Wednesday, May 4, 2011

Fiscal Spending—The Steroids of GDP

Last week, first quarter GDP numbers came out—they weren’t pretty: GDP grew at a pace of 1.8% per year, during January through March. These figures are supposed to be adjusted for inflation. But if you think as I do that the Bureau of Labor Statistics is off in its inflation estimates, then at this pace, the American economy is probably contracting.

Body-builder, after a round of
Keynesian steroids—

I mean, “stimulus”.
Apropos of the announcement, Brad DeLong said, “Contractionary fiscal policy is contractionary.” Andrew Leonard at Salon added, “When you cut government spending in a slack economy, you practically guarantee a slowdown.”

DeLong and Leonard presuppose several things by these statements. One, of course, is that there have actually been cuts in government spending. Two, that the GDP number would have been better if there had simply been more government spending—so therefore, anyone opposed to increasing government spending is also against increasing the GDP.

But the third assumption they make is the assumption I’m interested in discussing: The notion that the GDP number is something we always want growing. The notion that a positively growing GDP number is always and with absolute certainty the thing we want most, as a society.

First off, let’s put away DeLong and Leonard:

Government spending has increased—drastically—at all levels of American government—under any and every metric you’d care to name over the last year. After all, there is a reason the Federal deficit has ballooned to $1.6 trillion in fiscal year 2011: FY 2009 government spending was $5.896 trillion. FY 2010 spending dipped to $5.798 trillion—a fall in $96 billion, roughly 1.6%. (data is here)

But for fiscal year 2011, which started this past October 1? The fiscal year where first quarter GDP figures are firmly nestled? Spending increased to $6.163 trillion—a bump up over FY 2010 spending of 6.29%.

So according to DeLong and Leonard, a rise in spending of 6.29% is contractionary? Please alert Merriam-Webster—tell them to update their definition of the word “contractionary”.

(Leonard also rather dishonestly claims that “Cutbacks in government spending -- local, state and federal -- shaved 1.09 percent off the growth rate. Plug that spending back in and you've got almost 3.0 percent GDP growth.” Where he gets this figure he leaves unsaid, just as he leaves unsaid that much of the local and State spending cuts were necessary in order to avoid local and State insolvency. Crap like this is why Leonard shouldn’t be taken seriously. (Well, then again, he’s not.))

Second, of course the GDP number would be better had the government spent more—government spending is one of the components of GDP.

Review the definition of “Gross Domestic Product”: The sum of private consumption, gross investment, government spending, and exports minus imports.

DeLong and Leonard and most other Neo-Keynesians implicitly believe that anyone opposed to more government spending is opposed to the growth in the GDP—and anyone who is opposed to the growth in the GDP is necessarily opposed to prosperity in the U.S.A.

This is the fallacy I’m interested in pointing out: The conceit that growth of the GDP is the same thing as national prosperity.

On its face, identifying GDP growth with prosperity seems sensible: After all, as a society, you want a simple measure of whether or not things are going good in the economy.

The problem with this need—and with the worldview that identifies GDP growth with prosperity—is that it uses GDP as the measure of an economy’s health, but without ever examining what the GDP is really measuring.

As per its definition, GDP is merely a measure of spending—nothing more. Spending on what is left undetermined—

—and right away, you can see the problem with measuring the health of an economy by the growth of GDP. Presumably, increased spending on hookers and blow would be a good thing, by the metric of GDP; so long as the hookers didn’t send remittances back to their home countries, and the cocaine was domestic-made, they’d be golden for the GDP.

I’m being facetious, of course—but not by much: The GDP has been turned into a fetish number by economists and—much more troublingly—by the politicians and the electorate, who view it as the be-all-end all.

The mise en place that economists and their discipline have laid for politicians and the general society makes it all but impossible for people to consider economic prosperity by any other metric—all is spending. All is GDP.

But consider this simple real-world hypothetical:

Suppose you earn $3,000 a month—but you spend $3,500 a month. The extra $500? You get that from your credit card.

Now of course, you can’t go on like this forever: The bill’s gonna come due. After a whole year, you earned $36,000—but you spent $42,000.

Which means you have $6,000 worth of debt—plus interest.

Question: Would you ever claim that you actually earned $42,000 a year? No—of course not, that’s absurd.

But that is exactly what economists who kowtow to The Great God of GDP—and the politicians they advise—claim it measures:

They confuse spending with actual wealth—irrespective of how that “wealth” is financed.

Another question: If you cut up your credit cards, and in fact tried to pay them off, does that mean you are earning less money? No of course not—it means you are spending less money. Which will of course make you feel poorer—because you’re feeling the effects of having pulled future earnings into the present, and now living with the consequences. But you won’t actually be poorer.

But that is what so many economists seem to think, when discussing austerity measures: Reducing government spending in order to pay off fiscal deficits reduces GDP—ergo, these economists claim that the country is “poorer” because of austerity measures.

