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We Should Ditch GDP as a Measure of Economic Activity

This article exposes the false economic concepts behind GDP, which is only the visible tip of a large iceberg of economic deceit. Describing an increase in GDP as economic growth owes its meagre validity to imprecise definition. An economy does not grow, only the quantity of fiat currency deployed grows. A successful economy progresses our condition, our wealth, our standards of living. The evolution of misleading statistics such as GDP to their current condition is only governed by their usefulness to governments, not as an objective development of sound theory by seekers of truth.

There are perhaps two plausible reasons for producing the GDP statistic, other than employing statisticians, and both have nothing to do with economics. By compiling the figures, a government keeps track of its tax base, and it can enter into the game of my-country-is-bigger-than-yours.

In international comparisons of economic performance, gross domestic product adjusted for price inflation is the most common metric used. Countries are ranked by size, and success is measured by the rate of growth in GDP. This is important to the political class.

About two years ago, I was told that the Indonesian central bank had a plan to do away with cash entirely, because it would bring unrecorded transactions into Indonesia’s GDP, promoting it from sixteenth to perhaps the thirteenth largest nation measured by GDP. I have no idea if this was true, but allegedly, this was important to the Indonesian government.

We should not be surprised if going cashless is partly motivated to give the illusion of GDP growth, in the same way that in 2014 the EU decided to add in estimated contributions from prostitution and drug dealing. These are examples of why and how GDP is manipulated to produce a goal-sought answer.

…click on the above link to read the rest of the article…

US Gross National Debt Jumps by $1.27 Trillion in Fiscal 2018, Hits $21.5 Trillion

US Gross National Debt Jumps by $1.27 Trillion in Fiscal 2018, Hits $21.5 Trillion

But wait — these are the Boom Times!

The US gross national debt jumped by $84 billion on September 28, the last business day of fiscal year 2018, the Treasury Department reported Monday afternoon. During the entire fiscal year 2018, the gross national debt ballooned by $1.271 trillion to a breath-taking height of $21.52 trillion.

Just six months ago, on March 16, it had pierced the $21-trillion mark. At the end of September 2017, it was still $20.2 trillion. The flat spots in the chart below, followed by the vertical spikes, are the results of the debt-ceiling grandstanding in Congress:

These trillions are whizzing by so fast they’re hard to see. What was that, we asked? Where did that go?

Over the fiscal year, the gross national debt increased by 6.3% and now amounts to 105.4% of current-dollar GDP.

But this isn’t the Great Recession when tax revenues collapsed because millions of people lost their jobs and because companies lost money or went bankrupt as their sales collapsed and credit froze up; and when government expenditures soared because support payments such as unemployment compensation and food stamps soared, and because there was some stimulus spending too.

But no – these are the good times. Over the last 12-month period through Q2, the economy, as measured by nominal GDP grew 5.4%. “Nominal” GDP rather than inflation-adjusted (“real”) GDP because the debt isn’t adjusted for inflation either, and we want an apples-to-apples comparison.

The increases in the gross national debt have been a fiasco for many years. Even after the Great Recession was declared over and done with, the gross national debt increased on average by $954 billion per fiscal year from 2011 through 2017.

…click on the above link to read the rest of the article…

Strong GDP Data and Individuals’ Wellbeing

In the New York Times September 14 2018 in an article – We’re Measuring The Economy All Wrong, the writer of the article David Leonhardt complains that despite strong gross domestic product data (GDP) most people don’t feel it. The writer of the article argues that,

The trouble is that a handful of statistics dominate the public conversation about the economy despite the fact that they provide a misleading portrait of people’s lives. Even worse, the statistics have become more misleading over time.

According to the accepted rules of thumb, recessions are about at least two quarters of negative growth in real gross domestic product (GDP). Recessions, according to this way of thinking, are seen as something associated with the so-called strength of the economy. The stronger an economy is the less likely it is to fall into a recession. The major cause of recessions is seen as various shocks, such as a sharp increase in the price of oil or some disruptive political events, or natural disasters or a sudden fall in consumer outlays on goods and services. Obviously then, if an economy is strong enough to cope with these shocks then recessions can be prevented, or at least made less painful. For instance, a well-managed company with a well-managed inventory is likely to withstand the effects of various shocks versus a poorly managed company.

Severity of a recession and the strength of the economy

We suggest that recessions are not about two quarters of negative growth in real GDP, or declines in various economic indicators as such. They are also not about successful inventory management. We would suggest that recessions are not about how resilient an economy is to various external and internal shocks.

