Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Economic Recovery, Pass out the 3D Glasses

Economics / Recession 2008 - 2010 Jul 31, 2009 - 03:41 PM GMT

By: Andy_Sutton

Economics

Best Financial Markets Analysis ArticleIt doesn’t take long these days to find an economic bull that’s for sure. Whether you turn on the television, radio, or pick up a newspaper, they’re everywhere. The most popular phrase to date has obviously been Bernanke’s ‘Green Shoots’ comment made several months ago now. Boy have we gotten some mileage out of that one.


San Francisco Fed President Janet Yellen became the latest to don the well-worn 3D glasses early this week at the Oregon and Idaho Banker’s Association convention. The following are some of her comments:

“We glimpse the first solid signs since the recession started more than a year and a half ago that economic growth may be poised to resume… indeed, I expect that to happen sometime this year.”

Again, it all comes back to one’s definition of growth. Yellen, like most mainstream Keynesian policymakers believes in the idea that if GDP rises and that increase is subsequently discounted by some arbitrary deflator, then the balance is ‘growth’. There is a lot more to it than just that unfortunately.

GDP has a number of components and is calculated by the formula below:

GDP = C + I + G +(X-M)

C is classified as private consumption. It is the spending done by consumers on final goods and services. Virtually all consumer spending is counted excluding home purchases. However this component does include rents paid.

I is the investment portion of GDP. However, as one would typically assume, it does not include purchases of stock and/or bonds since such transactions are essentially just changes of title and do not involve capital goods and/or services. Components of I are business investment in capital goods, and purchases of new housing units by consumers.

G represents the government spending portion of GDP. It represents the government’s purchases of final goods, payment of government employees, and investment in capital goods. Transfer payments such as Social Security and Medicare are not included in the GDP calculation.

(X-M) is essentially our trade balance. If we run a trade surplus, then this component contributes to GDP. If we run a deficit, then it is deleterious to GDP. Imported goods are subtracted here because they have already been counted once in C, I, or G since the goods/services came into the country and were purchased in some manner be it as final goods or capital goods.

It is easy to see that there are many factors affecting GDP, and this is where Mrs. Yellen’s comments border on ludicrous. Even those folks who still use two tin cans connected by a piece of string for their communication know the government is borrowing and spending huge sums of money in an attempt to ‘stimulate’ the economy. Much of this spending goes right into GDP. What we have is a situation where the government is trying to pick up where consumers have left off. So if for example consumer spending drops by $200 billion but the government spends an extra $300 billion, we can now advertise (all else equal) that we have economic growth by way of a $100 Billion increase in GDP.

Consider this confirmation of the above from the Bureau of Economic Analysis’ report on GDP released this morning:

“The much smaller decrease in real GDP in the second quarter than in the first primarily reflected much smaller decreases in nonresidential fixed investment, in exports, and in private inventory investment, upturns in federal government spending and in state and local government spending, and a smaller decrease in residential fixed investment that were partly offset by a much smaller decrease in imports and a downturn in personal consumption expenditures.”

As a side note, BEA has released their comprehensive revision, which generally happens every five years. While the details of the methodological changes are outside the scope of this article, they must be mentioned and considered in the analysis of GDP. Perhaps the most important factor is that BEA is now using 2005 dollars versus 2000 dollars in their calculations, which will tend to overstate GDP since the 2005 version of the greenback was considerably weaker than its predecessor. Consequently, purchasing the same amount of goods required more greenbacks thanks to the diluted value.

If one were interested in calculating a more honest version of GDP, any government borrowing (for starters) would be subtracted. Sure the money is spent on goods, but it is not money that is free and clear. It represents a future burden on growth, and should be treated as such. Just as an example, in FY 2008, the Federal Government ran a deficit of over $400 billion. Taking that off 2008 GDP lops another 2.8% off GDP. Imagine what deduction nearly $2 Trillion worth of borrowing would do to 2009 GDP if it were counted.

I am sure this position will bring argument that debt should not count against GDP, but if the GDP is being used to measure growth and debt constitutes a drag on future growth, then we need to be accounting for it. By the same token, we should also be counting consumer debt against the consumer’s contribution to GDP as well.

When one looks at Ben Bernanke or Janet Yellen’s remarks through the lens constructed above, their comments take on a totally different meaning. Essentially what they are saying is that growth can always be achieved at will by printing money, lending it to the government and having the government spend it. Are we really that far off here?

And true to form, Mr. Bernanke issued some well-couched comments last week regarding the economy. It is remarkable to watch him climb the learning curve of how to speak without really saying anything. A man that was easily pinned down early in his tenure because he was specific has now plunged headlong into ambiguity:

“The economy is showing tentative signs of stabilization.”

And the classic ‘green shoots’ comment:

“I do. I do see green shoots. And not everywhere, but certainly in some of the markets that we've been functioning in. And we've seen some improvement in the banks, as well, certainly in some key cases.”

The first part of this quote says it all. Bernanke is basically admitting that those markets which include the mortgage-backed and GSE securities market would still be in shambles if the Fed weren’t in there with its helicopters providing liquidity. How can such an unsustainable path be considered as positive?

Somehow the idea that government, by stepping in and putting trillions of dollars on the taxpayers’ tab – without any invitation to do so – then spending the money and calling it growth defies common sense.

The idea of the Fed ostensibly rigging key markets to create even more phony low interest rates for the purposes of continuing a binge that never should have happened in the first place is equally absurd.

It is becoming rather clear that if you want to do well in the land of green shoots that you’d better have a pair of 3D glasses. Hopefully those glasses come with a helmet because we’re going to need it.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules