Empirical Proof of the Giant Con
I want to continue on with my recent focus on the giant con and if you’ve been reading my work lately you’ll certainly know what that is. However, for those of you not familiar with the giant con, it is the idea that our economy is growing when, in fact, it hasn’t had growth in decades with the exception of the late 1990′s. In a recent article I wrote for the benefit of Steve Liesman, I showed that the giant con is entirely a function of debt. I explain why debt is actually a net negative given real interest rates and I strip out debt from GDP to show that GDP has actually been contracting for some time. Recently I’ve been I looking for other ways to prove that the giant con is truly happening. But let’s just have a quick look at what real GDP adjusted for Debt would like. We see in the past 40 years the only period of real GDP growth was between 1996 and 2000 and has collapsed since early 2007 to date.
Most of us are familiar with the concept of money velocity. It is a measure of how effectively or efficiently we are utilizing our money stock to generate output. The idea is that the more I invest the more notional returns I can generate. However, in the economy there is a downside to ‘investing’ with additional money supply, namely, inflation. And so we want to maximize the amount of output we generate from a given stock of money to optimize our returns. We gauge this via money velocity and often we use M2 Velocity as the key measure. Currently M2 Velocity is around 1.3, meaning that for every supply of dollar we are generating 1.3 dollars of output. This is down significantly from the late 1990′s at which time we were generating around 2.3 dollars of output for every dollar of stock.
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