…click on the above link to read the rest of the article…

There Goes The Credit Impulse: Why Chinese Consumption Is On The Verge Of Collapse

Recently we discussed how in addition to the widely manipulated Chinese GDP data, new concerns had emerged about official data involving Chinese industrial profits, because while China’s National Bureau of Statistics has traditionally reported positive year-on-year growth rates in percentage terms, growth in absolute yuan terms has been negative. This deviation, which barely happened in the past, has reinforced scepticism over the quality of Chinese “data” and fueled fresh suspicion that the NBS generates data outcomes that match the policy goals of the Chinese government leadership instead of reflecting the true state of the economy.

More recently, similar worries have been noted over China’s consumption data, which have been sending what Goldman politely calls “mixed signals lately”, and which a more cynical take would dub “massaged”, if not outright fabricated. Which, with China’s economy increasingly turning into a consumption-driven model like that of the US, is a problem if economists, analysts and investors are unable to get an accurate grasp on consumption trends in the world’s second largest economy.

The problem in a nutshell: NBS retail sales slowed in Q2 and also in July, while NBS household consumption expenditure and GDP final consumption contribution (quarterly data) rebounded relatively strongly in Q2. Other widely observed consumption data include 100 major retailers’ sales, with the data painting a bearish picture in recent months and showing negative year-over-year growth in July.

This, as Goldman notes in a Saturday report, has led many investors to ask: where does the divergence come from and how has consumption been growing in reality?

…click on the above link to read the rest of the article…

Turkey: A harbinger of a global debt crisis?

The economic crisis brewing in Turkey seems to have surprised many. This was probably, at least partly, due to the ‘period of tranquility’ created by the central banks with theirs ‘unorthodox measures’. Many seem to have imagined that the “synchronized global growth” spurt were here to last. But, it was just a mirage, run by the stimulus of China and the major central banks.

As we warned in May, the global quantitative tightening will bring an end to the current business cycle. This is for a multitude of reasons (see Q-review 1/2018), but the most pressing of them is the fact that QT will raise interest rates and suppress liquidity. It will raise the costs of indebted companies, drive zombie companies to insolvency and ultimately crash the asset markets. A global debt crisis of epic proportions and depression are likely to follow. Turkey is showing what it might look like.

The debt conundrum

The current business cycle has had two exceptional features. First has been the steep rise in the balance sheets of central banks and the second the very fast growth of the non-financial sector debt, especially in the emerging economies. Figure 1 presents the private non-financial sector debt as a percentage of GDP in advanced and emerging economies. It shows the miniscule deleveraging in advanced economies and the harrowing rise in the private non-financial debt in the emerging economies since 2009.

Figure 1. Credit (debt) to non-financial private sector as a share of GDP in advanced and emerging economies. Source: GnS Economics, BIS

The rise of the non-financial private debt in emerging economies coincides with the QE programs of the major central banks.

…click on the above link to read the rest of the article…

If the Economy is So Good, Why are Wages Flat?

If the Economy is So Good, Why are Wages Flat?

Photo by Nathaniel St. Clair

We are supposedly seven years into a “recovery” from the global economic collapse that commenced in 2008. The latest evidence offered to promote this oft-peddled mantra is that U.S. gross domestic product showed a strong uptick for the second quarter of 2018, an annualized rate of 4.1 percent, nearly double that of the first quarter.

Coupled with the ongoing decline in unemployment (although standard unemployment rates greatly underestimate the true rate of employment), orthodox economists, conservative propagandists and apologists for the Trump administration would have use believe happy days are here again.

So why aren’t our wages increasing?

In part, it is because the true unemployment rate is not nearly so low as the “official” unemployment rate used by governments around the world, and thus the ranks of unemployed and underemployed are sufficiently large that there is no upward pressure on wages. Orthodox economists, dedicated as they are to ignoring any evidence that doesn’t match their models designed to “prove” that all manners of capitalist excess are as natural as the tides of the ocean — and thus in practice the professional wing of conservative propagandists — have various excuses for stagnant wages and ever increasing inequality. A favorite among these is an alleged “skills mismatch” — too many unskilled workers and a shortage of skilled workers for the high-tech jobs of today.

The data tells a different story, however. A 2014 report by the National Employment Law Project found that low-wage jobs were created at a faster pace than higher-paid jobs were lost in the first years to that point. The Project reported this breakdown:

* Lower-wage industries ($9.48 per hour to $13.33) constituted 22 percent of the 2008-2010 losses, but 44 percent of jobs gained since then.

