The Never Ending Recession–What’s In Your GDP

“The Gross Domestic Product (GDP) is one of the broader measures of economic activity and is the most widely followed business indicator reported by the U.S. government. Upward growth biases built into GDP modeling since the early 1980s, however, have rendered this important series nearly worthless as an indicator of economic activity. The popularly followed number in each release is the seasonally adjusted, annualized quarterly growth rate of real (inflation-adjusted) GDP, where the current-dollar number is deflated by the BEA’s estimates of appropriate price changes. It is important to keep in mind that the lower the inflation rate used in the deflation process, the higher will be the resulting inflation-adjusted GDP growth.”John Williams – Shadowstats

GDP is the economic statistic bankers, politicians and media pundits use to convince the masses the economy is growing and their lives are improving. Therefore, it is the statistic most likely to be manipulated, twisted and engineered in order to portray the storyline required by the elite. Two consecutive quarters of negative GDP growth usually marks a recession. Those in power do not like to report recessions, so data “massaging” has been required over the last few decades to generate the required result. Prior to 1991 the government reported the broader GNP, which includes the GDP plus the balance of international flows of interest and dividend payments. Once we became a debtor nation, with massive interest payments to foreigners, reporting GNP became inconvenient. It is not reported because it is approximately $900 billion lower than GDP. The creativity of our leaders knows no bounds. In July of 2013 the government decided they had found a more “accurate” method for measuring GDP and simply retroactively increased GDP by $500 billion – essentially out of thin air. It’s amazing how every “more accurate” accounting adjustment improves the reported data. Economic growth didn’t change, but GDP was boosted by 3 percent. However, this upward adjustment pales in comparison to the decades long under-reporting of inflation baked into the GDP calculation.

GDP is adjusted for inflation. The higher inflation factored into the calculation, the lower reported GDP. The inflation deflator used by the BEA in their GDP calculation is even lower than the already bastardized CPI. According to the BEA, there has only been 32 percent inflation since the year 2000. They have only found 1.4 percent inflation in the last year and only 7.1 percent in the last five years. You’d have to be a zombie from the Walking Deador an Ivy League economist to believe those lies. Anyone living in the real world knows their cost of living has risen at a far greater 70 rate. According to the government, and unquestioningly reported by the compliant co-conspirators in the the corporate media, GDP has grown from $10 trillion in 2000 to $17 trillion today. That  percent growth over the last fourteen years is dramatically overstated, as revealed in the graph below. Using a true rate of inflation exposes the fraud being committed by those in power. The country has been in a never ending recession since 2000.

sgs-gdp

Your normalcy bias is telling you this is impossible. Your government tells you we have only experienced a recession from the third quarter of 2008 through the third quarter of 2009. So despite experiencing two stock market crashes, the greatest housing crash in history, and a worldwide financial system implosion the authorities insist  we’ve had a growing economy 93 percent of the time over the last fourteen years. That mental anguish you are feeling is the dissonance of wanting to believe your government, but knowing they are lying. It is a known fact the government, in conspiracy with Greenspan, Congress and academia, have systematically reduced the reported CPI based on:

  • hedonistic quality adjustments,
  • geometric weighting alterations,
  • substitution modifications,
  • and the creation of incomprehensible owner’s equivalent rent calculations.

Since the 1700s consumer inflation had been estimated by measuring price changes in a fixed-weight basket of goods, effectively measuring the cost of maintaining a constant standard of living. This began to change in the early 1980s with the Greenspan Commission to “save” Social Security and came to a head with the Boskin Commission in 1995.

Simply stated, the Greenspan/Boskin Commissions’ task was to reduce future Social Security payments to senior citizens by reducing the CPI and thereby reducing cost of living adjustments to social security recipients. The tactic provided an “easy way out” for politicians. Politicians would lose votes if they ever had to directly address the unsustainability of Social Security. As a result, they allowed academics to work their magic by understating the CPI and stealing $700 billion from retirees in the ten years ending in 2006. With 10,000 baby boomers per day turning 65 for the next eighteen years, understating CPI will rob them of trillions in payments. This is a cowardly dishonest method of extending the life of Social Security.

