To begin with, the "real" U.S growth rate over the past half century has seldom exceeded 3.5% annually. Over the past 20 years or so, productivity growth has generally been around or slightly below 10%. Over the 1900-2005 period, corporate profits averaged around 5%., yet since 2002, corporate profits were running more than 50% above that average, and in 2007, they were almost 60% above that average, yet inflation was reported as "nominal." How could this possibly be? Productivity wasn't up that much, nor were costs down. In fact, until 6 months ago, energy costs were skyrocketing. What caused the reported profit increases was leveraged liquidity, since the costs of all those derivative-based funds weren't shown as costs on anyone's books, and even turned up as assets on many companies' accounting ledgers.

Yet, the stock market kept climbing, largely because the analysts kept pointing out that the P/E ratios [price/earnings ratio] of stocks were far below historic highs and at a 10 year low. The only problem with that was that the earnings were in all too many cases deceptively inflated.

Housing prices continued to inflate, based on demand-fueled, statistically flawed lending models that resulted in far too many people being given loans that could never be repaid.

Add to that the feeling that inflation was low and under control, based on government statistics. According to those figures, except for a period in the 1970s, inflation has been below 4.0%... except... the measurements for inflation, as I noted in an earlier blog post, have been changed to eliminate such key aspects of daily living as housing, food, and energy, and including those would increase the number by as much as 40%, and be far more realistic. What this meant was that Americans on the lower side of the income scale were getting squeezed, because so many of their benefits, from Medicare to Social Security, weren't keeping up with real price increases, since those benefits were indexed to the "core" inflation numbers. Then, just before everything turned sour, consumer debt peaked at an all-time high.

Throughout this entire situation, I doubt that any number produced by anyone was essentially accurate, or that, no matter how hard any analyst tried, any statistical assessment could be more than an approximation.

For various reasons, ranging from out-and-out greed to misguided altruism, we've created a system where few if any of the metrics industries and government use are accurate, and some are so far from such accuracy as to be laughable... if the results weren't so tragic. Yet, in case after case, when those few analysts who did understand and had the nerve to speak out tried to point this out, they were ignored, if not pushed out, because the deception was so much more comfortable to so many people. Just look at the analyst who tried for years to get the SEC to investigate Bernard Madoff. He couldn't "prove" through evidence; he only knew that such reported returns were impossible in practical terms, just as the returns on all the derivatives turned out to be.

No one can save us from our own self-deceptions... except us.

—L.E. Modesitt, Jr.:  2/17/2009 10:22:00 AM