Take the Consumer Price Index, a widely used measure of inflation. It tracks inflation in part by comparing a basket of commonly consumed goods over the years.

Governments don’t like inflation. So they simply pull a fast one on Joe Public and swap the goods in the basket as it suits them. This from TradeSystemGuru.com’s Matt Blackman:

In an effort to keep inflation down and accentuate growth, statisticians shamelessly distort and manipulate the data. For example, the Consumer Price Index measures inflation in part by comparing a basket of goods over the years. But what is not publicly understood is that each year, that basket changes. […]Here is just one example of how one of these tools, namely substitution, works. If the price of salmon goes up too much, the Bureau of Labor Statistics substitutes it for a cheaper food item like say hot dogs. The result is that from 2007 to 2008, CPI showed a 4.1% rise in the price of food. But according to the Farm Bureau, that tracks the same basket (without using substitution, weighting or hedonics), food prices actually rose 11.3%!

Employment figures are also fudged. As James Dale Davidson points out in the upcoming issue of Crisis Strategy Alert:

The official unemployment statistic picked up in today’s headlines, the Bureau of Labor Statistics’ U-3 measure, does not count everyone who is unemployed and underemployed.But that’s not the only problem with the numbers.

The government also inserts an official fudge factor – which in May amounted to 220,000 fictitious jobs. These so-called “birth/death” statistical adjustments arbitrarily add fluctuating numbers of jobs to the total measured employment. This supposedly accounts for jobs supposedly being created by new businesses that are supposedly too small and young for the government to detect. U-3 is also flawed in that it doesn’t count people ineligible for unemployment benefits. […]

To get a real picture of the current unemployment levels you need to focus on the grossly underreported U-6 data set known as “alternative measures of labor utilization.” The U-6 data set includes everyone counted in U-3, plus “all marginally attached workers” and people who aren’t working full-time but wish they were (i.e., the underemployed). (Marginally employed covers “persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.”)

When you add up U-3 and all the underutilized workers, the official U-6 rate for May 2009 is 16.4%. In other words, the employment picture is twice as bad 14 months after the recent peak as it was in December 1930, 18 months after the peak prior to the Great Depression.

As James says, “If you take care to analyze the data, it’s easy to see that there are not many green shoots growing. In fact, when you put aside the hype and look more carefully, indicators such as employment, industrial production, stock prices and international trade are all tracking their trajectories from the Great Depression… or worse.”

Taking care to analyze the data can clearly mean the difference between a good investment decision and a bad one… the difference between a stock market victim and a successful investor… the difference between a comfortable retirement and a last-minute scramble to cover a pension shortfall.

If you’re interested in discovering the truth behind the government’s lies about the economy and protecting your wealth during the current crisis, you can take a 60-day risk-free test drive of James’s research service.

You will get immediate access to past issues, weekly updates on how to profit in the downturn and the full Crisis Strategy Alert portfolio. If you decide within the first two months of the test drive that James’s investment research and crisis recommendations are not for you, it won’t cost you a dime… guaranteed. Frankly, this is a no-lose offer. Take it or leave it. It’s entirely up to you.

One thing the feds can’t fudge is the amount of tax receipts they take in. As Barron’s recently put it, “nobody pays taxes on phony, phantom jobs or earnings.”

According to Trim Tabs, the decrease in income-tax withholdings since May “indicates wage declines and job losses have accelerated.” This from Barron’s:

[I]ncome-tax withholdings in the past four weeks are down 6.1% from a year ago; in the last two weeks, they’re down an even bigger 8.1% from last year. That marks a sharp deterioration from May, when income-tax withholdings were off “only” 4.8% from a year ago. […]Meanwhile, “other” taxes were down 39.5% year-on-year, down from 33.6% in May. Corporate income taxes were down 35% from a year ago in the latest four weeks after having been down 12.3% year-on-year in May. […]

Not only do plunging tax revenues tighten the fiscal vise on the federal, state and municipal coffers, they provide unambiguous confirmation of the truly dire straits of the economy.

These numbers, of course, are at odds with the surge in the stock market, which had lifted the averages by about a third from those March lows. Now, however, equities appear to be rolling over, which could be nothing more than profit-taking to nail down wins ahead of the end of the second quarter.

But the advance also seems to be losing steam in bourses abroad as well as in commodities, which suggests much of the surge was liquidity-driven, not unlike last summer’s spike in crude oil prices to $147 a barrel. We’ll see.

No matter what our government says about the true health of bank balance sheets, the real stress test for the U.S. stock market lies in what happens next to the BKX. I have a feeling the major averages will start following the banks should they continue moving lower, but who really knows? The safest prediction I can make is that the S&P 500 won’t be hanging around 850 much longer.

I’ve been calling for a drop in the Dow since the beginning of the month.

Back on February 2, I told readers this: “If the VIX is rising, that means the Dow should be falling, possibly breaking under 8,000 sometime in the next few weeks and heading towards 7,000.”

And Crisis Strategy Alert, a new crisis investing service (published by the same guys who put together ContrarianProfits.com), has helped our subscribers make 20% profits on the Dow’s slide. (They are still banking coin!)

But is the Dow going to keep dropping? Let’s take a look…

This is a 12-year monthly chart of the Dow Jones Industrial Average (DJIA).

Notice how steep the most recent fall was.

Also notice how the DJIA recently broke under its 2002 bear market lows.

That means had you invested in a Dow Jones index fund back in 1998 your account would have LOST MONEY after inflation.

That makes this one of the worst investments known to man.

And it doesn’t seem like the pain will end anytime soon.

Above you’ll see that 7,000 is a major psychological support point.

Why?

Because it’s a round number. And because the DJIA has traded close to that level in the past.

Today the DJIA is about 100 points away from this mark.

So here’s what I suggest you do.

If you’re already short the Dow via an ETF like the Diamonds Trust (NYSE:DIA), then hold onto your position.

If you have not yet entered into a short position, then wait for the Dow to break under 7,000 before getting involved.