A third question: Suppose that after a year of this spending spree, you said to yourself, “I am not going to cut back: I’m going to keep on livin’ high on the hog, as I’ve been doin’—spending $3,500 a month without fail—and hope that my salary goes up enough to pay off all this debt I’m building up.” What do you think will happen?

Sure, you might get a raise, pay off all your debts, and live happily ever after—but then again, you might not. And if you don’t, then it’s bankruptcy court for you.

That is exactly what the United States is doing, under the influence of this GDP fetish: It’s government has added on even more debt—between pointless wars, ineffective stimuli, and ridiculously expensive health care—in an effort to “grow our way” to prosperity.

So the U.S. fiscal deficit for fiscal year 2011 stands at about 12% of GDP. And it will be another 12% of GDP for 2012, 2013, 2014 and 2015—for sure.

If not higher.

Now, this level of indebtedness is going to bankrupt the United States. Of course, a sovereign nation cannot be liquidated in a bankruptcy proceeding: So what will happen is, either there will be a default on Treasury bonds, or the currency will be inflated away (as is currently happening with QE-2 and likely QE-∞) until monetary recklessness trips over into hyperinflation.

But nobody in the political class is doing anything about this sovereign bankruptcy. Nobody in the political classes is trying to reign in the debt. Certainly not the Democratic administration, certainly not the Republican opposition.

(BTW, the liberal critique of the Ryan budget proposal is dead-on: Paul Ryan’s proposal is a bunch of bullshit. Any budget proposal that doesn’t touch the Department of Defense cannot—and should not—be taken seriously, period. I say this as an anti-choice, anti-welfare-state, anti-vegetable, pro-red-meat, pro-gun, pro-Catholic-Church Conservative who is eagerly waiting for the Constitutional Ammendment that will make it legal to shoot hippies for sport.)

A lot of critics of fiscal austerity are claiming that “Austerity doesn’t work—because it’s shrinking the GDP! It’s not making the GDP grow—like it’s supposed to!

They’re pointing to the examples of Britain and Iceland, and other countries that have embarked on austerity programs, proof positive that austerity shrinks the GDP—

—and they’re right: Of course austerity shrinks the size of the economy—because that economy wasn’t real.

That’s the nub: The U.S. economy we’ve been living in—most especially the economy of the past decade, but arguably the economy since 1987—was an illusion.

It was nothing more than a credit-fueled spending spree, an economy based on over-consumption—over-consumption based on debt. A debt that was created by myriad “innovations” and central bank lassitude. A debt that was encouraged by government spending programs and tax incentives, that have created what I think is likely an insurmountable sovereign debt. A debt that was used to buy a false sense of prosperity—

—a debt that simply could not be sustained.

It looked okay—because every year, everyone said, “The GDP is growing! The GDP is growing!” But those GDP numbers were like the bulging muscles of a steroid-soaked body-builder.

And just like a juiced up body-builder, we never considered the shape of this “growth”: Was it healthy, to have exported so many middle-class and manufacturing jobs overseas? Was it healthy, to allow the rich to become so disproportionately rich? Was it healthy, to allow a casino mentality to permeate private finance? Was it healthy, to let all the distortions of all the speculative bubbles percolate throughout the economy, explaining it all away by reference to the “growing” GDP?

Like those poor twisted body-builders who want to “get big” regardless of its costs, all we saw as a society was the growth of GDP—regardless of its costs.

The UK is getting realistic about its fiscal debt: It’s cutting its fiscal spending, rolling back a lot of services and payouts, getting tough with its financial system, and taking a good hard long look at its military and other necessary government departments.

The usual suspects in the economic commentariat—DeLong, Leonard, not to mention Little Paulie Krugman—seem to think that this austerity is a bane to the British GDP—which it is, because the UK government is spending less, therefore the British GDP is contracting.

But is this necessarily a bad thing? Would it be necessarily a bad thing if the U.S. eonomy “contracted” to something healthy and sustainable?

What if—despite what mainstream economics insists—we allow the American GDP to contract. We cut spending—seriously cut it, defense and all—start retiring Treasury debt, and let the chips fall where they may? What would happen?

Might we wind up with a smaller but far healthier economy? Might we wind up with a society which is better overall?

But this goes to the heart of the problem with so much of economics as a discipline, and economics as a prominent part of the public discourse: The use of GDP as the sole measure of the health of the economy. Size over quality.

The political classes refuse to cut spending because the primacy of GDP plays into their peculiar needs: Politicians need a simple metric which they can sell to the electorate, proving to them that they are “leading the country”. So they latch on to GDP. How do you goose along GDP? By pumping the government full of debt.

Hence the hole we’re in.

They always complain that austerity hawks are “ideologues”. But Krugman and the other Neo Keynesians dominating the mainstream discourse and thus the conceptual framework driving the government apparatus—by definition—are themselves the worst sort of ideologues, bent on bankrupting a society. Bent on bankrupting America—literally. Because they see only expenditure as the measure of health of an economy—size as all that matters. And if that measure isn’t big enough? Then to this mindset it has to be juiced up—by way of government spending. By way of government debt. And then more government debt. And then more debt on top of that—they’ll only be satisfied when the government is finally bankrupt and either defaults, or hyperinflates.

