The Market Ticker
Commentary on The Capital Markets- Category [Macro Factors]
2017-03-01 13:03 by Karl Denninger
in Macro Factors , 613 references
[Comments enabled]  

Between the CNBS nonsense I feel it is necessary to put this up based on arithmetic.

Folks, GDP is defined in economics as C(onsumption) + G(overnment spending) + I(nvestment) +  E(xports, net)

But GDP is also defined as P * Q.  In other words, price * quantity.

What you really want is not the product, you want Q.

If you produce (in total) 100 bushels of corn in an economy the dollar amount of corn sales does not tell you how much corn was produced and sold!  In other words quoting P*Q is intentionally a fraud when talking about the rate of change of actual production of goods and services, which is otherwise called growth (or lack thereof) in an economy.


Basic, first-semester algebra says you must therefore remove "P" from the equation in order to find "Q".

Thus we must restate the GDP equation, assuming we want to talk about what matters (the actual amount of "stuff" made in goods and services, or "Q") as follows:

GDP   C + G + I + X    
--- = -------------
 P          P

But literally nobody does so and by not doing it they are intentionally lying and committing fraud against you because mathematics does not comprise a set of suggestions it is in fact a set of laws.

I went through this in Leverage.

There's a huge problem in this regard when it comes to "economists" and similar wonks because they consider debt to be a "non-event" -- that is, all it does is express a time preference.  You buy today instead of tomorrow.

They're forgetting something important -- it's only a time preference if, over time, debt levels, specifically, unsecured debt compared to GDP, which correlates almost-exactly to P in a fiat currency economy -- stays constant.

That is never the case.

If we consider that debt secured by an asset removes the asset from the market as "spendable" during the time the debt is out, which is an accurate and functional way of looking at it (if your house is mortgaged then the cash you can receive if you sell the house is reduced by that mortgage amount) then we are forced to conclude that all unsecured debt simply adds to "P" since it removes or sequesters nothing from the economy when it is issued and thus must be factored into all GDP calculations if we are interested in the net change of Qin other words how much STUFF did the economy produce?

We know what those figures are because the Fed emits the Z1 every quarter and tells us, in specific terms, exactly how much debt is outstanding in various categories.  The sum of "consumer debt" (not mortgages) + Federal Borrowing + State Borrowing (ex Pensions) is "close enough."  It's not perfect (it includes cars, for example, but excludes student loans) but between the two it's close enough to get a handle on what's going on.

How bad is the news when you adjust GDP to get rid of "P"?


Here's 1980 to today, quarterly, as annual rate of change:

Notice something interesting when looking at 1950 to today, however:

From 1952 to 1980 we oscillated between good and bad but the "good" outweighed the bad -- by a lot.  In other words the economy advanced on a broad basis for pretty-much everyone, although there were some ugly periods here and there. From 1960-1980, however, times were good!

We had a moribund economy on a truthful basis, but with some spikes of good, in the 1980-1990 timeframe -- we oscillated around zero, but the draw-downs were pretty ugly.

Since 2000 we have rarely crossed over the zero line, we have never printed over 2.5% and since 2008 we have barely managed any positive growth at all.

And by the way if you're wondering if the two graphs have similar trendlines, that is, whether omitting the earlier period changes the trend the answer is no.

This is quantity folks, not price * quantity.

The news is actually worse than this.  Why?  Because how much stuff you get depends on how many people "Q" is distributed over!  Since population grows about 1% a year in the United States, and has been more-or-less constantly doing so since the 1960s in that regard, take 1% off those figures annually for a per-person view of it which means we have not had a single positive quarter of economic progress on a per-person output basis since 2008!

If you want to know why we cannot sustain "growth" in the cost of medical care and all sorts of other machinations by the Fed (and Federal Government) in terms of debt and deficit spending fail to expand the health of the middle and lower economic classes this is the reason -- expanding "P" by emitting unsecured credit (e.g. deficit spending) does not, it is proved, turn into quantity improvement in the economy and that is all you care about in reality.

Sure, on a P*Q basis GDP has "grown" but in terms of actual "stuff" (good and services produced) it never meaningfully recovered since 2001, has never printed a number of 2.04% for even a single quarter (2006Q2) and has never printed a single quarter since the 2008 crash of greater than +0.25%.

And that's a mathematical fact.

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