Tag Archives: GDP

Interest rates, money supply, and GDP, Alasdair Macleod

Alasdair Macleod is one of the few economists out there who actually touts honest economics and is not just a political whore. From Macleod at goldmoney.com:

That the world is on the edge of a monetary and economic cliff is becoming increasingly obvious. And becoming more obviously permanent than transient, price inflation will almost certainly lead to rising interest rates. Rising bond yields, falling equity markets and debt-triggered insolvencies will naturally follow.

According to the economists prevalent in official circles, a prospective mix of so-called deflation and rising prices are contradictory, should not happen at the same time, and therefore cannot be explained. Yet that is the prospect they now face. The errors in their lack of economic judgement have evolved from the time when central banks began to manipulate their currencies to achieve economic objectives and then to subsequently dismiss the evidence of policy failure. It has been a cumulative process for the Federal Reserve and the Bank of England since the 1920s, which can only now end in a final catastrophic failure.

The denial of reasoned economic theory, embodied in a preference by state actors for state-driven outcomes over free markets, has led to this cliff-edge. This article explains some of the key errors in economic and monetary theory that have taken the world to this point — principally the relationships between interest rates, money supply, and GDP.

Introduction

Following the First World War, central banks have not only acted as lender of last resort, which was the role the Bank of England and its imitators took on for themselves in the preceding decades, but they have increasingly tried to manage economic outcomes. The trail-blazer was pre-war Germany which grasped Georg Knapp’s state theory of money as justification for Prussia’s socialism by currency, eventually ending with the collapse of the paper mark in the post-war years. But the genesis of today’s monetary policies has its foundation in the then newly constituted Federal Reserve Bank, chaired by Benjamin Strong, who in the 1920s collaborated with Norman Montague at the Bank of England who was struggling to contain Britain’s post-WW1 decline.

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How Long Can Lies & Control Supplant Reality & Free Markets? By Matthew Piepenburg

Financial asset prices have completely detached from the underlying economy. From Matthew Piepenburg at goldswitzerland.com:

The facts of surreal yet broken (and hence increasingly controlled and desperate) financial markets are becoming harder to deny and ignore. Below, we look at the blunt evidence of control rather than the fork-tongued words of policy makers and ask a simple question: How long can lies & control supplant reality?

The Great Disconnect: Tanking Growth vs. Supported Markets

It’s becoming harder to keep up with the increasingly downgraded GDP growth estimations from the Atlanta Fed.

As recently as August, its GDPNow 3q21 estimates for the quarterly percentage change was as high as 6%.

But within a matter of weeks, this otherwise optimistic figure was cut embarrassingly in half.

Last month their GDP forecast sank much further to 0.5%, and as of this writing, it has been downgraded yet again to 0.2%.

GDPNow Real GDP estimates

Needless to say, 6% estimated growth falling to effectively 0% growth is hardly a bullish indicator for the kind of strengthening economic conditions which one might otherwise associate with risk asset prices reaching all-time highs for the same period.

The current ratio of corporate equities to GDP in the U.S. (>200%) is the highest in history.

Markets are at an all-time high according to the buffett indicator

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Money and statistical delusions, by Alasdair Macleod

Much of this article will be tough sledding for noneconomists. For the short version and the upshot of the article, skip to the last section, GDP Fallacies. From Alasdair Macleod at goldmoney.com:

I can prove anything with statistics, except the truth

— Lord Canning, c. 1819

Does Canning’s aphorism still hold true, given that data collection and statistical analysis have progressed beyond all recognition in the last two hundred years? This article tests that proposition.

It is still true, because of the interests for which statistics are deployed. We know, or should know, that CPI indexation of prices fails to reflect the true rate of decline in the purchasing power of fiat currencies. That is at least a simple case of governments saving money on indexation. But being economical with the statistical truth is a far wider practice encompassing input suppression, misleading deployment, and their use to support beliefs and preferred outcomes instead of backing up properly reasoned economic and monetary a priori theory.

