Every time you hear the following statement, your anxiety levels should rise.
‘Australia continues its record recession free run.’
Because as a nation we’re going deeper into debt.
We are living well beyond our means.
Eventually, this delusion will end.
And the longer it goes on, the worse the correction has to be.
Last month we were told…
‘The Australian economy has beaten expectations, with very strong 1 per cent growth in the first quarter driving a 3.1 per cent annual increase in GDP.’
ABC 5 June 2018
The numbers portray a strengthening economy.
Unfortunately, the truth is far darker than the GDP fiction.
The publication of statements that include the words ‘very strong’ are deceptive. People are lulled into a false sense of security…encouraging them to maintain the same spending habits.
When you understand how the economic numbers are compiled and manipulated, it becomes easy to see GDP for what it is…statistical con job.
According to Investopedia, GDP is defined as:
‘The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis.’
GDP is the measurement used to determine a nation’s economic activity.
The GDP measurement commands global attention.
Treasury boffins sweat on the number.
The G20 finance ministers have all committed to policies to permanently move the GDP needle above the 2 percent range.
The reality is that GDP is a quantitative measurement…numbers in and numbers out.
It tells us little about the real economy.
Here’s a simple example to highlight how easy it is to manipulate the numbers.
WE could immediately improve Australia’s GDP with two very simple transactions — I pay my wife $60 for cleaning the house and my wife pays me $60 for mowing the yard…statistically, we have just added $120 per week to the nation’s GDP.
If this weekly exchange of money ‘for services rendered’ happened in 2 million Australian households, the nation’s GDP would jump $240 million. Annually this equates to $12.5 billion…hey presto a 1% rise in GDP.
To reach the desired target of 2% growth we could simply increase the weekly payment to $120 for each service. Problem solved. Growth objective accomplished. But are we any richer as a nation? No.
This silly example is meant to demonstrate how the GDP growth numbers border on the fictitious.
A few years ago, Italy and Britain broadened the definition of ‘services rendered’ to include the cost of hookers and the sale of illegal drugs in their GDP calculations…my silly example is not so silly.
Torture the numbers hard enough and they’ll surrender whatever answer you want.
John Kenneth Galbraith was one of the twentieth centuries most influential economists.
This is what Galbraith had to say on Hitler’s pre-WWII economic achievements:
‘…The elimination of unemployment in Germany during the Great Depression without inflation — and with initial reliance on essential civilian activities — was a signal accomplishment. It has rarely been praised and not much remarked.’
Galbraith looked at the numbers — zero unemployment and rising GDP — and interpreted this as an economic success story. That’s the quantity, but what about the quality?
Building a war machine certainly registers full employment (especially when you are employed at gunpoint) and full capacity utilisation, but hardly qualifies as a productive and sustainable use of labour. Germany’s glowing pre-war GDP numbers were ‘fake news’.
The largely irrelevant Wayne Swan is still telling anyone who’ll listen (which these days must only be his immediate family) how he single handedly saved Australia from a recession in 2008/09.
Technically he did. Sending out money (he didn’t have) to be spent on tattoos and TVs registered as economic activity. Swan’s wasteful tactic moved the GDP needle (enough) into the positive to avoid the technical definition of a recession. It was a desperate trick by a desperate Treasurer.
Throwing more money (he also didn’t have) at over-priced school halls and pink batt schemes were hailed as pure economic genius…at least that’s what we are told.
These wasteful projects definitely kept the needle on the right side of the GDP meter.
What lasting benefit did we derive from this wanton government spending? A pile of debt for future taxpayers to repay. But Swan did get to write a book…where he was obviously the hero of the day.
Here’s a thought. If Swan was still Treasurer he could send us all cheques to buy his book. Statistically, GDP would rise and the best sellers list would tell us that Swan had a best seller.
What was that about three types of lies, ‘lies, damn lies and statistics’?
To be fair, Swan didn’t invent the GDP sleight of hand trick. He just knew how to scam the game.
The GDP fix has been going on for a long time
The following chart is from the website of Steve Baker an MP in the UK.
General government expenditure (green) and private expenditure (black)
General government expenditure (green) and private expenditure (black)
In the good old days, when Government was small, regulations were fewer and men took responsibility for their actions, the private sector (black line) represented 90 percent of economic activity.
The two major contractions in private expenditure and subsequent increases in public expenditure, coincided with WWI and WWII.
From 1950 onwards, the public sector started to choke the private sector.
Bureaucracy and welfare dependency have enabled government to grow more powerful and pervasive…a major contributor to our so-called economic output.
The public parasite is feeding off a shrinking private host.
The only things government produce are more red tape, tax assessment notices and grief.
Australia could be headed for a recession in 2018. But there’s a few steps you can take now to protect your family’s wealth. Find out more here.
A diminishing private sector host is why parasitic Governments of all colours and nationalities have accrued mountains of debt. There is just not enough blood in the veins of the private sector to feed this beast.
The great pin-up economy of the 21st century, China, is going through the same process.
The following chart was compiled by JP Morgan Asset Management.
The private sector is easing back on fixed asset investment due to diminishing rates of return.
Rather than let the system correct itself, the Chinese Government steps into the breach to keep the ‘growth’ machine going. Irrespective of whether there is any merit or return on yuan spent.
Perhaps the powers-that-be in China have looked at what Swan did in 2008?
The US is on the GDO con as well
According to Bill Bonner in his book Hormegeddon (emphasis is mine):
‘[US] GDP minus government spending was $9.314 trillion in 2001. Ten years later it had risen to on $9.721 [trillion]’.
When you deduct US Government spending from the numbers, almost all economic growth in the US — since 2001 — is from Government expenditure.
That’s NOT genuine growth.
Which explains the skyward trajectory of US Federal Debt since 2001.
More and more debt is required to maintain the illusion of growth.
Source: Federal Reserve Economic Data
As we are now finding out, Swan GFC ‘heroics’ come with a cost…not to him personally, he’s well looked after by you and me.
No, the cost is to future taxpayers. Our nation’s public debt continues to climb and despite Treasurer Morrison’s assurance of a budget surplus (heard that before), the repayment of this debt is going to be borne by taxpayers for decades to come.
The debt has to be serviced and hopefully repaid. Taxes need to be raised and/or expenditure curtailed. Either way it is a drag on genuine future growth.
What seems to be forgotten in this whole ‘debt financed economic growth’ experiment is the level of debt dependency that builds up in the system.
According to the following chart, these days we are not receiving much bang for our borrowed buck.
Source: Macro Analytics
In the lean and mean years, a dollar of debt produced 4.6 percent of GDP growth.
Today, a dollar of debt barely raises the GDP needle.
Therefore, to create the impression of growth, governments, corporates and households are forced to pile more and more debt on top of the existing pile.
The last count on global debt was US$240 trillion and rising…for comparison purposes, in 2008 it was around US$142 trillion.
One snowflake can cause an avalanche. At some point an added dollar of debt (needed to falsify the GDP data) is going to cause a financial avalanche like no other.
Shrinking back to an economic model built on the foundations of a productive private sector is, in the long run, a good thing.
Government is too invested in this GDP scam to let this much needed cleanse to happen voluntarily.
Therefore, we’re destined to be fed more GDP — Grossly Distorted Propaganda — as we sleepwalk our way towards the financial cliff.
Editor, The Gowdie Letter
PS: Find out why Australia is poised to fall into recession as soon as this year and what you could do now to protect your wealth. Download now (free).