In one of my more recent articles, I discussed how the CPI was falsely measured in order to keep inflation rates low.
The Fed does this because they want to ensure consumers that things are going well, and that there is nothing to be concerned about. They also prove this to consumers through the GDP, which is currently at 18.5 trillion.
Just look at that growth (this graph is per capita or per person, rather than total)
Image courtesy of FRED
GDP grew at an annual rate of 3.1% according to the “third” estimate released by BEA as of September 28 2017. They explain this growth from “positive contributions from PCE, nonresidential fixed investment, exports, federal government spending, and private inventory investment that were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased” (BEA.gov)
Graph courtesy of bea.gov
But a good point that Dave P of www.marketdailybriefing.com brings up is that when we measure this exponential GDP, it doesn’t account for debt.
It’s like that one person that you know that lives the high life with only $2 in their bank account. They have mega loans to finance their BMWs and high-rise apartment and fancy clothes. On the outside, everything looks perfect, but on the inside, they are quite literally drowning in debt.
Dave’s explanation of the problem with not factoring liabilities into the GDP calculation is a bit more provocative.
To paraphrase, he says for example, that hurricanes increase national income through increased spending, but overall equity (ownership) decreases because people lose homes and cars.
They will replace those homes and cars, so assets in the economy remain the same, but liabilities increase because they have to take out debt to replace those assets.
But that extra debt isn’t reflected in the GDP calculation. Debt makes people worse off (generally). Assets make people better off (generally). But the only thing that is reflected is that increase in income from increased spending, which makes the GDP shine.
This goes back to what I was talking about in my previous article – are things really 19% better off than they were in 2000 as the GDP says it is?
Also, this “life improvement by 19%” is being financed by massive amounts of debt, as I alluded to earlier.
Both graph and quote courtesy of Charles Hugh Smith
Now we can see the correlation between the exponential growth of the GDP and the exponential growth of public debt.
They basically follow the same growth curve.
There is actually a metric that breaks this down – the Debt-to-GDP ratio. It is a ratio between government debt and GDP.
A low Debt-GDP indicates that an economy is healthy and can produce enough to have a healthy economic relationship with selling and buying.
Just look at the images above.
So I have a couple of questions.
- What the heck is going on in 2017 to where we need to have almost enough public debt to finance a World War like we did in 1945?
- Why is the US light years ahead of the other OECD countries in terms of ratio metrics (106.7% vs. UK’s 87.8%)?
- Also, if we take Japan out of the calculation for debt levels of advanced G-20 countries, we get a metric of 67.46%)
- Why is this debt not a bigger deal?
This is bleeding into the lives of Americans, which concerns me for the financial health of our future.
I think this graph paints a pretty good picture of what is actually going on.
Image Courtesy of Charles Hugh Smith
Household income hasn’t increased by 45%. The blue line is a much more accurate representation, and accounts for inflation.
Household income has increased by 1% (based on this measurement) over the past 17 years. For comparison, student loans have increased by 300% in the last decade.
Image Courtesy of Charles Hugh Smith
I think the graph above is probably the best graph I have ever seen.
I am very concerned about the oncoming correction. I think there are a lot of structural weaknesses that are on their last legs and could crumble the entire economy.
Our current path simply is not sustainable. (And for those that say to look at corporate profits and the growth that they have experienced, I recommend that you analyze the Fed’s Z1 report)
There’s a lot going on that I don’t understand. Student loan debt is outpacing income growth? Wealth inequality is increasing, but we are better off because GDP is also increasing? Corporate profits are at all time highs, but have actually stagnated?
Information justification and presentation is very important. You can’t tell two different stories with the same set of numbers. It just doesn’t work.
Image Courtesy of First Rebuttal
So when I see graphs like this, and then turn back to our GDP calculation, I’m just confused.
How does it work like that? How can the government justify “growth” when there really isn’t any – in fact, there’s a decline in overall prosperity, free time, savings, disposable income, retirement accounts, reduced debt loads, and financial security?
This needs to be brought up on a national level, or I’m afraid that our economy will implode at some point. And it’s very hard to be a prosperous nation at that point.
Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.