GDP as the flawed measure of a nation’s wealth

I am still working on a final complete article. In meantime, here are three important topics the article will cover:


Why comparisons to the US in the 1930s and Japan are flawed

Although they all experience the collapse of a large credit bubble, the fundamentals of the US in the 1930s and Japan were very different then they are for the US today. Here is a quick look at those fundamentals

US in the 1930s
currency:
hard
federal debt:
low
Foreign trade:
surplus
International debt:
creditor nation
Severe global downturn:
yes
World's reserve currency:
no

Japan
currency:
paper
federal debt:
low/moderate
Foreign trade:
surplus
International debt:
creditor nation
Severe global downturn:
no
World's reserve currency:
no

US today
currency:
paper
federal debt:
high
Foreign trade:
huge deficit
International debt:
debtor nation
Severe global downturn:
yes
World's reserve currency:
yes

As you can see, the US economy today is in a much weaker position then either the 1930s or Japan. Anyone expecting a similar end result (years of deflation) is ill-informed at best.

Hyperinflation despite a shrinking money supply

Regular deflation/Inflation are monetary phenomenon, which occur because of shrinking or expanding supply of money. Hyperinflation is a psychological event which involves the loss of confidence in a paper currency. Unlike regular deflation/Inflation, Hyperinflation is not caused by changes in the money supply, but by a drastic acceleration in the velocity of money. Basically, once people lose confidence in a currency, they try to get rid of it. This makes circulation speed up enormously, and prices can rise despite a shrinking money supply.

GDP as the flawed measure of a nation's wealth

Imagine a world where a person's net worth and credit worthiness was estimated using his yearly spending. In such a system, a person who spends big money on an enormous mansion, expensive cars, and lavish parties would be considered to have a high net worth and excellent credit rating. Furthermore, with such a means of estimating worth, it wouldn't matter whether a persons used income and borrowing to fund his spending. In fact, a person could quit his job and then borrow heavily to finance a luxurious lifestyle. The system would judge this unemployed worker to be wealthy and would allow him to borrow even more money to continue his . Sounds crazy right? Well, that is how a nation's GDP is estimated and used by economists.

Like in the spending-equals-wealth example above, GDP is calculated in a manner that focuses on a nation's consumption while ignoring the source of that consumption. In today's system, a nation like the US can have a 11.7 trillion dollar GDP despite being completely dependent on foreign imports and debt.


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0 Responses to GDP as the flawed measure of a nation’s wealth

  1. Dave says:

    You might also consider that in the 1930s the U.S. was an industrial powerhouse. Today its industrial base is much weaker and in decline.

    In addition, in the 1930s many more people lived in rural areas and on family farms where, if nothing else, they could at least grow food. Today most people live in cities and are unable to take care of themselves. Also, having so many farms in the hands of families back then spread the wealth more uniformly than today's concentrated, corporate, factory farming model.

    Finally, the U.S. was richer in natural resources in the 1930s, especially oil.

    Minerals (and the industry needed to exploit them) and agriculture, being the fundamental sources of all wealth, are crucial to our ability to "recover" from the coming depression. Alas, those very tools we need for such a recovery are absent.

    Dave
    http://daveeriqat.wordpress.com/

  2. SPECTRE of Deflation says:

    As of today, the Bond Market is flashing Deflation. If we were in a vacuum in the actions we were taking, then yes, hyperinflation would be a concern, but we aren't the only ones. The Treasury Auction today had a yield of 0% on the one month, and a negative 0.01% on the 3 month. The Auction was oversubscribed by 4.2 to 1! If this isn't Deflation then I don't know what is.

  3. SPECTRE of Deflation says:

    There is a loss of confidence, but it's with other nations and not America.

  4. Jason says:

    Pumping up the money supply should melt a credit freeze. The Fed chairman faces huge obstacles
    in trying to restart the credit engine and get maxed out consumers spending again. Given the
    scale of the Fed's interventions, it should be weakening the value of the dollar and setting
    us on a course toward inflation. Inflation happens when prices rise. Deflation happens when
    they fall. In this December's dark economy, falling prices for gasoline, cars, and clothes and
    just about anything would seem like a silver lining.

    http://nomedals.blogspot.com

  5. Anonymous says:

    I like Peter Schiffs analogy of "running towards the blast" when he talks about flight to safety vis a vie treasury notes. I wish Eric you would give the "true GDP" that is domestic production minus international import consumption that would tell you how bad things will be when the foreigners wisen up. I can't think of much we produce anymore besides fluff and neurotic, spoiled, whiny, wimpy, fat, lazy, self-indulgent, juvenile, invalid citizens.

  6. Dread says:

    SPECTRE, stop being a pollyanna. In 1932, GM (General Motors) was one of the best run companies of its time. Its stock price dropped from 73 to 8! Where is GM today? One of the worst companies run to date in US history, facing bankruptcy, and whining to the citizenry, pleading for a bailout. Is that microcosm of the situation enough for you?

    The recession of 1920 corrected itself within a year. There is no reason why the RECESSION of 1929 should have been any different. The "fundamentals" (as Eric illustrated) in both of those recessions were sound. We were on "sound money" (hard currency) in both of those periods. And where are we today?

    Time for you to educate yourself and read a little Rothbard...

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