out, "if you were to peel back changes that were made in the CPI going back to the Carter years, you'd see that the CPI would now be 3.5 percent to 4 percent higher" - meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are.

Furthermore, when discussing price pressure, government officials invariably bring up "core" inflation, which excludes precisely the two categories - food and energy - now verging on another 1970s-style price surge. This year we have already seen major U.S. food and grocery companies , among them Kellogg and Kraft, report sharp declines in earnings caused by rising grain and dairy prices. Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor Department acknowledged that in January, the price of imported goods had increased 13.7 percent compared with a year earlier, the biggest surge since record-keeping began in 1982. From Maine to Australia, from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years of rapid growth in the supply of money from the world's central banks (not least the U.S. Federal Reserve), as well as by massive public and private debt creation.

THE U.S. ECONOMY EX-DISTORTION

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is a high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the super-rich, and we are falling back into recession. If what we have been sold in recent years has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.

Under measurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing and therebay would endanger the viability of the massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowed to inflation - could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the united States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.

Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crisis "can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI....With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates." Were mainstream interest rates to jump into the 7 to 9 percent range - which
could happen if inflation were to spur new concern - both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the suro since 2002, could slip down an even rockier slope.

The credit markets are fearful, and the financial markets are nervous. If gloom continues, our humbugged nation may truly regret losing sight of history, risk, and common sense.

Kevin Phillip's new book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, was published last month by Viking.

Yupp! The real full unemployment figures have always been about double those published. Add part-timers who want full-time or those working hard, but not making enough or not getting any benefits and a rigged money system [trickle-up] and what-ya-got? Add this eye-opener to the pot 'Banking System Too Bad To Bail-Out' [ready for a depression and economic collapse? - coming to a country near you soon!]

http://www.kpfa.org/archives/index.php?arch=25261

But then a Nation who would have some inside it kill their own popular and duely elected President and cover it up; lie about and spin all the wars; covert ops, assassinations; government manipulations and overthrows; control the media with propaganda, etc, .....then fudging on the financial stuff is just 'small change'. America's lack of morality, false-values; greed, avarice and lies of those in control is coming home to roost - bigtime and right now. Sadly, the poorest and most vulnerable will be the ones to suffer most. So far, those guilty of building this Potemkin Village have not even been pointed-out to most, let alone decended-upon by the mobs, as they should be. Truth, Justice and a sense of either fairness or balance seems to be what is lacking most now in America. Sad, very, very sad. It is going to get MUCH worse IMO and may be beyond saving, unlesss there is an immediate 180 degree chance of direction, economy, morality, and who runs this ship of state. The Oligarchy have run it into the ground - and sucked-in all the wealth for themselves...leaving a smoking ruin for the rest. Nice.

************************************************************

"Yupp! The real full unemployment figures have always been about double those published. Add part-timers who want full-time or those working hard, but not making enough or not getting any benefits and a rigged money system [trickle-up] and what-ya-got?"

The story of my life since June 19, 2006, as Reagan's "voodoo economic" scheme via the Milton Friedman-Friedrich Hayek Chicago School of Economics, come trickling down on my head in the form of a "golden shower." No "golden umbrella" waiting for this little chickadee. No, sir! Gotta keep those plebes working til they're at least 70, otherwise their Social Security benefit check will be cut in half at their "break even" point. So, forget about retiring at 62, because your benefit will be cut in half at the age of 75. But, if you work until you're 70, you won't reach your "break even" point until the age of 83. Then, they're hoping you'll drop dead by the time you reach 76, or perhaps even before you can collect. Did anyone ever explain that little scam to people? Not even, not ever!

Well, it's off to The hill Of The Seven Jackals, for me. Hi Ho, Hi Ho, it's off to work I go...
Oh yeah, tell me how lucky I am to even have a job!

Phillips on Democracy Now!
http://www.democracynow.org/2008/5/6/bad_m...failed_politics

AMY GOODMAN: We turn now to this nation’s economy. With the collapse of the housing market and the rise in oil prices, much attention has been paid to the question of whether the US is in a recession. But is it possible the nation’s economic well-being is in even deeper financial straits?

