Why You Shoudn’t Trust the Government’s GDP Claim

Dear Diary,

The feds pulled a rabbit out of the hat. We had just been speaking with Simone Wapler, our colleague in Paris.

I think GDP will come in lower than expected,’ we told her. ‘And then it will be revised downward. Probably negative.’

We were wrong. Instead, the number that the feds delivered yesterday surprised to the upside. The US economy grew at an annual pace of 4% in the second quarter.

Four percent! Hey, that’s almost like a healthy GDP growth rate.

Well. What can we say?

The feds were right. We were wrong. The recovery is real! The economy is booming! Central financial planning really works, after all!

Now, Janet Yellen can join Ben Bernanke and Alan Greenspan on the cover of TIME magazine as a great heroine, a Joan of Arc for the 21st century.

Stepping on the gas

Wait a minute…

In theory, you can’t create real growth by printing phony money…and pretending to have ‘demand’ that doesn’t really exist.

And in theory, you can’t create prosperity by jacking up the stock market and putting more debt, backed by junky collateral, onto people who can’t pay it back.

Also, there’s no theory that tells us we can build real wealth without saving money…and investing it in new factories, machines, skills, and so forth.

Because it can’t work in theory, we’re suspicious. Maybe it didn’t work in practice either.

Is the economy really booming? Is it making people genuinely better off?

Short answer: Probably not.

But to fully appreciate what has happened we need to go back seven years, to the fourth quarter of 2007. It was then that the credit machine was beginning to sputter. The mechanics at the Federal Reserve got out their wrenches and WD-40…and got to work.

The problem is they only have one trick: They gave the thing more gas!

A gush of liquidity

By lowering the fed funds rate to between 0% and 0.25%, the Fed claimed it needed to ‘promote moderate growth’. Then it added almost $4 trillion in electronic ‘cash’ into the system by way of QE.

Ever since, the US Federal Reserve has been ‘stimulating’ the economy with ultra-low interest rates. In length, this is the same amount of time as it took Pharaoh to prepare for the lean years…by laying in stocks of grain. And it’s the same length of time as the lean years themselves.

Pharaoh’s countercyclical program was a great success. The people of ancient Egypt beat the Old Testament famine. How is the Bernanke-Yellen team doing?

As we’ve been pointing out, there are 3.7 million fewer full-time jobs now than there were before the stimulus began. Household incomes for 99% of the population are lower than they were in 2007. And the real rate of growth over the last seven years has been just 0.9% per year.

Factor in even a slight underestimation of inflation and real (inflation-adjusted) economic growth in the US has been negative. Adjust for population growth, too, and the ‘growth’ disappears entirely.

Real hourly wages have not risen a penny. Business investment is still 20% below 2007. And 77 million people have overdue bills in collection.

This was bought, we remind you, by the biggest gush of cheap liquidity since The Flood. All that cheap money has washed over the economy…seeped into every transaction…and warped and rotted every price signal.

But hey…GDP is growing at a 4% annual rate! (Subject to later revision, of course!)

Janet, you go girl!


Bill Bonner
For Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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