If CPI was calculated exactly as it was computed prior to 1983, it would have averaged between 5 percent and 10 percent over the last fourteen years. Even computing it based on the 1990 calculation prior to the Boskin Commission adjustments, would have produced annual inflation of 4 percent to 7 percent. A glance at an inflation chart from 1872 through today reveals the complete and utter failure of the Federal Reserve in achieving their stated mandate of price stability. They have managed to reduce the purchasing power of your dollar by 95 percent over the last 100 years. You may also notice the net deflation from 1872 until 1913, when the American economy was growing rapidly. It is almost as if the Federal Reserve’s true mandate has been to create:

  • inflation,
  • finance wars,
  • perpetuate the proliferation of debt,
  • artificially create booms and busts,
  • enrich their Wall Street owners,
  • and impoverish the masses. Happy Birthday Federal Reserve!

inflation-1872-present-alt-cpi

When you connect the dots you realize the under-reporting of inflation benefits not only the government but corporations as well. If the government was reporting the true rate of inflation, corporations would be forced to pay their workers higher wages, reducing profits, reducing corporate bonuses, and reducing profits.  Reporting a true rate of inflation would force long-term interest rates higher. These higher rates, along with higher COLA increases to government entitlements, would blow a hole in the deficit and force politicians to address our unsustainable economic system.

A Financial Storm Approaches

Financial Storm

It is so easy for a country to print money… Said another way, it is so easy for a government to create inflation.

Because it’s so easy, nobody believes that DEFLATION – the opposite of inflation – is possible.

But it is

Financial StormEarlier this week, Republican politicians proposed a bill that would limit the powers of the Federal Reserve.

We are all for limiting the powers of government… But if the Fed’s powers are limited, its ability to print money would be limited… If this happens, persistent deflation could be an outcome – and that could trigger a financial storm that nobody is expecting.

“The most likely path of the Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation,” Jim Rickards writes in his excellent book The Death of Money. However, “the Fed may reach the political limits of printing.”

This is a scary thought for the Fed.

“Deflation is the Federal Reserve’s worst nightmare for many reasons,” Rickards explains. The new bill proposed by the Republicans is an example of the Fed reaching the political limits of money printing.

For one, “Deflation increases the value of government debt, making it harder to repay. If deflation is not reversed, there will be an outright default on the national debt, rather than the less traumatic outcome of default-by-inflation.”

Even worse, deflation “feeds on itself and is nearly impossible for the Fed to reverse.”

If deflation actually takes hold, how can we get out of it?

Rickards explains it: “The only way to break deflation is for the United States to declare, by executive order, that gold’s price is, say, $7,000 per ounce, possibly higher.”
Deflation can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35.00 per ounce… If the United States faces severe deflation again, the antidote of dollar devaluation against gold will be the same, because there is no other solution when printing money fails.”

To be clear, Rickards isn’t actually predicting deflation…

He says we’re in an epic battle between inflation and deflation… where the government desperately wants to create inflation.

Conventional wisdom dictates that the government will succeed in creating inflation. But Rickards’ book describes an eye-opening, credible argument on deflation could actually take hold.

The actions this week by House Republicans suggest that Rickards is right – there is a legitimate risk that the Fed “may reach the political limits of money printing.”

We highly recommend you pick up  The Death of Money… It will open your eyes…

Economic Scenarios

Economic-scenarios.png

We believe the future of the U.S. and global economies will likely follow one of four different scenarios.

Four main scenarios

Economic scenarios

For each scenario, the position of the bubble shows the combination of growth and inflation that we expect to see in the next one to three years.

The size of the bubble illustrates our view on the likelihood of this scenario occurring – this is subjective, and is intended just to illustrate our thinking.

Growth is expressed in relation to the potential for each country. For example, a growth rate of 4 percent would be low for China but very high for Europe. Similarly, inflation relates to a country’s individual inflation target.

Economic scenarios text

Implications for investment returns

The tablebelow summarizes the expected returns of the major asset classes under each of our four main scenarios.

The circles in the boxes show the expected return over the next three years, relative to the long-term expected returns*. Light green means higher than long-term expected returns*, while light red means lower.

Economic scenarios returns

Conclusion

In most scenarios equities are the most attractive asset class. But valuation support is limited, exposing equities to a potentially sharp correction.

1. Favor equities

We continue to favor equities despite their demanding valuations:

  • Abundant liquidity and repressed interest rates in our “muddling through” and “new monetary world” scenarios continue to support equities.
  • Improved earnings prospects in our economic renaissance” scenario should also boost equity prices despite the prospect of higher interest rates.
  • This pattern applies particularly to the US market. It is the most overvalued region but prices could continue to rise if the “economic renaissance” scenario becomes increasingly likely.