That’s why they were silent while the incompetent Bush administration pissed away the national capital.

That’s why they’re clamoring that British austerity measures are a “failure”.

That’s why they are claiming that the growth in GDP would be higher if only the government would spend more—without ever considering the effects of such expenditures. Without ever considering the effects of such debt.

Viewing an economy—any economy, but particularly one as complex as America’s—through the pointilistic approach of GDP is either cynically blind, or corrosively autistic. (Which I guess would make Paul Krugman the Rain Man of macro-economics: “More GDP! Definitely-definitely-definitely more GDP!”)

An economy is not about how much you spend. The economy isn’t even the most important thing about a society.

But try telling that to the people bemoaning last week’s low GDP numbers. Try telling that to the people clamoring for more spending-spending-definitely-more-spending!

They’ll only be satisfied when the Federal government either defaults on its Treasury obligations, or more likely hyperinflates away the debt.

If you’re interested in my discussion about the end game scenario, please check out my presentation “Hyperinflation in America”.

46 comments:

  1. But once again GL: I agree with all of it but how do we educate people when schools and universities teach twisted economics. I took macroeconomics as part of an MBA. Never did we truly learn why GDP had to be grown but the message always was that it must grow or we were doomed to oblivion.

    It was only when, years later, I learned of the principles of Japanese manufacturing and, within that, the importance of eliminating the seven types of waste:
    ◦waste from overproduction.
    ◦waste of waiting time.
    ◦transportation waste.
    ◦processing waste.
    ◦inventory waste.
    ◦waste of motion.
    ◦waste from product defects

    These types of waste, when viewed more broadly, apply to the broader economy. The first, overproduction, is stimulated by our fetish with GDP. The others all apply to everyday life and ultimately the economy too.
    I always like to add the 8th waste: waste from lost ideas. If we open our minds and lose the dogma we will all be better off in the end and build a better more tolerant world.
    Oops.. rambling and ranting :-)

    A concerned Canadian

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  2. Vinny CarabilloMay 4, 2011 at 3:31 PM

    "Mr. Bernanke makes clear there will be no QE3. And he hopes that it will not have much impact when the purchases end: “We are just going to let the purchases end. Our view is that the end of the program is unlikely to have substantial effects on the economy or financial markets.”"
    http://norris.blogs.nytimes.com/2011/04/27/live-blogging-bernankes-news-conference-2/

    GL - are we screwed now? Is he lying? will he do it even though he says he wont? Will there be secret QE?

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  3. Great insight once again. Black is white, up is down, night is day ect. ect. until it all goes boom per Minsky. Take your pick of default or hyperinflation, but the Crack Up Boom is a comin'! How the sheeple believe that we are different than any other great empire throughout history is beyond me, but believe it they do while the thieves steal the last nickel from the American Treasury as the bread and circus continues uninterrupted.

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  4. Vinny, The Bernack lies through his teeth on a daily basis. In the past and under oath he said he would not monetize the debt and then he did exactly that thing. Fool me once, shame on you, but fool me twice shame on me. You won't have to wait long for whatever new flavor of Kool-Aid they will be serving for the next circus. Bring your own bread as the denarius doesn't go as far as it used to.

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  5. To "A Concerned Canadian": I recently foolishly thought I could explain the problems with our U.S. economy to a close friend and encourage her to prepare for what I believe is coming. I gave a simple explanation of what the U.S. is doing (thanks to GL's clear explanations) and references to past hyperinflationary economies and recommended she put aside a little extra food when she could. I kept it simple, didn't go into any theories or conspiracies or possible end-games. Just the facts and a mild suggestion of what she might try to do. This is a close friend of 17 years - we've been through good times and hard times and never had a "spat". Until now. I was taken aback and the venomous personal attack she leveled at me! The anger and near violence of her response to me was completely unexpected and I honestly feel, drastically unwarranted. It leads me to believe that I really never knew her at all.

    My point in relating this story is this: the "sheeple" don't want to know. they are happily asleep, going about their daily lives with no regard to the future, no matter how short term the future may be. It has nothing to do with ideology because I presented none. I gave no background, no possible causes, no political or religious connotations at all. Unfortunately, I feel the "education" boat has sailed. I was accused of living in fear. How is putting on a life jacket when you are on a sinking ship "living in fear"? I am left with the conclusion that sheeple don't know because they don't want to know. They trust in government to make everything "all better" while they live in fairy tales and disneyland. The band plays on on the deck of the Titanic.

    Thanks for the list of "wastes" - very interesting. I never took a class in economics and I find this extremely enlightening.

