A False Sense of Confidence

 If you have read our recent article "Shadow Statistics," you already know that most government statistics such as GDP, unemployment numbers, and inflation rate are tweaked to make the big picture look more appealing.

We conclude that the only reliable marker for the health of the U.S. economy is the personal experience of "the man on the street." Do we pay more for our groceries? Is there plenty of month left at the end of our money? What is the experience of John and Jane Q. Public?

Two words: Pawn shops.

In the wake of gasoline prices reaching the $70+ range, Americans have started selling their possessions for gas money.

Pawn shops across the U.S. have recently seen a dramatic increase in business, with people pawning jewelry, TVs, brand purses, etc. to get by.

"They come in on Monday and Tuesday, saying, 'I need the money to put gas in my tank so I can get to work and get my check by Friday," a pawn shop owner from New Jersey told CBS.

For some it's even worse than that, says one of his Texan colleagues: "Some of the construction people tell us they are having to pawn their tools to buy gas, but when they pawn their tools they can't go out and work in the construction business 'cause their tools are in pawn. So it's kind of a catch-22."

Does that strike you as a sign of a healthy economy--Americans having to pawn their belongings at the first sign of a price increase in gasoline? What will those people do when prices reach $4 or $5 a gallon, as they already have in some areas... or if they simply just stay around $3 for good? What will happen when prices of goods rise because of increased shipping expenses?

Our friends from the Daily Reckoning posted on April 21: "[The] U.S. dollar has lost 13.8% of its value over the past two years, with prices increasing an overall 16.0% over that time frame. That works out to an annualized rate of inflation of 7.7%. . . [T]hat means you had to have an after-tax nominal gain on your investments of 7.7% just to break even. If your pay has gone up by the average amount of 3%-4%, you have been taking a cut in pay, not getting an increase. Real wages in the U.S. have been falling. Nominal GDP has grown by 6.7% on average over the period, so in fact real GDP has been in contraction by some 1% per annum."

Unbelievably, a recent study by New York-based Conference Board found that consumer confidence is at a 4-year high, with "consumers' overall assessment of the economy [remaining] positive."

We're baffled, dear readers. It seems nothing, but nothing, can pull the plug on our bubbly optimism. The awakening will most likely be a rude one.



Some readers pointed out to us that Canada has a population not of five million but of about 35 million. The error, which appeared in the article "The Folly of Wealth Transfer," was part of a passage we quoted from a Frontline article. Even though the blunder was Frontline's, we should have noticed. Sorry, Canadians.

Posted 05-02-2006 6:11 PM by Doug Casey