GDP, Inflation and Smoke and Mirrors
By Jan Paul
GDP based on deficit spending and growing interest on that debt, is not going to give you a proper perspective of anything related to GDP and the health of our economy. It has become “smoke and mirrors” that distorts reality. That reality is a nation that is moving away from private sector growth as a portion of GDP. Manufacturing, for example has dropped from 30.4% of GDP in the 50’s to around 10% or less, now. But, government spending is now 44% of our national income according MW Hodges of “Grandfather Reports.”
Here is what our own Government Accounting Office reported to Congress in their 2007 report:
“Further, as of September 30, 2006, the U.S. government reported that it owed (i.e., liabilities) more than it owned (i.e., assets) by almost $9 trillion. In addition, the present value1 of the federal government’s major reported long-term “fiscal exposures”—liabilities (e.g., debt), contingencies (e.g., insurance), and social insurance and other commitments and promises (e.g., Social Security, Medicare)—rose from $20 trillion to about $50 trillion in the last 6 years.
…….the federal government’s current fiscal policy is unsustainable. Continuing on this imprudent and unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our domestic tranquility and national security.” (emphasis mine)
(http://www.gao.gov/new.items/d07362sp.pdf )
We can’t “grow” our way out of this mess. Our GDP growth has never had sustained levels needed to grow our way out of this. We can’t “tax” our way out either. Tax rates high enough to solve this would be so high, we would have virtually no money left to spend on our own needs as a nation.
There is one other aspect of GDP that distorts everything we compare to it. Inflation!
Inflation is so much higher and GDP so much lower that it isn’t even close to reality. When we had a huge inflation problem in the past, we finally raised interest rates enough to stabilize the collapsing dollar but, we also started changing the way we reported inflation. Why?
Look at this chart that, even with “underreported inflation,” and you can see why “reality had to be hidden” from the people to avoid panic and an end to foreign loans we were growing more dependent on.
Source MW Hodges - Grandfather Reports
As inflation really took off after we went off the Bretton Woods policy, and kept climbing and climbing even after we “restored confidence” in the dollar, “brilliant minds” in Washington decided we needed to change the way we reported inflation.
Had we not changed the way we report it, all spending with mandatory Cost of Living Adjustments (COLA) in them would have had to increase so fast, that taxes would have had to be raised astronomically or loans to meet deficit spending demands would have had to soar. Had we not changed the way we report inflation, Social Security checks would probably be 50% to 70% higher today than they are.
But, “real GDP growth” is determined by subtracting “real inflation” from “nominal GDP.” So, as you can see, the more we under report inflation the more we over report GDP. That is why some say that even with a recent 4.9% GDP growth report, we are really in a recession because “real inflation,” is closer to 9% than 2% as reported.
Returning to debt, if you were to have reported GDP accurately over the last couple of decades, you would probably find that “debt,” has risen much higher to GDP than is reported and “deficit spending” is a much greater portion of GDP than reported (due to the adjusted real GDP being a smaller amount than reported).
Who is paying for that distortion? This generation, to be sure. We are not only losing buying power but we are also losing the respect of the world for us. They no longer believe we know what we are doing and are losing the faith they need to continue to loan us money or hold our dollars for very long.
Yet, as much as we are suffering, it is the next generation that will have to pay most of the bills as they come due. It is they, that will be saddled with the coming 71 million retirees (2030 estimate) living on reduced benefits. Oh they may get a social security check for $5,000 but, it won’t buy a weeks worth of food, energy, and shelter.
Our children and grandchildren are going to have a horrible price to pay.
I predict that in 10 years, give or take a few, millions of our young will graduate and then see the $400,000 unfunded liability our GAO says is owed by each full time worker, and leave for other nations where economic opportunities aren’t joined at the hip with a $400,000 burden. Our standard of living will have dropped enough here and risen enough in other nations that they, not us, will be the land of opportunity if we don’t start reforms now.
