Dear CIGAs,

The Federal budget, or total receipts less total outlays, divided by GDP defines “The Formula.” The Federal budget is normalized or divided by GDP to remove the effects of dollar devaluation and smoothed to provide unbiased historical comparisons. For example, -5% Formula reading in 1992 is largely comparable to the -5% Formula reading in 2008.

I say largely because the two Formula readings, statistically speaking, are not comparable. The GDP time series has become increasingly bias over time due to subtle changes in the way it is calculated since the early 1980s. For further discussions on the reality of GDP and other official government times series please click here…

The leading formula is nothing more than a slight modification of the “Formula.” Tax withheld less outlays, divided by GDP defines the “Leading Formula.” Taxes withheld, a subsector of total receipts, is more sensitive to marginal changes in business activity. This sensitivity provides leading characteristic within the Formula calculation and provides valuable insight to changes in trend.

As stated previously on www.jsmineset.com, an economy is either rising at a rising rate or business activity is falling at an increasing rate. This is economic law 101. Falling business activity manifests itself as falling “Formula” values. Think of the Formula, Trade and Current Account Deficits as a speedometer of money flows in/out of the US. A negative speedometer in the "Formula" reading implies outflows. Ultimately, persistent outflows will send interest higher and devalue the dollar. For a detailed review of how the formula works click here…

The Formula has broken the 1983 and 1992 lows and continues to accelerate to the downside in 2009.

Regards,
CIGA Eric

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