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  6. Gl, you just nail it!! Since the last 30 years the economy was an "ILLUSION"
    The problem is that the majority of the average Joe's in america had been indoctrinated and brainwashed to allow the 2% to loot the country, creating the "Illusion-Machine, making they believe that everything is rossy and can seat on the top of the globe, when actually the country is falling off the planet.

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  7. GL,
    Your analysis misses one big point and it destabilizes the whole argument.
    "What would happen?" you ask.

    The answer is easy and the fact that you don't address it once reveals a big hole in the foundation of your argument:

    Unemployment.

    A contracting GDP leads to higher unemployment. "What would happen?" you ask. Sky rocketing - 25%+ U3 and 40%+ U6 unemployment.

    We don't have to wonder about this. We have history to look at. The Great Depression was the last great contraction in GDP and the results were high unemployment. That contracting GDP means people out of jobs, out of homes and out of food.

    The comparison of national overspending to individual overspending doesn't follow. The individual overspends for a new HDTV. The national overspending keeps people employed (and docile - but that's another post).

    I think you should re-analyze the GDP situation and decide if "What would happen?" would be an idyllic society of a right-sized economy or a wrecked society of millions more in poverty. Believe me, if you think the rich are disproportionately benefited by high GDP, wait to see the disproportion of contracting GDP (hello Oligarchy, hello Mafia, hello '90s Russia).

    Also, consider that current government spending is increasing in no small part due to payouts to unemployment insurance, food stamps and medicaid (due to slow GDP growth) and due to more and more Boomers hitting Social Security and Medicare eligibility. Contracting the GDP more will likely cost the Government more in transfer payments (redistributing the wealth?) than current spending on things that might actually produce something (a road, a bridge, a bomb).

    Anyway, I think you are right that we will inflate away our debt (FOFOA recently made it very clear that it's in the Government and "Elite's" interest to do so - you should definitely read the piece). But I think the idea of contracting GDP and austerity measures will lead to greater social disorder and misery (and bloodshed?) then the current inflationary course. In either case, we have some fiddler paying coming due.

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  8. To Doug. Yes a contraction will be painful. Yes there will be more unemployment and more piper to be paid. However would you rather die a horrible bleeeding death over time from a thousand rusty cuts, or would you rather stop the madness and try to salve some of the wounds and stop some of the blood flow by cutting back on the number of rusty cuts? The choice is not one of things getting worse if we do. The choice is how do you want to die? Little by little with no hope,or with some hope that those that do survive will be smarter, better, and be able to rebuild all that has been broken?

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  9. "This is a close friend of 17 years - we've been through good times and hard times and never had a "spat". Until now. I was taken aback and the venomous personal attack she leveled at me! The anger and near violence of her response to me was completely unexpected and I honestly feel, drastically unwarranted. It leads me to believe that I really never knew her at all."

    You are invading her contrived and very surreal world where the good times continue to infinium, she never studied exponential math or maximum potential, with no hiccups allowed that would screw up her current paradigm.

    Always remember that,

    "It's hard to get a man to understand something when his job depends on him not understanding it."

    Welcome to human nature when backed into a corner, and you have seen nothing yet, as we are damn sure not in 1937 Kansas anymore.

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  10. Gl,

    Have been enjoying your blog and all the comments that follow suit. Your observations are very keen that help many of us cut through the BS as seen on MSM.

    Yes, the US has it days in the sun and now a mega-storm is brewing in the horizon. Being in the relatively young mid-late 20's crowd. I would say roughly 99% of them don't have a clue about the current situation and most of them don't even have any assets/jobs to begin with thanks to the recent public con job, thievery and robbery. I'm afraid that you would have one (or two) lost generation that probably too ignorant to understant they're being screwed by the current unsustainable status quo and many of the get-rich-quick schemes from the current generation.

    This country could have been in much better shape if basic "real" economic/personal finance in highschool or college. But that wouldn't sit very well with the banksters and the govt wouldn't it if people would "get it"?

    Heck they are so juiced up with the reality TV junks, sitcoms and the like that not much else matters. And let not even discuss their spending habits.

    The fall of ancient Rome is due to the corruption and excessive spending by the Roman govt and its people (also juiced up in many of the reality gladiator/racing games). Also look what happened to China in the 19th and early 20th century. A combination of bad govt, opium consumption, and foreign interests pratically sank the country into chaos. History got a nasty habit of repeating itself so it appeared that we [America and maybe the world] might havea aready bought a one way ticket to oblivion and as for the return ticket is well....we haven't arrive at oblivion yet.

    Like Arnie would say "Get ready for the big surpise". Really?

    Just the usual useless rant.

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  11. Krugman hasn't been asking for more debt. He's been asking to get the fiscal house in order as much as you are. He touted the People's Budget that was introduced by the Progressive Caucus of the Democratic party. One of it's main themes was cutting military spending (which is what you wanted) and raising taxes on the wealthy (which is also what you wanted, GL).

    Take a look at the People's Budget from the Progressive Caucus and then take a look at what Paul Krugman said about this particular budget. You will be surprised that he says many of the same things that you just stated, GL.

