The Wheels Have Come Off the Cart

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By RodgerRafter
December 1, 2005

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GDP is probably the most politicized statistic that comes from the government. A negative number would have been pounced on in the media as evidence that the administration's economic policies are failing. A positive number at least allows the government to pretend it is on the right course and allows the average citizen to believe that his personal economic pain is merely temporary.

I've seen a few posts around the web talking about how the GDP is inflated by using a bogus inflation number. While this point is already well understood by most of us on the Mish board, I haven't seen it really presented for the masses in clear simple terms, so here goes my attempt:

If the Commerce Department had used the CPI measure of inflation instead of the chain deflator then the economy would have been shown to have contracted at a 1.7% rate.

CPI for July, Aug, Sept was .5%, .5%, 1.2% respectively. Annualized that netted a 9.14% rate of inflation. The annualized current dollar value of GDP was 7.4% for the quarter. Subtracting 9.14% instead of 3.0% yields -1.7%, rather than 4.3%.

And then some even more important/scary things to consider...

1. According to TIC data, Foreign investors plowed $288 Billion in investments into the US economy in Q3 (up 40.9% from $204.4 B in Q2), which multiplies out to a $1.152 Trillion annualized investment. That compares to a total of $1.912 Trillion in annualized private domestic investment in the GDP in Q3. In other words, potentially more than half of the total investment dollars spent in the US appear to have come from foreign investors. Those invested dollars in turn circulated through the economy as construction workers and other beneficiaries plow money into personal consumption, and then retail workers re-circulate their money.

Try to imagine the strength of the US economy without the totally unsustainable trade gap and foreign to keep things humming. Every year we have grown more dependent on foreign creditors to fuel our economy. "Deficits don't matter," we've been told. They only don't matter as long as you can follow them up with bigger and bigger deficits. Once you try to start unwinding those deficits, you suddenly realize that you've been living in a house of cards.

2. Even with all the foreign investment fueling GDP activity, and even with the government twisting the numbers to make it look like the economy is still growing, the system is undeniably breaking down. Net Domestic Product actually went down in Q3. NDP was +$181.5 B in Q4 2004, +$96.1 B in Q1 2005, +$81.4 B in Q2 2005, and -$182.0 B in Q3 2005

Definition of NDP: The GDP minus depreciation on a country's capital goods. This measure allows users of the country's national accounts to estimate how much the country has to spend just to maintain their current GDP. If the country is not able to replace the capital stock lost through depreciation, then GDP will fall. In addition, a growing gap between GDP and Net Domestic Product indicates increasing obsolescence of capital goods, while a narrowing gap would mean that the condition of capital stock in the country is improving.

And that is where we stand today. We could not survive being a nation of spenders rather than savers and hope to compete in the global marketplace for long. We could not hope to consume Trillions more than we produce and expect to remain wealthy for long. We could not hope to outsource our manufacturing abroad and hope to maintain a self-sufficient economy at home.

Even with massive infusions of foreign investments, our economy is rotting away at the core. It is completely incapable of standing on it's own two feet. The current trade imbalances are by far the worst the world has ever seen. Take away foreign credit suddenly and we'd be thrown into a deepest depression the world has ever seen. Bringing about a slow steady transition to a sustainable economic balance might be possible with tremendous global cooperation, but even that would likely result in drastically lower standards of living for middle-class Americans.

For now we need only dig down into the GDP report to see that the wheels have in fact come off the cart. If for some reason you can't see that already, then don't worry - It'll become obvious to you soon enough.


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