This article finds that the application of all these methods corrupt monetary statistics, including the three principal components of the equation of exchange. This analysis is sparked by recent changes to the definition of M1 money supply in the US.

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Statistics, lies and the reservoir effect, by Alasdair Macleod

This article is a little denser than usual, but like everything Alasdair Macleod writes, is well worth plowing through. From Macleod at goldmoney.com:

This article debunks the misconception that GDP represents economic health. It explains how monetary flows have led to markets in financial assets inflating while non-financials in the GDP bucket are in deep distress. And why, at a time of rapid monetary expansion, all attempts to quantify the effects of monetary policy on the real economy become even more meaningless.

Financial markets are acting like an inflation reservoir. And when the dam bursts bond yields will rise substantially, undermining values of other financial assets. The non-financial GDP economy will then face the full force of monetary depreciation, with calamitous consequences for ordinary people: the unemployed (of which there will be many), the low-paid and retirees living on meagre pensions and savings.

Macroeconomics have led state planners in all high-welfare economies headlong into policies of monetary and economic destruction from which there is no politically acceptable means of escape. 

Introduction

Only those with a lack of perception are unaware that their nation’s economy is in deep trouble. It is far worse than just a pandemic-induced disruption in our lives which in a little time will return to normal. Lest we forget, liquidity strains had already appeared in the US repo market and forced the Fed to reverse its policy of reducing its balance sheet before the coronavirus even existed. And before that, the trade tariff war between the US and China had led to international trade grinding towards a halt.

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The Worst Unemployment Spike In U.S. History – 1 Out Of Every 4 Workers Has Filed For Unemployment Benefits In 2020, by Michael Snyder

It’s hard to argue we’re not in a depression with those numbers. From Michael Snyder at themostimportantnews.com:

Even though most U.S. states have begun the process of “reopening” their economies, the unprecedented tsunami of job losses that we have been experiencing just continues to roll on.  On Thursday, we learned that another 2.4 million Americans filed initial claims for unemployment benefits during the previous week, and that brings the grand total for this pandemic to a whopping 38.6 million.  To get an idea of just how badly this swamps what we witnessed during the last recession, take a look at this chart.  This is the biggest spike in unemployment in all of U.S. history by a very wide margin, and analysts are expecting another huge number once again next week.

After my father got out of the U.S. Navy, he worked as a math teacher for many years, and throughout my life I have always had a deep appreciation for numbers.

And in this case, the numbers are telling us that we are facing something truly horrific.

During the month of February, the number of Americans that were currently employed peaked at 152,463,000.

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GDP Growth Isn’t the Same Thing as Economic Growth, by Frank Shostak

Frank Shostak explores the fraud that is the Gross Domestic Product statistic, and its wider implications. From Shostak at mises.org:

To gain insight into the state of an economy, most financial experts and commentators rely on a statistic called the Gross Domestic Product (GDP). The GDP framework looks at the value of final goods and services produced during a particular time interval, usually a quarter or a year.

This statistic is constructed in accordance with the view that what drives an economy is not the production of wealth but rather its consumption. What matters here is the demand for final goods and services. Since consumer outlays are the largest part of the overall demand, it is commonly held that consumer demand is the key driver of economic growth.

All that matters in this view is the demand for goods, which in turn will give rise almost immediately to their supply. Because the supply of goods is taken for granted, this framework ignores the whole issue of the various stages of production that precede the emergence of the final good.

However, in order to manufacture a car, there is a need for coal to be employed in the production of steel, which in turn will be employed to manufacture an array of tools. These in turn are used to produce other tools and machinery and so on, until we reach the final stage of the production of a car. The harmonious interaction of the various stages of production results in the final product.

Within the GDP framework, the aspect of funding economic activity never emerges. In this framework goods emerge because of people’s desires. In the real world, it is not enough to have demand for goods – one must have the means to accommodate people’s desires. The means are various final goods that are required to sustain various individuals in the various stages of production.

