The falsity of GDP numbers

Alasdair Macleod – 30 October 2009

Yesterday we had a surprising bounce in US third quarter GDP numbers – surprising because they were comfortably above economists’ expectations. This note looks at the validity of these figures, and shows that like most economic statistics, they are an inaccurate or one-sided representation of the true position.

Before doing that, it is useful to define what we are talking about. Gross domestic product is regarded as a summation of the value of consumption, investment, government spending and exports-less-imports. Government through taxation and spending can and does manipulate these figures. If government spending is increased, GDP would record a rise, without necessarily a corresponding rise in production (as proxy for consumption), except to the extent that that spending actually does lead to increased production. Changes in tax on production and capital are also directly reflected in changes in GDP statistics. This has the bizarre effect whereby increases in sales taxes (or VAT in the UK) raise the prices of and therefore the value of private sector consumption. With these and other variables, there may be offsets, but the point is that GDP numbers are not a good basis for defining economic performance, particularly when government’s role in the total economy is large.

In the case of the US GDP numbers, there were also specific distortions including the benefits of the cash-for-clunkers programme, the help given to first-time home buyers, and an increase in government spending. If you take away these distortions, the private sector actually contracted. But there is another factor which no one considers, the effect of monetary inflation.

Monetary inflation is a hidden tax on money, money in which GDP is measured. Economists try to measure this effect by deflating GDP growth by consumer price inflation, which is not the same thing. The reality is that all goods and services are measured in money that has been surreptitiously devalued. In the same way that official taxes such as VAT add to GDP, so will the transfer of value to government through monetary inflation.

Much of the time, ignoring monetary inflation will not matter, but when the Fed has increased the monetary base by 130% over the last fourteen months, we should make an adjustment. This increase represents a stealth tax of 7.8% of GDP, which should be adjusted out of it. And this is just a value adjustment, not to be confused with the eventual consequences for price inflation.

So are we to be cheered by yesterday’s announcement that the recession is over? The answer is a resounding no, because the figures are so distorted they cannot be described as having any meaning whatever.

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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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