Thursday, August 27, 2009

Enron Accounting and GDP; FDIC's Money Shortage

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Second quarter GDP revisions were out this morning and they were unchanged from the down 1.0% in the first reporting. The government claims that while some components of the GDP numbers declined, increases in other components offset the losses. Components revised upward included government spending (what a surprise). State and local government spending was supposedly up 3.6% (federal spending up 11%) even though over 30 state governments are now considered to be in serious financial trouble. In a separate report, the FDIC is once again about to run out of money because of the increasing rate of bank failures that are taking place even though Fed Chair Bernanke has told us repeatedly that the financial system has been fixed.

While the state and local government spending numbers are suspicious to say the least, far more suspicious is the corporate profits component of the GDP report. Before-tax corporate profits supposedly increased $67.6 billion or by 5.7% quarterly. This was the biggest increase in four years and even larger than the 5.3% gain in the first quarter. You may be wondering how can corporate profits increase by large amounts during the worst recession since the 1930s? Quite simply, they can't. Even worse, proof of the inaccuracy of these numbers is supported by the net cash flow figures in the GDP report. These fell by $26.9 billion. Companies that are actually making money generate cash. Those who are lying about making money don't. This is what happened with Enron. It claimed to have substantial profits, but its cash flow indicated that it didn't. While this smoking gun was right there is the published figures, Wall Street and the mainstream financial media talked up the stock almost to the day that the company declared bankruptcy.

Other components from the report indicate an economy that is in extremely bad shape. Amazingly, even though corporations are making those huge profits, business investment fell 10.9% after plunging at a record depression level 39.2% annual rate in the first quarter. Another impossible statistic in the report is disposable income for consumers. The GDP report claims this went up 3.8% despite the severe recession. However, according to the report the savings rate rose 5.0%, which means that this increased fantasy income wasn't flowing into the economy. Exports, which the Fed and economists have pointed to as one of the cornerstones of the 'resurgent' economy, fell 5%. Imports fell 15.1%. Collapsing trade is a sign of a sick economy. Even though we have heard repeatedly from the media and the Fed that the U.S. real estate market has bottomed, investments in housing fell for the 14th consecutive quarter, dropping at a 22.8% annual rate -that's some recovery all right.

Also contradicting the government's 'economy is getting better' PR blitz, is the continuing failures of U.S. banks. This problem hasn't been solved, it has merely been swept under the rug. The FDIC's deposit fund will be running out of money sometime later this year. It would have run out of money last year if it had to pay off for either the Washington Mutual or Wachovia failures. Both were handled outside the system with the U.S. Treasury making guarantees for the acquiring banks. So far 81 banks have failed this year and the number of banks on the FDIC's troubled list is now 416 (up from 305 at the end of the first quarter). This is the largest number since the Savings and Loan Crisis. Banks insured by the FDIC swung to a total quarterly loss of $3.7 billion in Q2. It looks like we can expect a lot more bank failures in the future.

NEXT: Commodities, the Dollar and More Government Fantasy

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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