America’s economic recovery

Alasdair Macleod – 12 January 2011

We are presented with tentative evidence of economic recovery in the US. The ECRI US Weekly Leading Index bottomed out at -11.0 on 23 July and is now in positive territory at 3.3. Furthermore, according to official statistics there has been positive GDP growth for the five quarters to Q3 in 2010, averaging 2.9%. Unemployment, which we are told is a lagging indicator, hovers between nine and ten per cent, but according to some, is actually showing faint signs of improvement.

These figures are so misleading that they are valueless, and one has the impression that the authorities’ only hope is to bull them up and pray that a spark of confidence reignites true recovery. The fact that the unemployment figures are extraordinarily misleading is highlighted by John Williams at, who sensibly prefers a broader measure (his equivalent of the Government’s U6), that on his calculations shows true unemployment to be over 20%. This is inconsistent with any sort of GDP growth, and the recovery officially recorded so far.

It should be remembered that GDP is the sum total of all output or consumption, usually consumption, of the private and public sectors. So, if government expands its own spending in the economy without increasing taxation, hey presto! GDP increases. Gordon Brown, when he was Chancellor of the Exchequer in Britain, was a master at playing this game. His forecasts for GDP were always more optimistic than those of independent economists: he increased the GDP numbers by simply spending more, so that he was right. It was amazing he was never rumbled.

When a government spends more by taking private sector income in taxes, it spends the available economic resources less productively, which is not adequately reflected in the GDP statistics. But private sector savings, and the bulk of corresponding investment are missed by GDP statistics; so when these savings are commandeered by government, either through bond issues or taxes on capital, GDP is created out of thin air. The statistical results from the diversion of economic resources and savings from the private sector can therefore be quite dramatic.

For example, in fiscal 2010, US private sector GDP actually contracted an estimated 0.1%; but with public sector spending growing at 6.3%, the government was able to claim an overall growth in GDP of 2.6%. Uncovering the truth in this way, we see that the US private sector also contracted in fiscal 2008 and 2009 by -0.5%, -9.7% respectively, so the private sector is still in recession after three years. This example illustrates that government can make the headline figures much better than the underlying reality. It is a simple distortion of the figures by ramping up government spending.

That way of getting a political result may not be generally appreciated but is really quite obvious to those not blinded by Keynesian economics. There is a Machiavellian neatness in getting money out of the taxpayer to con him into believing government can do a better job of getting recovery going, than he can by spending or investing his own money. But what happens if the taxpayer has been wrung dry, which is roughly the position today? The answer is to either borrow the money from abroad or print it. Both have the same effect of inflating the GDP figures beyond their true value.

Put simply, if government causes an increase of money to enter the economy, and if that money is spent, the GDP number will rise. And remember, the deflator is price inflation, not monetary inflation. There is no adjustment for injections of capital from outside the economy: there is no recognition that the comparison is not like-for-like.

From government figures we know that in fiscal 2010 net sales of Treasury stock to non-US investors was $549.3bn, representing previously exported dollars being reintroduced into the domestic economy, and that sales to the Fed were $318.3bn, representing an injection of newly printed money[i]. From this, we must deduct the increase in the amount of money owned by private sector banks but held at the Fed, and therefore withdrawn from circulation, which is $126bn. The net injection of new money into the economy was therefore $741.6bn, representing 5.1% of notional GDP. So instead of growing at about 2.7% as implied in the 2011 Budget Forecast, adjusted for monetary inflation the economy actually contracted by 2.3% in the last fiscal year.

If you asked an American what the economy felt like, he would probably confirm that it was still in recession, giving credence to our analysis. If you asked a Wall Street banker, he would probably tell you the economy has turned the corner. The different perception partly arises from the fact that Wall Street is booming on the back of the Fed’s money-printing, in contrast with the rest of the economy; but this optimism also comes from the self-interested idleness of those in the finance sector who accept government statistics unquestioned.

There is yet a further way government corrupts the figures, and that is by under-reporting inflation, and therefore the GDP deflator. For Fiscal 2010 this was 1.17%, yet the same John Williams at calculates true CPI to have been about 6%. Adjusting GDP by this rate as a deflator gives an economic contraction of 2.2%, coincidentally a similar rate when it is adjusted for monetary inflation.

There is a systemic drift that leads the establishment to spend considerable sums and employ the best brains to end up with meaningless statistics. The general ability of government statisticians to be selective in their assumptions, taken with the vested interest of politicians to present the data in the best possible light invalidates the verity of these statistics. They paint a rosy economic picture for the current year and beyond, so long as an exogenous crisis does not intervene. This is why the economic outlook, according to government statistics, can always be for economic growth.

Manipulating the statistics to keep confidence afloat and politicians in power will only make things worse in the long term, because avoiding reality ensures that painful political decisions are deferred until crisis intervenes. The misleading presentation of GDP statistics is only one example of political spin, the whole statistical process being infected. In this brief analysis we have seen how only two important statistics, unemployment and inflation deflators, are so corrupted as to be meaningless, then used to produce a further misleading number. Furthermore, the basis of government accounting itself, from which many other statistics are derived, is also corrupted through denial of fundamental accounting practices, invalidating public sector statistics even further.

This has important implications for the budget deficits for future years, which according to the Government will fall as a result of economic recovery. What recovery? And if the only answer offered by the Government is to bridge its spending gap by monopolising private sector savings for its own inefficient use and by printing money, not only will the outlook be for accelerating price inflation, but there will also be little hope for the productive private sector.

So much for GDP statistics and forecasts. It is folly to treat economics as a pure, measurable science: it is not, and to believe otherwise, as governments, central bankers and economists have come to is a big mistake.


[i] Figures from the Office of Debt Management.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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