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  12. @Anon12:46PM

    My mind on this has recently been stuck on this idea:
    "It is true, we are at the end of one of the longest-running "easy money camp" regimes. And these things usually swing back to the other side. But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it's usually the blood of the hard money campers that is shed. (See: the French Revolution.)"
    http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html

    Don't want to hijack GL's blog to flog FOFOA but the link above may be one of the most significant treatises on Hyperinflation in a long time. It's converting deflationists like Ackerman and it establishes some paradigms that are crucial to understanding the issue.

    All that said, I think the option is between a thousand rusty metaphorical cuts and actual bloodshed. It's also somewhat inevitable that we will have the hyperinflation, so it's not really an option to "stop the madness". The madness is at the tipping point. It's a matter of surviving the madness now. And that's why I look forward to GL's SPG.

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  13. http://www.nytimes.com/2011/04/25/opinion/25krugman.html?_r=3&ref=opinion

    Paul Krugman on the People's budget and his request to cut the military and raise taxes on the wealthy.

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  14. @Anon1:27PM

    It's not popular to defend Paul K here. Nevertheless, reading him over the long term (and throwing out his anti-Republican party snark) you begin to see that he's not an idiot. He recently recalled a column from 2001 where he decried the Bush Tax Cuts because without them we would have a surplus that could be used to offset the impending and inevitable deficits that would come in the next recession when Keynesianism calls for increased government spending. His point being that Keynesianism isn't just spend, spend, spend all the time. It's spend in the bad times and save in the good times (so you can spend in the bad times). When the Bush Administration began they said "it's your money and we are giving it back to you" turning a (potential) surplus over the 2000's into a horrible deficit and debt and no preparation to handle the GFC other than to print.

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  15. And PK calling for keeping the surplus and not returning it to the tax payers:
    http://www.nytimes.com/2001/08/26/opinion/reckonings-that-sinking-feeling.html?pagewanted=all

    All this relatively hindsight=20/20 at this point. Looking forward we are screwed. The key now is to find out how to keep you and your family from getting destroyed instead of just getting screwed.

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  16. Here is the problem: The United States Federal Government spends more money than it takes in.

    Therefore every day the government’s debt increases.

    Very soon the debt ceiling will have to be raised. This is like your ordinary citizen asking the credit card company to raise his limit on his credit card.

    Of course, as we all know, this cannot go on forever, the day of reckoning will come.

    The Federal government is in a huge predicament, it either has to cut spending by about 40% or raise taxes by the same amount.
    Both actions have huge implications for American citizens.

    If the debt ceiling cannot be raised (unlikely) then the USA will have to default, which has never happened yet.

    My guess come May, is that the debt ceiling will be raised to a whopping $16 Trillion. This will equate to every man, woman and child having to pay $53,333 to eliminate this debt.
    So what will happen?

    First, governments, institutions, investors, hedge funds will start to reduce their holdings of US dollar denominated investments.

    This will cause USA government to print more dollars to cover its expenditures, thus more debt equals more interest payable to service the debt, and it’s a self perpetuating cycle.
    Many countries have started to move away from the dollar, and trade in other currencies, Kuwait discontinued pegging its currency exclusively to the dollar, preferring to use the dollar in a basket of currencies. Syria made a similar announcement on June 4, 2007.

    In September 2009 China, India and Russia said they were interested in buying gold to diversify their dollar-denominated securities.

    As more and more countries start to diversify away from dollar denominated assets, we will at some point see a sudden rush for the exits, this is what is termed Hyperinflation.
    Nobody wants the dollar, it becomes worthless paper.

    So how can your ordinary citizen protect themselves?

    Below are a few examples of simple actions that will protect you when Hyperinflation strikes:

    1.Exchange dollar cash assets into other currencies, Swiss francs, Canadian Dollar, Pound, and Aus Dollar.
    2.Liquidate assets in American stocks, and revert to hard physical cash in other currencies, not deposited in a bank.
    3.Accumulate stores of essentials, food, medicine, consumables, everyday items that would not be available when the US dollar collapses.
    4.Maybe own a gun, I said maybe, I am European!!
    5.Have an exit strategy, where can you go?
    6.Any others you can think of………

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  17. GL -

    That's unbecoming to put Markus Ruhl in such an unfavorable light...

    Seriously, the picture of Ruhl is an old 'photoshopped' picture of him back stage during a contest. He's all the bit impressive - even without the photoshopping, but enterprising souls out there can't help themselves I guess.

    You didn't know this of course, so my comments are no slam on you.

    But let's give 'ole Markus a break. He's a good fellow - I've actually met and talked with him.

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  18. Anon @9:37 AM,
    Nickels will be removed from circulation before The Thieves can get their hands on the last one.

    Hoarding of coin is one of the signs of the times. Only the Fed knows how many nickels are in circulation. They are not telling. The metal value of the nickel has been greater than 5 cents for some time, and the coming inflation will bump it even higher.