A new book by the renowned political analyst Kevin Phillips argues it is. Phillips says successive administrations have imperiled the US by a combination of shortsighted policies and a trend against regulation. These include unparalleled credit card debts, the expansion of financial industries such as hedge funds, ballooning national debts, and deliberately altering statistics like inflation and unemployment to mask the accurate picture.


A generation ago, Kevin Phillips wrote The Emerging Republican Majority, which Newsweek described as the “political bible of the Nixon administration.” Throughout the ’70s and ’80s Kevin Phillips was viewed as one of the GOP’s top theoreticians and electoral analysts. But today he’s considered one of the leading critics of US political culture.


Kevin Phillips’s latest book is Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. It’s the fourteenth volume in his series of reflections on US political culture, following his bestseller American Theocracy. Kevin Phillips joins us now from Houston, Texas.

We welcome you to Democracy Now!, Kevin.

KEVIN PHILLIPS: Nice to be with you, Amy.

AMY GOODMAN: It’s good to have you with us. I know that you’re on a grueling road tour, but tell us, what is “bad money”?

KEVIN PHILLIPS: Well, “bad money” is sort of like “bad dog,” bad Wall Street, misbehaving finance. On the other hand, if you’re somebody who’s tried to travel in Europe recently and you know what you get when you turn in greenbacks, you can think of “bad money” as also a shorthand for the purchasing power of the dollar. We have an economy that’s eroding in lots of ways Americans don’t really fully understand yet.

AMY GOODMAN: What do you think is one of the most serious signs of this overall global crisis of American capitalism?

KEVIN PHILLIPS: Well, not to single out just one, I have an approach I use to say that normally when a country is—United States is—heading into a recession, there are one or two, sometimes three, factors that you worry about. But at this point in time, the American economy, you can think of it as being kind of in a shark tank, and there are like six or seven sharks, and you don’t usually see anything like that number.

And just to skim the list quickly, we have a financialized economy in which we don’t make much anymore, and finance is up to 20 to 21 percent of the US GDP, and manufacturing down to 12. Finance dominates the US economy.

The second problem is that we have massive debt, both public and private. It’s gone up about 700 percent since the early 1980s, staggering numbers where there—we basically have $50 trillion worth of credit market debt, which is tradable debt. And people just have no idea of this. It’s not government debts that’s the problem, it’s private sector debt, both financial and corporate and then in the consumer sector with credit cards and then mortgage debt. We just have this extraordinary level of it. 340 percent of the gross domestic product, that’s how big debt is. And the last time something was close to this—and it was less—was in the late 1920s and early 1930s. So it’s enormously a vulnerable, dangerous thing.

Third shark in the tank is the collapse of home prices. They continue to follow the scary trajectory that has people predicting that there’s going to be a 15 to 20 percent decline in home prices, which would be the sharpest since the Great Depression.

Then you can go to shark number four, that’s global commodity inflation. Oil and food, people are as worried now about the price of milk as they are about the price of a gallon of gasoline. That’s a global problem, but it makes a mockery of the administration’s pretense that there’s no inflation.

The fifth shark is, frankly, lousy economic statistics. I don’t think the average American should believe either the inflation numbers, the GDP numbers or the unemployment numbers. And there’s a lot of complexity and technical terminology involved here, but the long and the short is that over thirty to forty years, we’ve seen a kind of Pollyanna Creep, and administrations of both parties have done this. They want the figures to be friendlier, not to get them in trouble. And we’re at a point now where the figures lie enough that foreign investors are starting not to believe them and, I think, with considerable justice.

Now, the next shark in the tank is obviously the price of oil. And it’s not just global commodity inflation, it’s the problem that we see of oil production peaking in the world sometime in the next ten to twenty years. And the advance signs of this are scarcity in peaking in certain countries. And the prediction just came out of Goldman Sachs a couple of days ago that within a fairly short period of time, probably this year, you’re going to see $150 or $200 oil.

