Richard Whalen

The government’s number crunchers manipulate and fudge the real-world quarterly numbers, and the submissive American population is accustomed to being officially lied to.

But General Electric, arguably the best managed company in the world, never fudged its numbers and always hit its forecasted quarterly numbers under legendary (now retired) Chairman Jack Welch.

Now, under his successor, Jeff Immelt, GE, on April 11th gave the Street a nasty surprise. Immelt missed his first-quarter earnings forecast after having given bullish guidance to financial analysts. Between his telephone calls and the end of March, the bottom fell out of financial markets and GE’s financial services operations. Hot tempered Welch forgot he was retired, went ballistic and publicly bawled out Immelt, saying he had “a credibility problem.” Immelt ignored Welch’s tantrum, and he soon shut up.

GE is important because it is the most diversified model of U.S. corporate globalism. GE makes everything from jet engines to toasters. It makes more than half its sales and three-quarters of its profits outside the U.S. but it is still tied to its American base. GE’s disappointing surprise “tells us a lot about how goes the economy,” wrote Alan Abelson in Barron’s this week. “That GE, for all its obvious advantages, is feeling the drag, and is much more eloquent testimony to the true state of the economy and the growing force of the recessionary undertow….”

After a record 64 quarters of rising consumer spending, Barron’s reports, the long debt-driven boom ended abruptly in the first quarter. Now comes the potentially long painful process of consumer deleveraging, the struggle to reduce debt. It will be accompanied by the continuing wealth-destroying depression in residential real estate markets across the country. Merrill Lynch’s senior analyst David Rosenberg, among others, sees “a major risk of another 20 percent drop in house prices.”

Stagflation, as we learned in the 1970s, consists of stagnation and rising inflation, which is much worse now, according to private economists, than the government’s devious numbers managers would have us believe. As the daily blood-letting at the gasoline pump tells us, the government’s 3.4-4 percent “official” inflation range in March is a fantasy. Using the same techniques the government used in the 1970s and until 1980, John Williams, who publishes the newsletter Shadow Government Statistics, http://www.shadowstats.com/ calculates that the actual consumer price inflation rate in March was between 11.6 percent and 7.3 percent.

As inflation is deliberately increased, the Federal Reserve hopes and intends that the background danger of deflation, which last gripped the U.S. in the 1930s, will recede. Deflation caused Japan’s “lost decade” in the 1990s. We are now seeing the effects of deflation – the massive, forced liquidation of debt – grinding prices lower in the housing markets.

Our economy’s managers had hoped to contain deflation in the real estate sector. But the contagion is spilling over into other forms of consumer credit excess and debts. A recent Brookings Institution study found an unprecedented number of Americans falling behind on their mortgage payments, auto leases, and utility bills. That’s where much of the $120 billion in Federal stimulus checks will go in May – for repayment of old debts, not to buy new goods and services in the slumping economy. We’ve seen this movie before. The government tried aggressive stimulus tactics in 2001-2, but was unable to head off the recession or start the recovery. “We’re not believers that the government is bigger than the business cycle,” says Rosenberg. Surging exports, the bright spot in the gloom, are good news but not nearly enough to rescue our economy.

Housing, which peaked in 2006, holds the key to eventual recovery. But the process is agonizingly slow, as witness the devastated Florida market, where experienced real estate observers say the worst is yet to come. That assessment would push likely national recovery into the 2009-10 time frame, a grim prospect for the next president.