    The empty nickel tray in the change drawers of cash registers across America will be one of the indicators of a Big Shift in popular thinking.

    Watch for it. It's coming.

    K Smith

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  19. @ Gonzalo: excellent, excellent, excellent piece.

    Funny you use the same word I recently thought of to be missing in all economic statistics: quality.

    Besides: central banks, with their irredeemable, fractional money, only create wasteful consumption bubbles, not a real growing economy, which fulfills basic needs. Those bubbles pop, not the real needs (healthy food, clothing, housing, etc) themselves. Celebrate the crises: all the released manpower and capital could and should be used for the real needs of everybody.

    End the central banks, restore the gold standard!

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  20. To many overlook the importance of a central bank that makes overspending possible. Without a central bank and banking "regulation" specifically ordering fractional reserves and preventing redemption of specie the government simply COULD NOT spend more than it takes in...

    Audit the Fed and then repeal the Creature from Jekyll Island.

    America needs to be reminded what it used to mean to be American, it wasn't standing in line for a handout from the generous (with stolen money) government.

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  21. GL,
    Totally agree! I experienced the nonsense of a theoretically calculated GDP firsthand. I used to live in a communist-run Poland when they measured GDP based on how much coal and steel was used up in manufacturing some useless obsolete or unsaleable heavy machinery and military equipment, and not much else. Government-paid economists also used to behave just the same way as yours now - they used to write extremely convincing articles about the superiority of their socialism. In comparison, you probably shouldn't be so sarcastic about the real hookers...

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  22. So much for the "service economy". Most services are EXPENSES on any income statement.Yet the US's GDP should be spelled "GDE":- Gross Domestic Expenses-.

    A "Service Economy" is what you get after "they" outsource the means of production but want to sell those now foreign goods to the millions of newly unemployed locals.

    Take CNN's Fareed Zakaria, born and raised in Mumbai:

    -Oh, don't you manufacture the goods that you use
    in your daily life, leave that to us the BRICS.
    -We enjoy the benefit of voluntary slavery. Invent something Scy-Fy, like.... let's see NANOTECHNOLOGY!!- Just remember, once you have figured out how to package that, WE WILL TAKE IT FROM THERE!!

    Here's the order:

    1. Send us the Factory
    2. After a while, close it down and hire OUR factory.
    3. We will lease you money to buy anal gesics for your butt pain.

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  23. Forget the economic fundamentals-they are sort of irrelevant. What's going on is a tried and true method that the US has used to bring its opponents down, in the past, and is repeating it again now, against China principally.
    The trick is to cause, in your victim, excessive credit usage and excessive debt build up, with inflation in the process, and then deflate it. Boom bust. Your victim goes bust and so does their currency. And collateral damage? Hard cheddar, old boy, just the price of war.
    Anyone recall the inflationary boom in the late 1980's when Japan was the recipient of enormous praise for their economic model? And the whole planet experienced an inflationary boom at the time. And then it crashed when interest rates were jacked up. And the boom in the Asian tigers and then collapse? And what's happening now to China? They've had 2 booms - the lead up to the GFC, and now the stimulation to correct the downturn from the GFC. One of the head boys at Goldman Sachs has just gone 'concerned' about China - inflation and slowing growth there. Signal for money to flee from China?????
    Interesting times we live in, that's for sure.

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  24. Hey Gonzalo,

    I am really enjoying your articles. You are admirably prolific and yet I'm even getting to work my way through the artifacts of the months I missed before I 'came to'. Very insightful.

    I've been reading elsewhere from both inflationary and deflationary camps, and I've come to think isn't it the same thing? If America experiences massive hyperinflation, then what will happen here in Canada? And in Europe, and China? Now that the global economy is integrated the USA will be gobbled up from the outside as our currencies skyrocket in value against the US dollar. Rome will be sacked once and for all.

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  25. Jack in the PhilippinesMay 5, 2011 at 8:16 AM

    The other reason why fixating on GDP is nuts is because a large part of what it measures is utterly unproductive. In your example, it would be like spending most of your $3,500 a month paying someone to repeatedly interrupt you while you're working. In America we are getting close to the point where most of the economy is dedicated to making, complying with, documenting, or policing endless useless rules. I would bet that if it were possible to measure the fraction of the GDP representing goods and services that people would actually willingly pay for if not under coercion, it would be far less than half.
    The problem is, as Doug notes above, if you stop doing all these unproductive things, most people would have no way to obtain a living. I too am a libertarian/conservative, but I suspect that what we need may be more redistribution. I would rather pay the legions of bureaucrats to stay home, tend their gardens, and leave me alone, than continue to pay them for "working".

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  26. There is no meaningful austerity in the UK:

    http://www.telegraph.co.uk/comment/columnists/christopherbooker/8423832/Cuts-What-cuts-Spending-is-rising.html

    That everyone has become convinved that there is just demonstrates the power of the MSM (and in particular, the soft-left BBC) to spread a maim that they think will damage the evil "ideologues" on the right.

