Recently, the Commerce Department reported that the U.S. economy expanded at an annual rate of 2.2 percent in the first quarter of the year. While this figure suggests growth, there are underlying concerns that prompt skepticism about its validity. Understanding what this number represents requires a closer examination of the broader economic landscape.
The analysts at PIMCO have declared a “new normal” marked by low growth and returns since 2009. In that context, a GDP growth of 2.2 percent seems to align with their narrative.
Yet, simply accepting this figure as genuine growth is questionable. At Economic Prism, we believe it’s critical to explore what this number fails to convey.
Specifically, the 2.2 percent GDP does not symbolize true growth; instead, it illustrates stagnation. Our calculations suggest that the economy might actually be contracting at a rate between negative 0.5 percent and negative 8.1 percent. The significant range in our estimate reflects potential inaccuracies in Consumer Price Index (CPI) reporting. Let us elaborate…
Economies are Shrinking
The Bureau of Labor Statistics recently cited a 2.7 percent rise in prices over the past year. Subtracting that annual inflation from the annual growth results in a real growth rate of negative 0.5 percent. Unfortunately, much like the government’s unemployment figures, the CPI report can be viewed as mere propaganda.
According to John Williams of Shadow Government Statistics, true inflation figures as of March 2012 sit around 10.3 percent. Williams calculates inflation using methods from the 1980s, prior to the government’s manipulations of statistics through hedonic pricing adjustments for political reasons. Factoring in this more accurate inflation rate yields a real growth rate of negative 8.1 percent.
The choice of which number to believe is yours; we impart this information solely for your contemplation. Regardless of the metric, a 2.2 percent GDP signals that the economy is not expanding; rather, it is contracting. And the U.S. is not an isolated case in this trend…
Much of Europe is officially in recession. Reports indicate that the economies of Greece, Belgium, Portugal, Italy, Spain, the Netherlands, and Slovenia are all shrinking. France is currently grappling with economic challenges, and the nation is about to elect a Socialist leader. Meanwhile, Germany is struggling to maintain nearly zero growth.
Moreover, last week, the UK’s Office for National Statistics revealed a first quarter GDP decline of 0.2 percent, following a contraction of 0.3 percent in the previous quarter. Economists typically regard two successive quarters of economic decline as indicative of a recession. By this metric, the UK has officially entered recession.
In essence, Europe is witnessing the consequences of accumulating debt that outstrips sustainable growth. A more significant reckoning is likely on the horizon…
Mass Delusions of Cupcakes and Credit
“Mass delusions are not rare,” reflects Garet Garrett in his 1932 work, A Bubble that Broke the World. “They salt the human story. The hallucinatory types are well known; so also is the sudden variation called mania, generally localized, like the tulip mania in Holland many years ago or the common-stock mania of a recent time in Wall Street […]. This is a delusion about credit.”
Today, we see mass delusions manifesting in various forms, including over-the-top cupcakes and, reminiscent of Garrett’s era, the delusion surrounding credit. While extravagant cupcakes may be an amusing fad, the delusion surrounding U.S. government debt carries much heavier implications.
In recent years, we’ve seen the rise of these ornate cupcakes gracing children’s birthday parties, weddings, and banquets. While visually stunning, many are hardly edible and are likely to become just another fleeting trend.
Contrarily, U.S. government debt has been growing unchecked for decades, and it now surpasses the nation’s GDP. Furthermore, Federal Reserve Chairman Bernanke has stated that he will maintain near-zero federal funds rates until late 2014, enabling major banks to acquire more credit, often at the expense of those unqualified for such loans. There will inevitably come a day when the Fed’s facade can no longer hold.
When that day arrives, the U.S. Treasury bond bubble will burst, precipitating a downturn in U.S. financial assets, including stocks and bonds, as well as a plummet in the dollar’s value on international markets. Tragically, as a result, American citizens’ savings may be wiped out amid soaring inflation.
Sincerely,
MN Gordon
for Economic Prism
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