And that’s because, partly at least, of the scarcity, but the US dollar has been tied historically since the 1970s to oil, because of a deal worked out when OPEC wanted a price increase. Henry Kissinger and others were involved in getting OPEC to commit that they would sell and buy oil only in dollars and that they would invest their petrodollars in the US, in Treasury debt. So we have a currency that’s profited from the connection to oil, which sustained it in many ways. But now oil has boomeranged on the United States.

We have to spend $400 billion a year to import the oil we need. We don’t have the basis for controlling oil anymore, after the idiocy in Iraq, which was partly put in motion to solve the oil problem, and instead you’ve got oil prices going up 500 percent in five years. So the dollar is on the ropes, and that’s the other shark in the tank.

There has never been a period in anybody’s memory, except very old people who remember the late ’20s and ’30s, where you had so many things converging. And that’s what makes it frightening. And every time the administration says it looks like it’s under control or it’s half-over, you start to get evidence that, no, it’s not under control, and maybe it’s not even a third over.

AMY GOODMAN: We’re talking to Kevin Phillips. His latest book is Bad Money. And you have a piece in the latest issue of Harper’s magazine: “Numbers Racket: Why the Economy Is Worse Than We Know.” Who’s covering up, Kevin?

KEVIN PHILLIPS: Well, the political system has basically found it comfortable to let the data shade in the make-believe. And I wouldn’t single out either party, and that’s actually part of the difficulty. The pot can’t talk about the kettle, and the kettle can’t talk about the pot. There are some signs, perhaps, that Barack Obama is freer to talk about it. His chief economic adviser is somebody who has talked about the government cooking the books back earlier in this decade.

I think the government has cooked the books, and as a result, we get this unrealistic view of where the economy is. For example, they pretend that inflation is in the two- to three-percent range. Barron’s magazine did a survey of money managers, and their average estimate of what the CPI would be later this year was 2.7, and for 2009, at the end of the year, 2.8. Now, that’s ridiculous. We’re starting to see global commodity inflation. Foreign investors believe that the inflation rate, including food and energy, is six to nine percent, not this nonsense about 2.6 or 2.7 or 2.8 or 2.9.

Now, the real meaning here is that when you look at the growth statistics for the economy, the GDP figures, you have to take—to get the real figures, you have to take nominal gross domestic product growth, and then you subtract for inflation. So if you’ve got nominal growth of four percent and you subtract for inflation, you still would get a positive number if you use the number of, you know, 2.6 or three percent inflation. But if you’ve got nominal growth at four percent and inflation is really six to nine percent, then you’ve got big-time negative growth, and the economy is contracting.

The government talks, you know, like they used to say in the Western movies, with a forked tongue, but so does the financial sector. All the questions about whether the ratings were really AAA or they were really something lower than BB on the securities that were imploding, no honesty in economic data or ratings or descriptions of what really goes into a financial instrument, and this has the American people at some degree of peril, because foreigners don’t really believe what we say anymore.

AMY GOODMAN: We’re going to continue this discussion. Kevin Phillips is our guest. His latest book is Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. Stay with us.

[break]

AMY GOODMAN: Our guest is Kevin Phillips, his latest book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. I want to ask you about how commodity speculation has affected world food prices. We’re seeing food riots now around the world.

KEVIN PHILLIPS: Well, there’s a degree of commodity speculation going on, because a lot of the hedge funds in the United States have a major allocation to commodities, and they see commodities as a particularly attractive play with some of the major currencies losing their respect. And that’s particularly true of the dollar. American hedge funds think it may make more sense to be in commodities than to be in dollars or in American stocks.

But I would not say that the principal driver of global food prices is speculation. A lot of it has to do with climate change. Some of it has to do with energy. Grains that used to be used for food are now possible sources of energy. So is sugar in Brazil. So you’re getting an overlap of what’s food and what’s energy, and the whole commodity sector is being pushed up by that, especially as more and more people move into the lower middle class or middle class in China, in India, in Brazil, and the demand for food and for energy keeps climbing. So this is more than speculation, but they do play a role.