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How “Wealthy” Would We Be If We Stopped Borrowing Trillions Every Year? by Charles Hugh Smith

Charles Hugh Smith asks the trillion dollar question. From Smith at oftwominds.com:

These charts reflect a linear system that is wobbling into the first stages of non-linear destabilization.
The widespread presumption is the U.S. is wealthy beyond words, and will remain so as far as the eye can see: wealthy enough to fund trillion-dollar weapons systems, trillion-dollar endless wars, multi-trillion dollar Medicare for all, multi-trillion dollar Universal Basic Income, and so on, in an endless profusion of endless trillions.
Just as a thought experiment, let’s ask: how “wealthy” would we be if we stopped borrowing trillions of dollars every year? Or put another way, how “wealthy” would we be if the rest of the world stops buying our trillions in newly issued bonds, mortgages, auto loans, etc.?
The verboten reality is our “wealth” is nothing but a sand castle of debt. Take away more borrowing and the castle melts away. I’ve gathered a selection of charts that show just how dependent we are on massive debt expansion that continues essentially forever, as any pause in debt expansion will collapse the entire system.
Corporate buybacks have powered rising corporate earnings–and the buybacks are funded by debt. Corporate debt has exploded higher in the past decade, enabling stock buybacks on an unprecedented scale.
Government debt–federal, state and local– is rising an exponential rates.We’re not paying for more government programs with earnings–we’re simply borrowing trillions and hoping we can borrow the interest payments that will also rise along with the debt.
Household debt, student loans, auto loans–all are soaring. The corporate sector, government and the household sector–all are living on borrowed money, and relying on magical thinking to mask the inevitable consequences.
Here’s debt to GDP. Yes, the economy expanded, but debt expanded much faster. Every additional dollar of GDP now requires multiple dollars of new debt.

Q1 2018 Was A Disaster For America, by Chris Hamilton

In the first quarter, federal debt grew $621 billion. The US economy grew, if you can call it that, $110 billion. So ever dollar’s worth of growth cost over five dollars. That sounds like we’re heading backwards. From Chris Hamiton at economica.com:

In the first quarter of 2018, the financial and investing industry went into overdrive detailing the upside of the 2018 tax cuts and the positive impacts of a “business friendly” executive and congressional branch on business in America.  The stock market hit record highs and the Federal Reserve proclaimed such good times as to raise their economic outlook and increase the likelihood for interest rate hikes.

From January 1, 2018 through March 28, 2018 (Q1), real GDP likely grew $110 billion (a 2.5% rise on an annualized basis).  However, the fly in the ointment…according to the Treasury, from Jan 1, 2018 through March 28, 2018 (Q1), federal debt rose by an astounding $621 billion dollars (a 13.1% increase on an annualized basis).  The chart below shows the quarterly change in federal debt versus the quarterly change in real GDP since 2000.  Q1 2018 was the second largest quarterly growth in federal debt, only surpassed by the massive free spending of Q4, 2008.

Or, if we just subtract the quarterly growth in federal debt from the growth in real GDP…chart below. 

Unfortunately, Q1 2018 is one of the worst quarters on record with the growth in federal debt doing laps around the “growth” in Gross Domestic Product (which of course counts all the federal debt fueled activity?!?).  Incurring over $621 billion in new debt (to be serviced ad infinitum) to produce just over a $100 billion in new economic activity is something only government could achieve.

However, it gets downright miserable if you add in the massive $500 to $750 billion quarterly growth of unfunded liabilities alongside the growth in federal debt.  Together, the UL’s and federal debt are rising $3 to $4 trillion annually while GDP is rising around a half trillion.  The tax cuts and fast rising costs of social programs will continue to see deficits rise far faster than economic activity or resultant tax revenue.

How this can be reason for celebration…well, I guess it’s all a matter of perspective.  The US can never grow it’s way out of this hole…but the Fed and federal government is the best leadership money can buy.  In real time they are choosing (and aligning themselves with) the minority who will end up winners and leaving everybody else to endure the losses as this all shakes out.

To continue reading: Q1 2018 Was A Disaster For America

The Bonfire Burns On, by John Mauldin

Two things that sound the financial alarms: US credit market debt is about 350 percent of GDP, and cash allocations in mutual funds are at multi-decade lows. From John Mauldin at mauldineconomics.com:

“Life invests itself with inevitable conditions, which the unwise seek to dodge, which one and another brags that he does not know, that they do not touch him; but the brag is on his lips, the conditions are in his soul. If he escapes them in one part they attack him in another more vital part. If he has escaped them in form and in the appearance, it is because he has resisted his life and fled from himself, and the retribution is so much death.”

– Ralph Waldo Emerson, “Compensation”

Bonfires are fun to watch, but they eventually burn out. Human folly apparently doesn’t, so we just keep adding to the absurdities. The volume of daily economic lunacy that lights up my various devices is truly stunning, and it seems to be increasing. I shared a little of it with you in last week’s “Bonfire of the Absurdities.” Since it’s a holiday weekend and I was traveling all week, today I’ll just give you a few more absurdities to ponder. And this shorter letter will lighten your weekend reading load.

First, let me thank everyone who took my advice to register early for my next Strategic Investment Conference, March 6–9, 2018, in San Diego. Hundreds of you are now confirmed to attend. I know many more intend to do so. Sadly, we can’t accommodate an unlimited number of you. I can’t say when we will reach capacity, but I hope it is soon. I am in negotiations right now with a very familiar name whose economic views are, shall we say, different from mine. Our idea is to debate those differences in front of an audience. Fireworks will likely ensue. But, to get this to happen, I need some numbers to line up. You can help by registering for the conference now. Click here for more information.

Now, on with the absurdities.

Leverage, American Style

When I asked my “kitchen cabinet” of friends for instances of the absurd, Grant Williams sent a monumental slide deck. I guess I should have expected that, as the absurd is one of his specialties. My computer almost melted trying to download the deck, but it finally finished and was worth the wait. Here is just one example of craziness.

This chart is straightforward: It’s outstanding credit as a percentage of GDP. Broadly speaking, this is a measure of how leveraged the US economy is. It was in a sedate 130%–170% range as the economy industrialized in the late 19th and early 20th centuries. It popped higher in the 1920s and 1930s before settling down again. Then came the 1980s. Credit jumped above 200% of GDP and has never looked back. It climbed steadily until 2009 and now hovers over 350%.

To continue reading: The Bonfire Burns On

GDP Is Bogus: Here’s Why, by Charles Hugh Smith

The title is not hyperbole. GDP is in fact bogus, and the article offers a concise and easy to understand explanation why. From Charles Hugh Smith at oftwominds.com:

Here’s a chart of our fabulous always-higher GDP, adjusted for another bogus metric, official inflation.
The theme this week is The Rot Within.
The rot eating away at our society and economy is typically papered over with bogus statistics that “prove” everything’s getting better every day in every way. The prime “proof” of rising prosperity is the Gross Domestic Product (GDP), which never fails to loft higher, with the rare excepts being Spots of Bother (recessions) that never last more than a quarter or two.
Longtime correspondent Dave P. of Market Daily Briefing recently summarized the key flaw in GDP: GDP doesn’t reflect changes in the balance sheet, i.e. debt.
So if we borrow money to pay people to dig holes and then fill them with the excavated dirt, GDP rises to general applause. The debt we took on to fund the make-work isn’t accounted for at all.
Here’s Dave’s explanation:
Once I learned about accounting, I figured out why the GDP metric wasn’t sufficient. What is missing?
The balance sheet.
Hurricanes are a direct hit to your nation’s balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the “equity” part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred.
Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased.
We know this because we use the balance sheet equation: equity = assets – liabilities. Equity is another word for wealth.
Before hurricane:
wealth = (house + car) – (home debt + car debt)
After hurricane, you rebuild your house, and buy a new car, using borrowed money:
wealth = (house + car) – (2 x home debt + 2 x car debt)
Wealth (equity) has declined by the sum (home debt + car debt)
So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn’t actually matter; that equity is just gone. Destruction is always a downside for equity – even if there is a temporary positive impact on the income statement.
To continue reading: GDP Is Bogus: Here’s Why