## Shadow Stats: Still Very, Very, Very Wrong

Shadow Stats is frackin’ wrong. No doubt about it. Shadow stats is wrong, even if Zero Hedge thinks they might be right. And yet gullible John Malloy sees fit to report this crappy data on CNBC.

Once again:

1 +U.S. Treasury Rates = (1 + inflation) * ( 1 + real rates)

We know what the Treasury Rate is with a high degree of certainty for points on the Yield Curve for the next 5 years, because they are traded in a highly liquid market. The real rate is what investors really make after you take into account inflation.

So rearrange this equation to find out how much investors are really making by investing in U.S. Debt:

(1 + U.S. Treasury rates )/ (1 + Inflation) = ( 1+ real rates)

If we use 10% inflation and plug in the latest 6 month T-Bill Rate, we can see how much investors are making.

The 6 month T-Bill rate is 0.11% Shadow Stats says we have 10% inflation. So using grade school math, investors in 6 month T-Bills are losing 8.99% per year due to inflation! ** **

**Wow – those investors are really stupid or really worried! Or maybe, just maybe, John Williams is wrong. Which one could it possibly be? Who can know?**

Can you believe that this BS gets reported in the major media, by a guy who works for CNBC and used to work for Bloomberg? He must be a smart guy – every Bloomberg guy I’ve ever talked too has been whipsmart, and to go on CNBC is another huge step. So how can he not know this?

[Update: Here it is on the Front page of CNBC. We're getting less informed by this "news."]

[Update 2: Google "Shadowstats is wrong", and TC comes up #3. Slowly, we're getting traction.]

[Update 3 4/19/2011 Getting even more traction debunking Shadow Government Statistics. We've made the front page on the simple search term Shadowstats. For a complete roundup on why Shadowstats is wrong, and who is silly enough to promote this nonsense, see here, here, and here. ]

Wow, it’s true what they say… A little knowledge can be dangerous. So you have this nifty macro equation, which applies only in the context of a money cartel. Before this equation, there were two other ways two define inflation… MONETARY inflation and PRICE inflation. I don’t really need your equation, or SGS’s graphs to understand that amount of excess reserves in the system is at a potentially dangerous level, so much so that Bernanke is having to pay interest on them so the money doesn’t get out on the street. I also don’t really need your equation to see what’s happening to price of things I buy, and prices of commodities. I know that an increase in the costs is going to show up in the prices.

The entire basis for your argument is based upon something abstract though, called CONFIDENCE. “We know what the Treasury Rate is with a high degree of certainty for points on the Yield Curve for the next 5 years.” You are obviously not a student of history. So let’s clarify. WITHIN your academic bubble, your equation applies. And that is the ONLY place.

You are wrong.

If you really think that we have 10% inflation, you should borrow all that you can on a 5% HELOC, because you would be making 5% on that loan. It is Free money.

And if you think we have dangerous levels of excess reserves, look at Japan. It’s only been 20 years of deflation for them. Maybe next year they will have inflation, but then maybe not.

We do not have 10% inflation.

We know the prices on the yield curve because they are traded in one of the most liquid markets in the world nearly every business day. I don’t know why you think these prices are somehow not valid. Not only that, we have prices for years and years. These Treasury yields are not debatable pieces of data. So when you if claim that inflation is 10%, then you must mean that people are throwing money at the Fed.

If you doubt the equation holds, simply think about borrowing money at zero percent interest in Zimbabwe in 2008. Use the equation, and see if it makes sense at a rate of 1000% inflation. You’ll find that the equation makes a ton of sense.

Set t = 0%

i = 1000%

and figure out what the real rate of interest is for borrowing at zero percent with Zimbabwe inflation.

If you borrow at a lower rate than the inflation rate, you make money. If you lend at a lower rate than the inflation rate, you lose money.

I think one important thing has been left out: exchange rates. A good proportion of the US debt has been financed by other countries.

Taking into account exchange rates, the Real Yield is calculated like this for the first decade of the 20th century:

Real Yield = Treasury Yield – Inflation – U$ depreciation

Average Treasury Yield = 3.4%

Average Inflation Rate = 2.5%

Average annual U$ depreciation in terms of Swiss Francs: 7.0%

Average annual U$ depreciation in terms of Japanese Yen: 5.0%

So, here is the Real Yield for a foreign investor:

Real Yield for Swiss investor = 3.4% – 2.5% – 7% = -6.1%

Real Yield for Japanese investor = 3.4% – 2.5% – 5% = -4.1%

These real yields are roughly in line with the Shadow Stats numbers of -5.6%.