Finding Sound Economic Advice

One of the hazards of managing your money and planning your career is that finding good economic advice is almost impossible.

You can’t trust economic forecasts. Economists are good at providing data and charts, but their forecasts should not be taken seriously for two reasons:

• Economists are typically employed by governments or commercial organizations, which have agendas quite different from neutral economic analysis. In particular, overly optimistic forecasts are used by financial institutions to get you to invest money where they will be able to collect high fees.
  
  
• Furthermore, economic models are fundamentally incapable of predicting the future, because economics is not a science; at best, economists might be able to tell you approximately where the economy is now and to predict a continuation of recent trends.

Even worse, you can’t trust the governments who collect and interpret the raw economic data which economists use in their models. Governments believe that their job is to keep the population happy and optimistic, so they continuously revise their data systems to make the statistics seem more pleasant.

Check out John Williams’ Shadow Government Statistics (http://www.shadowstats.com/cgi-bin/sgs?) He says:

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. We offer an exposé of the problems within the reporting system, and an assessment of underlying economic reality.

I do not endorse this newsletter (nor do I endorse any other source), but it is a sobering contrast to official data. Most likely, John Williams overstates his points somewhat, but his fundamental conclusions are absolutely in the right direction. He believes that inflation is much worse than reported; that government deficits are worse; that economic growth is lower, if not negative; and, that money supply growth is far higher than claimed.

The recent euphoria in the global stock markets seems mostly a result of low interest rates and rapid growth in the supply of money. The American Government has been pouring out cheap money at rock bottom interest rates in order to prevent an economic meltdown. However other governments around the world are now tightening credit to tame inflation, but I wonder if global inflation isn’t already beyond control by such modest tightening.

So my outlook is much darker than that of official forecasts. I am gradually selling all the stock I plan to dispose during this boom cycle. Not that I am predicting all gloom and doom, like some soothsayers. But the immediate future is clouded by the spectre of rising inflation which will likely drive up interest rates and bring down stocks, real estate and economic growth.

I am not trying to set my self up as a new financial forecast guru; I assure you that I have no crystal ball at my desk. However, my lifetime experiences of studying at Harvard, working as a banker on Wall Street, and later as a corporate executive, cause me to doubt governments and economists. Their motives are rarely just to provide objective advice, but rather to soothe and to encourage.

Not everything is dark and gloomy in the economy, but there are major warning signs. Inflation scares me. Just look at how drastically prices have jumped for gasoline, houses, commodities, and for many other products in recent years.

Sound financial management pays off in the long run. Do not get further into debt. Do not buy real estate with little money down. Do not buy stocks with borrowed money. Do not assume that your income will always rise faster than your expenses.

And be careful of following the crowd in economic matters – they could be quite wrong. I hardly know where you can find sound economic advice in a field of so many commercial and political motives. Maybe you might just have to think for yourself!

(As a footnote, several points in my December 7, 2006 blog Investment 102: Stocks have now been confirmed by a major financial study at the University of Toronto. After analyzing the performance of a broad spectrum of mutual funds, they found that they generally perform noticeably worse than the general stock market, because of the exorbitant fees charged by the mutual fund industry; this is exacerbated when investors switch from one mutual fund to another, vainly trying to find the best mutual fund. These professors found that investing in stock market indexes with very minimal fees would have served most investors far better. They have confirmed what I told you in December. Thank God, there are a few objective souls out there providing helpful economic information in a sea of financial misinformation!)