2. Be cautious on bonds

  • We are avoiding long-maturity nominal bonds because they would be negatively affected by a normalisation of monetary policy in our “economic renaissance” scenario.
  • Within fixed income we continue to like shorter-maturity corporate bonds. This part of the market has two attractive features. First, there is still a decent yield advantage relative to government bonds. Second, the short maturity would offer some protection against rising interest rates, especially in our “economic renaissance” scenario.

3. Maintain exposure to real assets

  • The still sizeable probability of our “new monetary world” scenario lies behind our ongoing exposure to real assets such as gold, real estate and possibly inflation-linked bonds.
  • We are also confident that over an economic cycle equities continue to offer protection against inflation.
  • Additionally, we are focusing on hedge funds that have the flexibility to adjust to an unexpected increase in inflation.

4. Maintain hedges

Although we believe the “depression” scenario is the least likely, its impact would be so disruptive that it must be considered within our investment strategy. Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero.

Therefore, we recommend hedging strategies that can limit the potential losses from your portfolios.

Death of Money

inflation_vs_deflation.jpg

“The world is witnessing a climactic battle between deflation and inflation,” Jim Rickards writes in his excellent new book The Death of Money.
“It is just a matter of time” before this battle comes to a head.

inflation_vs_deflationAt some point, the U.S. economy will experience “an earthquake in the form of either a deeper depression [from deflation] or higher inflation, as one force rapidly and unexpected overwhelms the other.”

Which one will win? And what are the potential outcomes? Rickards goes over each of those in his book…

Inflation is the easy one to understand… For the most part, the government creates this one… by “printing” trillions of dollars.

Deflation is less easy to understand… For starters, we “have no living memory of it.” The last episode of persistent deflation was in the Great Depression. Rickards calls deflation “the Federal Reserve’s worst nightmare.” For one, deflation “increases the value of government debt, making it harder to repay.”

Because of fear of deflation, the Fed can’t stop its money printing. If it did stop, “deflation would quickly dominate the economy, with disastrous consequences for the national debt, government revenue, and the banking system.”

Which will win – inflation or deflation?

Rickards explains that “the most likely path of Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation.” The Fed assumes it can later deal with inflation that it might create.

I agree with him. Governments have proven for centuries that – while they might be pretty bad at most things – one thing they’re pretty good at is creating inflation through printing money.

The easy conclusion is that inflation will win… but many times, the easy conclusion isn’t necessarily the right one.

In his book, Rickards builds a strong case for how deflation could win as well.



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death of money

Whether inflation or deflation wins this battle, Rickards makes a strong case for a higher gold price.

If inflation wins, then it will take more paper dollars to buy an ounce of gold. And if deflation wins, then the price of gold will move higher to break that deflation…

The only way to break deflation is to declare by executive order that gold’s price is, say, $7,000 per ounce… the purpose would be not to enrich gold holders but to reset general price levels. Such moves may seem unlikely, but they would be effective… there is no other solution when printing money fails.

Our money is on inflation winning the battle – ultimately – but we think it could take a few years for the clear winner to emerge. In the meantime, we are likely to see short terms swings between deflation and inflation.

 

America’s economic myths exposed

Economic Myths

Mainstream economists and so-called experts have filled the minds of most Americans with economic myths that are constantly reinforced by the media and repeated on the streets.

Economic MythsThese myths are erroneous at best, sometimes based on half truths. Many of them are just false. We hear and read them every day:

  • “inflation” is caused by rising oil prices;
  • consumption is the most important element for economic growth;
  • low interest rates are helpful to the economy;
  • government expenditures help “stimulate” the economy;
  • there is an energy “crisis,” and many others.

In this article we will examine some of the most common ones and explain the reality behind these myths.

Inflation and Energy Myths

Inflation — or, rather, the general rise in prices – and the increase in energy prices are issues that have always created numerous economic myths. The following are some of the most common ones.

Myth 1: “Dependence on Foreign Oil”

This myth suggests that the problem with oil prices is due to America’s “dependence” on foreign oil.

The high price of oil has nothing to do with its origin; the price of oil is determined in international markets. Even if the United States were to produce 100 percent of the oil it consumes, the price would be the same if the worldwide supply and demand of oil were to remain the same. Oil is a commodity, so the price of a barrel produced in the United States is basically the same as the price of a barrel of oil produced in any other country, but the costs of labor, land, and regulatory compliance are usually higher in the United States than in third-world countries. Lowering these costs would help increase supply. Increasing supply, whether in the United States or elsewhere, will push prices lower.