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  27. Forbes-400 2010 wealth list

    The total assets of the current list represent $1.37 trillion with a T. Wow.

    Take it all. Redistribute it ...

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  28. GL and All,

    I am just your average joe who owns a small buiness. I have been fortunate to have had been born with an incredible sense of intuition.

    Never in my life had I really paid attention to anything outside my little "bubble" till recently...

    About six months ago I woke up with the familiar gut feeling, I mean a 5 alarm I'm never going to sleep again until I find out whats up alarm. I started peeling layers of our ridiculous economic onion to find that our country seems to be in a real bad way, and it the immediate future doesn't look so hot.

    Wow, I feel like such a "doomsdayer", but can't shake the feeling, and can't stop preparing.


    Globalization.. Why?
    QE... WTF?
    "FREE MARKET" Really?
    "Greenspan putt"
    "FOMC" WHAT!!!!!???
    ETC...............!!!
    The most powerful nation takes ten years to catch one guy? Million dollar man? multi-trillion dollar man..Rating boosts for everyone.
    Why does the Gov't break all the rules?

    I served in the Navy for 9years, believed in us, now what? I feel betrayed, awake.. I watch everyone around, feel like I'm on a cattle ranch waiting for the slaughter.

    Prepare, become sustainable, hope for peace (the peace thing is a joke btw). Funny, I could go on forever and I don't think I'm alone..

    I believe we have all given control and its too late..

    Want off this ride, probably going off grid at some point, maybe won't have a choice....

    Peace..

    The Landscaper

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  29. GDP was actually invented by Keynesians in the 1930s to promote the theory. Previously the economy was measured by the means of production, the critical factor that even the Marxists understand.

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  30. Paul Krugman is more full of shit than a stuffed Christmas Turkey. He couldn't find his way out of a paper bag with written direction on his best day. You can never cure a debt problem with more debt, and it's history speaking and not me.

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  31. The clueless are truly in charge. And, as to "allowing" the rich to get so much richer - can you plan their lives for them, GL? Are you the one to tell them how much cash is OK, and how much too much? If not you, who? And if that doesn't either lead to or fall out from "centralized planning", which worked so well in Cuba, North Korea, Stalin's Russia, Mao's China, and elsewhere, how do you describe / prevent it?

    There are times you seem to prefer a totalitarian hand above us all.

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  32. If you go to the US Treasury and check their balance sheet they wrote checks for over $11.1 trillion dollars in 2010 much more than what the White House stated.

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  33. GDP is a BS metric leading to BS decisions.
    Government Spending, Deficit, Debt or something like Defense Spending as a percent of GDP are BS metrics leading to BS decisions.

    The purpose of GDP is to mask government spending and must be eliminated.

    Capitalism relies on the efficient allocation of capital. Government spending uses political allocation of capital which is anything but efficient. Government spending is overhead and almost always slows economic growth and should not be undertaken lightly.

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  34. GDP is little more than measure of effort, not achievement (or anything worthwhile for that matter). Indicators and goals that do not reflect the true welfare of any system will never measure results.

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  35. Your perspective was right on for 1995 but if the government cuts spending now you would see the economy dry up. Then the people would scream for the government to fix the economy leading to even more government spending. With our present situation having DC being one of the only parts of the country that is prosperous the only option left is BANKRUPSY.

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  36. GL, you kinda lost me on that whole OBL conspiracy thing, but you have made a good comeback with this article about the fallacy of GDP. If you took away the mask of deficit spending, our economy would be shrinking by 8-9% per year, not growing.

    Also, if GDP was such an important goal for America, and if deficits don't matter, then why not borrow 20% of GDP to obtain 12% growth? How about we borrow 40% to obtain 32% growth?

    The Keynesians will always tell you that a country's balance sheet is different from an individuals. They are right to some extent, but the same general principles apply. An individual can't claim a cash advance on a c.c. as income. A rational unemployed individual wouldn't take a cash advance on a c.c. in order to keep up his/her lifestyle. That's what the US is doing. Not only is it unethical and immoral, but it's also forcing future generations into debt bondage, and I would even go so far as to say that it is borderline generational extermination.

    I can't think of one reason why anyone under 45 years of age would support Keynesian economics. They are basically voting themselves in a weaker economy and higher taxes at some point in the not so distant future.

    BTW, This is not a problem to be viewed through a left/right prism anymore. It's far greater than that. Anyone thinking that a Republican can get elected and clean up house is smoking something.

    The truth is, I think the damage is done, we'll all be eating shit sandwhiches no matter what happens from here. Opt 1 - we find some fiscal and monetary religion and finally cut spending and currency manipulation = great depression. Opt 2 - status quo = hyperinflation.