…click on the above link to read the rest of the article…

Weekly Commentary: $247 Trillion and (Rapidly) Counting

Weekly Commentary: $247 Trillion and (Rapidly) Counting

I chronicled mortgage finance Bubble excess on a weekly basis. Relevant data were right there in plain sight, much of it courtesy of the Federal Reserve. Yet only after the Bubble burst did it all suddenly become obvious. Flashing warning signs were masked by manic delusions of endless prosperity and faith in the almighty “inside the beltway”. These days, data for the global government finance Bubble is not as easily-accessible, though there is ample evidence for which to draw conclusions. It will all be frustratingly obvious in hindsight.

The Institute of International Finance is out with their latest data that, unfortunately, is not made available in detail to the general public. Global debt ended the first quarter at a record $247 Trillion, or 318% of GDP. Even after a decade of historic Credit inflation, global debt continues to expand at (“Terminal Phase”) double-digit rates (11.1% y-o-y).

Global debt growth accelerated during the first quarter to $8.0 Trillion – and surged $30 Trillion over just the past five quarters. In a single data point not to be disregarded, Global Debt Has Expanded (a difficult to fathom) $150 Trillion, or 150%, Over the Past Ten Years. Actually, the trajectory of Bubble-period Credit expansion may seem rather familiar. It’s been, after all, a replay of the reckless U.S. mortgage Credit episode, only on a much grander global scale.

July 10 – Financial Times (Jonathan Wheatley): “The amount of debt in the world increased by nearly $25tn in the year to the end of March, piling more pressure on a global financial system already struggling to deal with rising US interest rates, widening spreads for borrowers and a strengthening US dollar. The Institute of International Finance… said total debts owed by households, governments and financial and non-financial corporations amounted to $247.2tn at the end of March, up from $222.6tn a year earlier and an increase of nearly $8tn in the first quarter alone.

…click on the above link to read the rest of the article…

Canada’s Real Estate Sector Faces Difficult Transition

The great Canadian real estate bull market has pushed home prices to dizzying heights over the past two decades. And with ever-rising prices it has sucked in more capital and resources creating an almost self enforcing feedback loop, where an entire economy has become dependent on rising house prices. This misallocation of capital and resources is particularly well documented in the labour force where every year the number of realtors, mortgage brokers, and homebuilders seems to grow exponentially. Per Stats Canada, the share of employment tied to construction as well as finance, insurance and real estate is nearly two standard deviations above its long-term average.

I’m no economist but somehow it seems building an economy dependant on selling each other more expensive homes is probably not the greatest long term growth strategy. To illustrate this point we can see here that residential investment as a percentage of GDP now outpaces investment in machinery equipment research and development.

Source: Ben Rabidoux, North Cove Advisors

Currently there are over 55,000 new homes under construction across BC, with a record high number of housing starts also underway. This has created a massive shortage in the trades sector, while sending construction costs and house prices higher. However, with the real estate market across BC now beginning to slow, particularly in greater Vancouver, which saw housing sales across all property types drop to a 17 year low, early indications suggest a potential difficult transition may be underway.  With the help of Ben Rabidoux of North Cove advisors, we can see that job growth in British Columbia is been in a funk in recent months.

BC job growth
Source: Ben Rabidoux, North Cove Advisors

For simplicity sake, we can estimate how this would affect the real estate broker space, where real estate commissions now command 2% of Canadian GDP. Through the first four months of 2018, British Columbians have spent nearly $2 billion less on residential real estate.

…click on the above link to read the rest of the article…

Areas Of The World More Vulnerable To Collapse

Areas Of The World More Vulnerable To Collapse

Certain areas of the world are more vulnerable to economic and societal collapse.  While most analysts gauge the strength or weakness of an economy based on its outstanding debt or debt to GDP ratio, there is another factor that is a much better indicator.  To understand which areas and regions in the world that will suffer a larger degree of collapse than others, we need to look at their energy dynamics.

For example, while the United States is still the largest oil consumer on the planet, it is no longer the number one oil importer.  China surpassed the United States by importing a record 8.9 million barrels per day (mbd) in 2017.  This data came from the recently released BP 2018 Statistical Review.  Each year, BP publishes a report that lists each countries’ energy production and consumption figures.

BP also lists the total oil production and consumption for each area (regions and continents).  I took BP’s figures and calculated the Net Oil Exports for each area.  As we can see, the Middle East has the highest amount of net oil exports with 22.3 million barrels per day in 2017:

The figures in the chart above are shown in “thousand barrels per day.”  Russia and CIS (Commonwealth Independent States) came in second with 10 mbd of net oil exports followed by Africa with 4 mbd and Central and South America with 388,000 barrels per day.  The areas with the negative figures are net oil importers.

The area in the world with the largest net oil imports was the Asia-Pacific region at 26.6 mbd followed by Europe with 11.4 mbd and North America (Canada, USA & Mexico) at 4.1 mbd.