Importing a product does not mean you “depend” on it. This is like saying that when we “import” food from our local supermarket we “depend” on that supermarket. The opposite is usually true; exporters depend on us, since we are the customers. Also, importing a product usually means buying at lower prices, whereas producing in the United States often means consuming at higher prices. This point is proven when we see the cheap imports we can purchase from China and the higher prices of many of these same products manufactured in the United States. The amazing thing is that the protectionists claim, on the one hand, that America should be “protected” from cheap imports, but when it comes to oil, they say we should be “protected” from “expensive imported” oil.

Most, if not all, of the higher price of oil can be explained by the expansion of the money supply or the debasement of the dollar. The foreign producers are not at fault; our national central bank is the culprit.

Myth 2: “Inflation is caused by rising oil prices.”

False. If the money supply were to remain constant, then an increase in the price of one good, such as oil, would cause a decrease in the price of other goods. If more money is spent on oil, then less money will be available to spend on other goods. This will in turn cause a drop in the demand for other goods, which will subsequently cause a drop in the prices of these goods. The reality is that inflation is always a monetary matter, caused by the increase in the money supply due to the interest-rate-easing policies of central banks.

Myth 3: “Current inflation is being caused by the increased demand of millions of new consumers in China and India.”

At first glance this myth might seem true. Millions of new Asian consumers have entered the market, thus, there is higher demand for most goods, which would apparently cause higher prices. What is being overlooked is that these new consumers are also new producers. In general, most people produce far more than they consume, because most workers have to produce more than what they earn in wages (if not, they lose their jobs). While it is true that demand has risen due to these new consumers, supply has increased even more, due to their increased production. This can clearly be seen by the frequent drop in prices of most goods being manufactured in China. On the other hand, the only way these new workers can increase their consumption beyond what they produce is through credit. Thus we return to the real culprit behind inflation: credit expansion due to central banks’ intervention in the financial markets.Economic Myths

Consumption Myths

These myths were injected into the mainstream mainly by Keynesian economists who were trying to influence public policy.

Myth 4: “Consumption is the most important element of the economy.”

Consumption is indeed important in a free economy: particularly the freedom of consumers to buy their goods in unhampered markets. However, key to long-term economic growth is investment (savings), which is the opposite of consumption. Public policies that promote consumption — such as low interest rates — do so at the expense of savings. Less savings means less investment; an economy that does not save or invest will consume all of its resources and eventually end up bankrupt.

Myth 5: “Excess consumption is a feature of the free-market capitalist system.”

False. Excess consumption is mostly caused by central bank’s artificially low interest rates, which promote lower savings and higher consumption than would naturally occur. Currently, the real interest rates of savings accounts are negative. Thus it makes no economic sense to save. Since these same policies cause price increases, it makes sense to consume as much as you can immediately, before prices rise. Therefore we see that excess consumption is being caused by government policies and not by the capitalist free-market system.

Myth 6: “Federal Reserve interest-rate policy can help the economy.”

It is baffling how most Americans — including many of those who fought so hard against central planning in the 20th century — believe that the financial markets and the economy benefit from the central manipulation and influence conducted by the Federal Reserve.

To maintain a target of low interest rates, the Fed must add liquidity to the money supply by creating money without obtaining additional reserves. This is the infamous creation of money “out of thin air,” which so many have criticized. Many believe that this artificial injection of liquidity creates economic stimuli and promotes growth. However, even though it creates an apparent bonanza, these monetary injections must eventually be “paid back.” This payback happens by means of higher prices, the so-called inflation.

Low interest rates also create a dislocation between the market’s natural interest rate and the interest rate that the Federal Reserve sets. Supply and demand of money — mainly supply of savings and other deposits and demand for credit — is what should set interest rates in a normal unhampered market. Risk, too, should play a role in setting market interest rates.

When the Fed artificially lowers interest rates, it does so below the market rate. A rate below the market rate creates a higher demand for credit; thus people and companies get into debt beyond normal levels. On the other hand, low savings-account rates push people to withdraw money, lowering the market supply of funds. These dislocations are at the root of the eventual credit crisis, which follows the boom period that was caused by artificially low interest rates.

With today’s risky financial crisis, most people would demand a premium to deposit their money in a bank. Further, the current liquidity crunch should mean a lower market supply of money. Both forces should be pushing interest rates up. If the market were unimpeded (that is, if there were no intervention from the Fed), interest rates would be higher, not lower.

These economic myths have plagued the minds of mainstream Americans. Despite an alleged return of pro-free-market forces to the main political parties in the 1980s and ’90s, new myths seem to surface almost every day.

Thanks to the Ludwig von Mises Institute for this article.