    It boils down to a few key questions for me...Will the Boomers be willing to sacrifice their treasure (which is made mostly from borrowed money) in order to preserve the Republic for future generations? Will there be an uprising in the streets with people begging for a Great Depression over a Hyperinflation? Will we see picketing signs with "cut my SSI" or "lower my gov't pension" or "take away my farm subsidy" or "I'd rather starve than take your cushy gov't job"?

    Of course, the answer to these questions is simply no. Therefore, status quo wins, hyperinflation is the only way out.

    TJ

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  37. consider this: roughly 70% of the US GDP is trade which consists of roughly 70% of imports. Do we really count Chinese profits as our own? that is a deliberate deception of the international accounting standards. By the way, Mr. Obama's salary is allowed for in the GDP just as well. How on earth could the Public salary be counted as a surplus to the country's economy? it is strictly spending!

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  38. There is a reason why they dont teach these things in schools. Everything is a lie and college isnt even worth paying for anymore, especially when all you are taught are lies.
    The silver dollar value, along with gold, is screaming that something is wrong with our economy.

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  39. The simplified equation for national income is an accounting identity that measures spending: Y = C+I+G + Net Imports. C being private consumption, I is investment (everything not consumed) and G which is government spending.

    The Keynesian assumption is that all spending is equal. But if G is spending money to destroy resources via the military or to study the sex life of the liverwort is this spending equivalent to spending on an automobile or home or education in terms of benefit to society.

    I think not. Perhaps G should be negative adjusted. Perhaps (-0.8G). Every dollar spent by government makes us worse off having robbed the private sector of spending in the way it prefers.

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  40. Very insightful article. Some critical points:
    -The Soviet Union's GDP grew nicely yet few economists would argue that much real growth occurred.
    -A fraudulent GDP double-count: We have been taught to think of government spending as somehow separate from the the private sector- but it's the same income, already earned by the private sector, that simply changes form (in taxes)! The rest of government spending, as most of your readers now, is fed by what the taxes can't: Bond issuance and base money from the central banks.
    -Next, we keep forgetting nominal vs. real growth. Once you get past the fraud of inflation statistics and replace them with monetary growth, a clearer picture of real growth comes into view.
    -Lastly, GDP inexplicably lumps Consumption and Investment together. To understand the meaning of those two economic activities is to know that they cannot be lumped together: A world without return on investment.

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  41. while i'm long gold and believe the big bada bust is coming alright.......the us is not greece,printing the world's reserve currency....yes for now......we are not revenue constrained......but inflation from qe2 is a fact and we have been on a credit binge from '87 alright.

    fiat goes bust for a variety of reasons.

    i enjoy your blog.

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  42. It wasn't Hippies that got us into, now, four wars.

    It isn't Hippies that are responcible for over half of the U.S. budget being spent on wars and destruction.

    It isn't Hippies that lowered taxes on the uber rich.

    I can't wait for a Constitutional Amendment to make it legal to shoot Christians.

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  43. How about redefining GDP--or replacing the figure--with something approximating Production (GDP less additional annual debt)?

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  44. I can understand how looking at GDP as spending one might draw the conclusion that a reduction in spending could be good for our nation's well being. Naturally, GDP does not measure social well being but economic activity.

    We know from experience that GDP will increase from tearing homes down just as it will increase from building homes. We know that women leaving their children at home to join the work force will increase GDP but not necessarily will society be better off from this event.

    GDP can be calculated three ways and another way to calculate GDP is by summing income( wages, salaries, rents, profits, and interest) and one would be hard pressed to find anyone that would claim to be better off with a reduction in income; thus, thinking of improving our situation by reducing spending is ineffect suggesting we would all prefer less income. I don't agree that is consistent with our behavior.

    We do have a problem with debt but it is the use of the debt and not necessary the size of the debt. You see, much of our debt does not pay for itself, like consumer credit. Most everyone can obtain consumer credit but few can obtain capital credit which pays for itself and leaves and income stream that increases ones wealth.

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  45. Gonzola R.I.P. ?

    Hello Gonzola,

    “Some readers have criticized me for starting up The Strategic Planning Group.”

    Yes. I can follow them and I can follow you in the need to earn money. It’s like musicians. They love it to make music but don’t know how to make money out of it in the internet world full of free-riders. People who want to see the fireworks without paying for it.

    My opinion is that a closed to non-members site, will be the end of your fantastic work. (R.I.P.)

    Let’s take a closer look. You got talents for research, writing and explain economics. In my opinion can only a free share be the right way. But… yes I know you need money to.

    Some brainstorming
    • Travel around the world and give good paid performances for interested business persons, universities , bankers etc.;
    • Become a part-time professor for a good wage;
    • Write and sell books;
    • Become a highly paid personal adviser for the rich and them who wants to be rich;

    I hope you will find the right way and live a long and happy life with sharing your thoughts for free and paid.

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  46. But if you think as I do that the Bureau of Labor Statistics is off in its inflation estimates, then at this pace, the American economy is probably contracting.

    Steroids Canada

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If you have a question or a private comment, do feel free to e-mail me at my address expat229@gmail.com.

GL