Now, that we understand the energy dynamics shown in the chart above, the basic rule of thumb is that the areas in the world that are more vulnerable to collapse are those with the highest amount of net oil imports.

…click on the above link to read the rest of the article…

Do We Really Borrow From Only Ourselves? Does the Debt/GDP Ratio Means Anything?

QUESTION: Mr. Armstrong, the famous economist Paul Krugman says that debt is ok when we owe it to ourselves. He calls it “deficit scolding” as he wrote in the New York Times. Would you like to comment on this statement?

GH

ANSWER: Paul Krugman seems to lack any historical understanding of how nations rise and fall. Anyone who claims debt is OK and can be infinite because “we” owe it to ourselves is clueless. He wrote in the article you referred to that “we have a more or less stable ratio of debt to GDP, and no hint of a financing problem.” The debt to GDP ratio is interesting but totally irrelevant. China’s debt to GDP stands at 250%, the USA at 103%, and Greece buckled at 186%. Obviously, this ratio is rather meaningless as a forecasting tool. I have published this chart on call money rates previously. In my studies, I quickly discovered that you cannot reduce the cause of any effect to a single issue. We can see that the peak in call money rates took place during 1899 and it was the lowest in 1929 when the Great Depression hit. You can’t even claim that if interest rates hit some magical level the stock market would crash. The world is far more complicated than just this one-dimensional approach to everything.

Capital flows were fleeing the USA in 1899 so interest rates went higher with a shortage of money. In 1929, the capital was in the USA for it rushed here because of World War I. The inflow of capital created an excess so the peak in call money rates was lower than 1899 when capital was fleeing. We even have the world of President Grover Cleveland from the Panic of 1893 commenting on the net capital outflow because of the “unsound” financial policy of the Silver Democrats.

…click on the above link to read the rest of the article…

The Dangers of Investing Based on Phony Government Statistics

The Dangers of Investing Based on Phony Government Statistics

President Donald Trump recently took to Twitter to boast, “The U.S. has an increased economic value of more than 7 Trillion Dollars since the Election. May be the best economy in the history of our country. Record Jobs numbers. Nice!”

“We ran out of words to describe how good the jobs numbers are,” reported Neil Irwin of the New York Times, amplified in a Trump retweet.

Increase

If you believe the headline numbers, joblessness is at a generational low with the economy booming.

Trillions in nominal value added to the stock market since Trump’s election. GDP up over 3% in the second quarter. 223,000 jobs added in May. Unemployment at an 18-year low of 3.8%.

On the surface, this all paints a beautiful picture for the economy and stock market. But dig a little deeper, and the numbers aren’t quite as bright they appear. All that glitters is not gold.

Headline Unemployment Number Is Fake News

Donald Trump himself put his finger on one of the main flaws with the unemployment number back when he was a private citizen.

“Unemployment rate only dropped because more people are out of labor force & have stopped looking for work. Not a real recovery, phony numbers,” he posted on September 7th, 2012.

The headline unemployment number isn’t any less phony in 2018. Though it has improved under Trump’s presidency – in large part because of his pro-growth tax cuts and deregulation – the statistic is still derived from a dubious formula.

Back in 2012, Trump rightly pointed to the large numbers of workers who had dropped out of the labor force but weren’t counted among the ranks of the unemployed.

The labor force participation rate currently comes in at just 62.7%. That means 33.7% of the population is currently not employed in the labor force. The vast majority of these jobless Americans aren’t among the 3.8% officially “unemployed.”

…click on the above link to read the rest of the article…

The Eurozone’s Coming Debt Crisis

The Eurozone’s Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

The 19 eurozone countries have collectively saved 1.15 trillion euros in interest payments since 2008 due to ECB rate cuts and monetary policy interventions, according to Handelsblatt. A reduction in costs against the losses of pensioners and savers.

However, that illusion of savings and budget stability can rapidly disappear as most Eurozone countries face massive maturities in the 2018-2020 period and wasted precious years of quantitative easing without implementing strong structural reforms. Tax wedge rose for families and SMEs, while current spending by governments barely fell, competitiveness remained poor and a massive one trillion euro in non-performing loans raised doubts about the health of the European financial system.

 

The main eurozone economies face more than 2.1 trillion euro in maturities between 2018 and 2021. This, added to lower tax revenues due to the slowdown and rising spending from populist demands creates an enormous risk of a large debt crisis that no central bank will be able to contain. Absent of structural reforms, the eurozone faces a Japan-style stagnation or a debt crisis.

