Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19
Silver Is Cheap – And Getting Cheaper - 7th Oct 19
Stock Market Back to Neutral - 7th Oct 19
Free Market Capitalism: Laughably Predictable - 7th Oct 19
Four Fundamental Reasons to Buy Gold and Silver - 7th Oct 19
Gold and Silver Taking a Breather - 7th Oct 19
Check Engine Warning Light ECU Dealer Diagnostic Cost - Land Rover Discovery Sport - 6th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

The Coming Economic Slump

Economics / Global Economy Jul 25, 2014 - 10:38 AM GMT

By: Alasdair_Macleod

Economics

Governments and central banks have made little or no progress in recovering from the Lehman crisis six years ago. The problem is not helped by dependence on statistics which are downright misleading. This is particularly true of real GDP, comprised of nominal GDP deflated by an estimate of price inflation. First, we must discuss the inflation adjustment.


The idea that there is such a thing as a valid measure of price inflation is only true in an econometrician’s imagination. An index which might be theoretically valid at a single point in time is only subsequently valid in the wholly artificial construction of an unchanging, or “evenly rotating economy”: in other words an economy where everyone who is employed remains in the same employment producing at the same rate, retains the same proportion of cash liquidity, and buys exactly the same things in the same quantities. Furthermore business inventory quantities must also be static.

All human choice must be excluded for this condition. Only then can any differences in prices be identified as due to changes in the quantity of money and credit. Besides this fiction, an accurate index cannot then be constructed, because not every economic transaction is reported. Furthermore biases are built into the index, for example to overweight consumer spending relative to capital investment, and to incorporate government activity which is provided to users free of cost or subsidised. Buying art, stockmarket investments or a house are as much economic transactions as buying a loaf of bread, but these activities and many like them are specifically excluded. Worse still, adjustments are often made to conceal price increases in index constituents under one pretext or another.

Economic activities are also only selectively included in GDP, which is supposed to be the total of a country’s transactions over a period of time expressed as a money total. A perfect GDP number would include all economic transactions, and in this case would capture the changes in consumer preferences excluded from a static price index. But there is no way of identifying them to tell the difference between changes due to economic progress and changes due to monetary inflation.

To illustrate this point further, let’s assume that in a nation’s economy there is no change in the quantity of money earned, held in cash, borrowed or repaid between two dates. This being the case, what will be the change in GDP? The answer is obviously zero. People can make and buy different products and offer and pay for different services at different prices, but if the total amount of money spent is unchanged there can be no change in GDP. Instead of measuring economic growth, a meaningless term, it only measures the quantity of money spent.

To summarise so far, governments are using a price index, for which there is no sound theoretical basis, to deflate a money quantity mistakenly believed to represent economic progress. In our haste to dispense with the reality of markets we have substituted half-baked ideas utilising dodgy numbers. The error goes wholly unrecognised by the majority of economists, market commentators and of course the political classes.

It also explains some of the disconnection between monetary and price inflation. Price inflation in this context refers to the increase in prices due to demand enabled by extra money and credit. As already stated, newly issued money today is spent on assets and financial speculation, excluded from both GDP and its deflator.

It stands to reason that actions based on wrong assumptions will not achieve the intended result. The assumption is that money-printing and credit expansion are not having an inflationary effect, because the statistics say so. But as we have seen, the statistics are selective, focusing on current consumption. Objective enquiry about wider consequences is deterred, and nowhere is this truer than when seeking an understanding of the wider effects of monetary inflation. This leads us to the second error: we ignore the fact that monetary inflation is a transfer of wealth from the public to the creators of new money and credit.

The transfer of wealth through monetary inflation is initially selective, before being distributed more generally. The issuers of new currency and credit are governments and the banks, both of which reap the maximum benefit of utilising them before any prices rise. But the ultimate losers are the majority of the population: by the time new money ends up in wider circulation prices have already risen to reflect its existence.

Everywhere, monetary inflation transfers real wealth from ordinary people on fixed salaries or with savings. In the US for example, since the Lehman crisis money on deposit has increased from $5.4 trillion to $12.9 trillion. This gives us an idea of how much the original deposits are being devalued through monetary inflation, a continuing effect gradually revealed through those original deposits’ diminishing purchasing-power. The scale of wealth transfer from the public to both the government and the commercial banks, which is in addition to visible taxes, is strangling economic activity.

The supposed stimulation of an economy by monetary means relies on sloppy analysis and the ignorance of the losers. Unfortunately, it is process once embarked on that is difficult to stop without exposing the true weakness of government finances and the fragility of the banking system. Governments with the burden of public welfare costs are in a debt trap from which they lack the resolve to escape. The transformation of an economy from no monetary discipline into one based on sound-money principals is widely thought by central bankers to risk creating a major banking crisis.

The crisis will indeed come, but it will probably have its origins in the inability of individuals, robbed of the purchasing power of their fixed salaries and savings, to pay the prices demanded from them by businesses. This is called a slump, an old-fashioned term for the simultaneous contraction of production and demand. Not even zero or negative interest rates will save the banks from this increasingly certain event, for a very simple reason: by continuing the transfer of wealth from individuals through monetary inflation, the cure will finally kill the patient.

There is a growing certainty in the global economic outlook that is deeply alarming. The welfare-driven nations continue to impoverish their people by debauching their currencies. As Japan’s desperate monetary expansion now shows, far from improving her economic outlook, she is moving into a deepening slump, for which this article provides the explanation. Unfortunately we are all on the path to the same destructive process.

Alasdair Macleod

Head of research, GoldMoney

Alasdair.Macleod@GoldMoney.com

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2014 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Alasdair Macleod 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