Friday, January 21, 2011

GDP Growth

This is so alarming as to be nearly unbelievable. Think long and diligently about what this means. When and how does the illusion end? How does it manifest itself?

This post is pulled directly from Karl Denninger's Market Ticker. My commentary follows.

To properly look at GDP in terms of actual economic progress one must back out all the borrowing that takes place during the same period. That is, the proper way to look at GDP is to subtract back out that which is paid for not with today’s output, but with promises to pledge tomorrow’s. The reason for this is clear – you may in fact only spend a dollar once. When looked at this way one gets a very different view of “growth” in the economy, and the depth of the hole we have dug for ourselves becomes clear.

There has been no actual positive GDP growth during the entire period from 1953 onward – until the 4th quarter of 2009, and since 1980 the true GDP numbers, when one looks at output (not what one “pulls forward” via debt) has been hideously bad. The spike upward in actual debt-adjusted growth that began in the 4th quarter of 2009 and peaked in the 1st quarter of 2010 was due to total systemic debt reduction – the very thing the government is trying to prevent, but which is necessary to bring the economy back into balance.

This, incidentally, is why median incomes haven’t moved upward at all in the last decade and why it seems to be harder and harder every year to maintain a middle-class lifestyle - and has been since the 1950s. The loss of purchasing power in real terms, the drive to “two income” households and finally the wild screams from the media, government, and lastly Bernanke’s recent assertion that “QE2” has been a “success” because the stock market has gone up all underlie the truth – we have not grown the economy at all during the last sixty years! Instead we serially pulled out the credit card and said “Charge It!”, continually rolling over the debt and adding more to it.

If you look at the stock market, one has to ask – when did it start to “take off”? In 1991 the S&P 500 printed 300 and the Dow stood at 2,500. That was the start of the monstrous "bull run" in stocks.

Exactly none of the alleged “stock market appreciation” has come from actual economic growth since that time. It has all come from ever-increasing amounts of leverage (debt) that, when subtracted back out of the change in GDP, show that on an actual output basis the economy of the United States has been declining at absolutely outrageous rates every single year since 1992, peaking at an astounding 29% at the end of 2007!

Nobody in the media – or government – will talk about this, despite the fact that the there’s little room for argument on the mathematical facts – they’re right there in the government data.

From Finn, a note:

You might read the above and say to yourself, “Well, isn’t debt reduction good?” It is of course however, our entire economic model has been based on GDP growth. The main source of growth has been the expansion of debt. Example, you get a new car and take a loan for $15,000. That loan is debt and is representative of GDP. If the government borrows $1 million it’s GDP. If they spend that same million it is again counted as GDP. If some guy gets laid off and stops spending all money, the Gov counts as GDP a percentage of his NON-income that he WOULD HAVE spent on imports as GDP. Completely ridiculous.

The reason GDP HAS to keep growing is because it proves to the world that Americans are able to keep servicing their debts. How do you service debt? Well you work, get paid and pay your bills. If this perception changes in the minds of foreign investors (including Central Banks) and they start to believe that we have hit the wall, they will scale back in their purchases of our Treasuries.

What if they discover that America has a chronic unemployment problem? (They know we do)
What if they discover that our GDP growth has all been debt based? (They know this too)
What if they discover the Fed has been buying all the Treasuries and America will likely default on their debts? (They know this)

What foreign nations and investors are dreading, and indeed anticipating is the Awakening of the American people to our own situation. When Americans figure this stuff out and realize that their whole “prosperous” life has been nothing more than an illusion the lid on the boiling pot will fly through the roof. The reaction of the American people will be totally unpredictable except for the flight to value. Debt will be shunned. Things of “value” will be in vogue.

Imagine the ire that Americans felt towards Japan after Pearl Harbor except this time around the anger will be isolated within our own borders. It will be directed towards bankers, politicians and even each other. Think national L.A. riots, and hope it never happens.

Buy silver, buy gold.

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