 

…click on the above link to read the rest of the article…

Is the U.S. in a depression? (How John Williams became America’s most important statistician)

Is the U.S. in a depression? (How John Williams became America’s most important statistician)

America’s economy has been progressing steadily. First quarter real GDP growth came in 2.2%. The official unemployment rate is 3.8%. Inflation, according to the Fed’s preferred measure is 2%.

But how accurate are those numbers?

“Nonsensical,” says John Williams, founder of Shadow Government Statistics, who has been tracking U.S. government data for more than three decades.

Williams reckons that, using traditional calculation methodologies, true inflation is likely running above 6% and the unemployment rate over 20%.

Most importantly, Williams’ calculations suggest that the US economy has been in a two decade-long depression. His line of reasoning is worth a look.

Underestimating inflation

Williams argues that U.S. statistical agencies overestimate GDP data by underestimating the inflation deflator they use in the calculation.

Manipulating the inflation rate, Williams argues in Public Comment on Inflation Measurement , also enables the US government to pay out pensioners less than they were promised, by fudging cost of living adjustments.

This manipulation has ironically taken place quite openly over decades, as successive Republican and Democratic administrations made “improvements” in the way they calculated the data.

These adjustments (such as hedonic adjustments to inflation calculations, or not counting people who have stopped looking for work as part of the labor force) inevitably cast the government’s numbers in a more favorable light.

However, mainstream media journalists tend to have a poor grasp of mathematics. They were thus unable to grasp the depth of the problem, let alone explain the issues to the public.

Politicians have thus been able to fudge economic data openly. For example, the chart below shows U.S. GDP growth as measured by official sources.

The following chart (produced by Williams) shows GDP growth as calculated using a GDP deflator, corrected for an approximately two percentage point understatement.

…click on the above link to read the rest of the article…

Seven Ways to Think Like a Twenty-First-Century Economist

This excerpt has been adapted from Kate Raworth’s book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist (Chelsea Green, 2017) and is printed with permission from the publisher. Now available in paperback and audio.

Seven Ways to Think Like a Twenty-First-Century Economist

Whether you consider yourself an economic veteran or novice, now is the time to uncover the economic graffiti that lingers in all of our minds and, if you don’t like what you find, scrub it out; or, better still, paint it over with new images that far better serve our needs and times. The rest of this book proposes seven ways to think like a twenty-first-century economist, revealing for each of those seven ways the spurious image that has occupied our minds, how it came to be so powerful and the damaging influence it has had. But the time for mere critique is past, which is why the focus here is on creating new images that capture the essential principles to guide us now. The diagrams in this book aim to summarise that leap from old to new economic thinking. Taken together, they set out—quite literally—a new big picture for the twenty-first-century economist. So here is a whirlwind tour of the ideas and images at the heart of Doughnut Economics.

First, change the goal. For over 70 years, economics has been fixated on GDP, or national output, as its primary measure of progress. That fixation has been used to justify extreme inequalities of income and wealth coupled with unprecedented destruction of the living world. For the twenty-first century, a far bigger goal is needed: meeting the human rights of every person within the means of our life-giving planet. And that goal is encapsulated in the concept of the Doughnut.

…click on the above link to read the rest of the article…

Work in a World Without Growth

WORK IN A WORLD WITHOUT GROWTH

A fixation with growth in economics has seen GDP increase in proportion to environmental damage. As planetary limits draw ever closer and are even being surpassed, such a model cannot be sustained. Riccardo Mastini explains how a job guarantee could open up the way to a sustainable economic model.

Since the dawn of capitalism, market economies have placed a high emphasis on labour productivity. Continuous improvements in technology geared towards productivity increases lead to more output being produced for a given amount of labour. But crucially these advances also mean that fewer people are needed to produce the same amount of goods and services each year. As long as the economy expands fast enough to offset increases in labour productivity there is no problem. But if the economy does not grow, people lose their jobs.

Economic growth has been necessary within this system just to prevent mass unemployment. Communities and the politicians that represent them celebrate the construction of a new factory not so much for the increase in supply of some needed product, but because of the jobs it creates. In advanced economies, the shortage of employment has become more pressing than the shortage of products. Basically, we produce goods and services mostly to keep people employed rather than to cater for their needs.

But what if economic growth were to slow down and, eventually, come to a halt in the near future? More than half a century of ‘growth propaganda’ supporting the dogma that pursuing never-ending growth is plausible and desirable may make this new prospect shocking for some. However, there is now overwhelming evidence that  decoupling GDP growth from increases in natural resource and energy use is impossible. And our plundering of Earth’s bounty has already reached unsustainable levels with the overshot of several planetary boundaries.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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