Inflation, unemployment, annual reports, purchasing power: economic information today is rife with deficiencies and dominated by marketing. But there are tools to extract information and obtain quality knowledge.
Is economic information in developed countries objective and complete? Can we trust official figures, annual reports, financial communication? The answer isn’t an obvious «yes», but rather a qualified «no», as I show in my latest book, «Economic Disinformation» (just published in French by Editions Favre). Here are some key takeaways from the book.
First, there is the observation that economic data such as GDP, inflation or unemployment is a key conveyor of power and performance among countries, but also companies. It is at the core of any investment pitch. This tilts the choice of statistical methods in favor of the most flattering measures. Window dressing and communication have penetrated economic information, where marketing rivals reporting.
Switzerland, for example, boasts full employment, with a rock bottom unemployment rate of 2,5% (end of February), according to the Staatssekretariat für Wirtschaft. But this figure leaves out many things such as the increase in temporary contracts, structural unemployment of older people, underemployment (at an 18-year high), and most of all, it leaves out discouraged job seekers who reached the end of their benefits and are no longer registered with a regional employment office. Europe and the U.S. are also analysed, showing that the same underestimation issues affect unemployment figures in all major economies.
Inflation is perhaps the most socially sensitive figure. On its basis, salaries are adjusted. If the methodology underestimates actual price increases, this single figure can be the source of social instability. In Switzerland, the EU countries and the U.S., the CPI (Consumer Price Index) methodology doesn’t provide a cost of living index. It only claims to be a price index. Basic premises are that consumers, when prices increase, adapt their habits and buy less costly equivalents (substitution method), and gain quality (or price decreases) when technology evolves (hedonistic method).
The book challenges both premises and discusses how little they account for losses in choice and quality of life, and how forced expenses for unnecessary technological options are overlooked (i.e. too many features nobody uses). I also discuss at length the specifically Swiss issue of the soaring insurance premiums that are excluded from the Swiss CPI, and what issues it raises, especially for low-income households.
Company reports are not immune to forms of embellishment. They are not only the place of faithful reporting but are also carefully crafted to be a sales argument for investors. Typically, a report by a blue chip company can reach 500 pages, come in separate downloadable sections, conveying an impression of overwhelming exhaustivity and transparency.
Yet it can have poor informative quality and be packed with legal and marketing language. Very technical disclaimers can eat up huge space and drown more essential information. Environmental, social and governance sections enhanced by sophisticated graphic design strike a promotional chord, yet can be contradicted by independent NGO reports showing that the company’s ESG score isn’t nearly as rosy as depicted.
Another example: For several years, we’ve been having 1% mortgage rates in Switzerland for a 10-year-loan. One would think that buying property has never been so easy. Yet the rate is largely misleading. Financial conditions are tougher than ever. To qualify for a mortgage with an interest rate of 1%, a customer must be able to cover a 5% theoretical rate. According to the bank Raiffeisen, in order to acquire a 1-million-CHF-property with 200’000 CHF equity capital, one must earn an annual income of 176’000 CHF.
Residential real estate prices are up by about 50% over 10 years. For an 800’000 CHF flat, a buyer needed to earn 140’000 CHF in 2011. Today, the same flat costs 1,2 million CHF, and the buyer would need to earn 200’000 CHF. As a result, an increasing number of households are excluded from property, which is the main source of savings, and they pay more on rents, which is bad news for general prosperity.
Another typical disinformation is to suggest that when stock markets go up, households get richer. A press release from the Federal Reserve said in 2020 that thanks to the stock market, «household wealth reached a record in Q2». Actually, only 10% of Americans have exposure to the stock market. They own 90% of stocks. The other 90% of Americans are little or not at all impacted by stock gains. They depend on salaries, which have undergone a massive relative loss of purchasing power. In Switzerland, pension funds haven’t gained much from the stock market rise: only 1% to 2% of performance went to the insured capital, while the rest went to longevity reserves.
One chapter deals with the quality of information spread by journalist consortia about tax evasion and money laundering accounts leaked from offshore jurisdictions. We’ve had Offshore Leaks, Swissleaks, Panama Papers, Pandora Papers, and Swiss Secrets. But the problem lies in the source: who hands those thousand gigabytes of data to newspapers? How to be sure about data integrity? Why are those affairs exposing only small jurisdictions such as Switzerland (exposed twice in the course of 7 years) Panama, Malta, and Middle Eastern kings and Russian oligarchs, but never major jurisdictions like London or Delaware, or US congressmen, generals and spies? Could the sources of the leaks be governmental, such as in the HSBC case (French government) and in the Credit Suisse spy case (German government)?
The only conclusion can be that if an investor, saver, entrepreneur or analyst wants to be informed and inform others correctly, it is imperative to cross-check information, diversify sources, complement statistics with other indicators, question methodologies, and never take any institutional information for scientific truth.