GDP Manipulation? You Should Consider Getting Short
James Bibbings, September 10th, 2009
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It has taken much longer than I would have liked to get this article out and it's been a few weeks since we last talked about GDP. I again want to thank each and every one of you for following me, analyzing what I have to say, and being patient. To get everyone up to speed a few weeks ago I wrote an article titled "The 11th Hour, Moments before A US collapse." That article summarized some thoughts that I had regarding government intervention and its effects on GDP. I followed that feature up with a supporting article the next week titled "GDP Fallacy, Do Governments Willfully Mislead People" in which I supported the first two points of my original thesis. After this I wrote "How to Trade When the Government Controls Investment" and explored the details of my third point in the original article; how the government has worked to control gross investment.
Within each of these articles I have also tried to investigate potential investment opportunities. My thought has been that if we can gain an understanding of the government's intentions within the markets, we may be able to make higher probability trades. Since I've taken so long to put this together, I want to discuss points four through nine of my original theory.
So if you've been following me the whole time let's get started; and if not take some time to read my previous work before moving on. When you read remember to remain mindful of the GDP equation and the fact that GDP is intended to measure economic well being:
GDP = (A) Private Consumption + (B) Gross Investment + (C) Government Spending + ((D) Exports - Imports))
Point Number Four
When originally deciding on the GDP equation, the Government wisely includes part D. Exports less Imports are included as any decline in imports (during a recession) helps to assist overall GDP. Conversely (during boom times) import gains will be offset by the other three components of GDP. Thus including letter D benefits GDP much more than it can hurt it and the equation becomes self moderated for long term growth.
Throughout the recession examples of this have been made readily available. To lay out the type of part D activities that will show mathematical gains to GDP consider the following: Suppose an unemployed person wanted to buy anything that was imported to the US but can't due to their employment situation. Since this person forgoes their purchase imports fall and cause exports to be "less" negative. In addition, since this person will always have basic needs (which will be supported by savings or government assistance) they will still spend domestically on essentials. This spending will support private consumption, and in the case the person is government assisted will also drive government spending or part C. Thus, even though a person doesn't have a job they still able to hold the GDP equation at near level or may even perhaps provide gains under the right scenario.
Now, recall for a moment that real unemployment is likely near 20% (see government U6 and adjust from there) especially when considering those unemployed for more than 26 weeks who are no longer counted. In fact since we know that there are roughly 120 million workers we can say this scenario could apply to as many as 24 million people. On the low side, using the "official" unemployment figure this scenario could apply to as many as 11.28 million people. Either way more than 10 million people being unemployed should not "net" in the GDP equation or even potentially move it forward. Thus by the nature of the GDP formula this component helps more than it hurts. Onward.
Point Number Five
Now that the Government has control of gross investment (B), government spending (C), and since Part D doesn't really matter, in order to move GDP they need to influence consumption or Part A. Knowing that part A can't be controlled, at the beginning of the recession the government uses "stimulus" to encourage private consumption (lowering interest rates, discussing rebate checks, making cash available to banks for next to nothing, disguising government spending as "public investment", trying various ploys such as raising FDIC insurance minimums etc.) in order to lead GDP forward.
It doesn't take a rocket scientist to understand what the Obama Regime and his clan of trusty Keynesians were trying to do; stimulate, stimulate, stimulate. But for what purpose? Since Ben Bernanke is Alan Greenspan's child and a proclaimed Keynesian student of the great depression they did they only thing they knew how to do. They encouraged more debt and more spending from tax payers and became cheer leaders. Do you recall how the Federal Reserve and the Treasury department tried to encourage as much spending from the public as possible this spring? Nearly every day someone from the current administration was on the television clamoring for more lending and easy credit. What you were witnessing was the first attempt by the government to sway public consumption.
The only problem here (besides the fact that spending and stimulating was and remains a horrible idea) is that they completely underestimated the power of the consumer, private businessman, and the overall ability of the American people to hold on to what little money they had left. In implementing this strategy they were trying to fight a problem which had already occurred and to this day cannot be stopped. Which brings us to point number six...