AMY GOODMAN: Kevin Phillips, you also write about peak oil. What do you mean? And how does this fit into the global crisis of American capitalism?

KEVIN PHILLIPS: Well, it’s a very unfortunate circumstance. The United States used to be the big oil power. We had the big oil resources in the twentieth century, and oil powered our success in two world wars, it made our industry the strongest in the world, and it built our transportation and residential infrastructure, which is now something of a threat because it consumes so much oil. But the United States at this point only produces a third of the oil it needs.

The peak oil question has to do with whether or not global production isn’t either about to peak within the next five, ten, fifteen years—some people believe that it’s peaked already. And if that’s the case, you can expect that, given the demand for oil that can’t be replaced by other things too quickly, certainly not in five to ten years, you’re going to see oil prices just keep climbing. And if people can assume they keep climbing, then they become a speculative vehicle, if you want to get your money out of dollars, which then makes oil prices rising or a huge negative for the dollar, which means that we have this currency which is weakening in ways that raise all kinds of other questions.

So peak oil is one of those things you just won’t see on the front pages of the newspapers, but I wish they would deal with it, because there are lots of things going wrong with the economy that the media, as well as the politicians, really don’t want to put on page one, and page one is where they ought to be. This is serious stuff.

AMY GOODMAN: Kevin Phillips, what could you see as the global crisis at its worst?

KEVIN PHILLIPS: Well, the global crisis has several dimensions. One of the dimensions, obviously, is that if the economy goes sour and if we have a run on the dollar and the value of American dollars declines in a severe way, you’re going to have foreigners buying up a lot more of our industry, and people would want to sell it to them. America’s role as a global debtor would just mushroom. We’d be at the beck and call of other countries. The dollar would be subject to being abandoned by the oil producers. You can have a major league recession in the United States, which of course then would be compounded by all this huge amount of debt beginning to fall in.

But I think there’s another dimension that people tend to forget here. If you have the rise of finance, as we’ve seen it in this country, to be the largest part of the private economy, you have on one hand the growth of the Federal Reserve Board in regulating more and more of the American economy, and they’re partly controlled by the banking sector. They’re not elected by anybody. So you’re missing a democratic ingredient in that respect.

It’s also very true that the growth of finance has involved the growth of a debt and credit industry. And part of what finance has brought as it grows is that more and more people are in more and more debt, and the amount of debt that individuals have and that they have to service is increasingly a burden. And people get into debt to maintain either a living standard they can’t afford or one that’s been nurtured by consumerism and advertising to get people to spend money they don’t have. So you’ve got an element that the public is losing control of its own economic future when you have an economy that’s full of debt and credit industries, which are a mainstay of finance.

The implications of all of this for who controls what within the United States are huge, and that will be especially true if a lot of the debt we’ve built up starts imploding because of higher inflation and higher interest rates.

AMY GOODMAN: What do you think has to happen?

KEVIN PHILLIPS: I think, unfortunately, the first thing that would be good would be to have serious political candidates taking serious positions. I haven’t seen any of that, and I really doubt that we will. The two parties are both complicit in some of the circumstances here. They’re not going to want to grapple with the truth of some of what’s happened to the economy and the incredible amount of debt and the danger that poses, so I don’t think we’ll see it discussed.

If it’s not discussed, the president elected, whoever it is, will not have a mandate to deal with these things, and the interest groups are so much in control of Congress that only a president elected by going to the people with a serious case for reform—and some of the reform has to be re-regulation of finance—only such a president would be able to do it. And I doubt that any of the people running at this point have laid the groundwork to have a mandate for serious reform. I think that’s—it’s appalling, frankly. We can’t have the solutions come to the fore until we have at least the discussion begin.

AMY GOODMAN: Kevin Phillips, I want to thank you for participating in the discussion. His latest book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, speaking to us from his book tour. He’s on the road in Houston, Texas.

KEVIN PHILLIPS: Thank you, Amy.

AMY GOODMAN: Thank you so much for joining us.