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May 13, 2014

What Recovery?

U.S. Has Not Exited Recession

Out of curiosity, I downloaded annual GDP numbers from the FRED database in order to do a few, quick calculations of my own. Anyone with a modicum of observational skills can get the sense that the U.S. economy, outside the energy sector, remains quite anemic. However, numbers are preferable to intuition, so let's see what can be derived from the data.

First, consider the published, real GDP numbers over the last four years: +2.5%, +1.8%, +2.8%, +1.9%. This period covers the supposed recovery from the 2008-09 meltdown. My first comment is to note that these are real GDP figures, meaning inflation-adjusted. However, they have been adjusted by inflation figures designed to have people perceive inflation as lower than it really is. If you believe inflation is under 2%, you haven't been paying attention to your own grocery bills.

According to John Williams over at Shadow Stats, inflation is running at least 3% higher than published figures. Applying an extra 300bp of inflation to the contrived government data wipes out real growth, making the best of the last four years come in at -0.2%.

Zero growth... in fact, continued contraction... is supported by another Shadow Stat calculation showing that the unemployment rate has been creeping higher over the last four years rather than declining as the BLS would have us think. Furthermore, money velocity continues to collapse to at least 55-year lows (the data only goes back to 1959).

But a more disturbing stat must be applied to these figures. Until the beginning of 2014, the Fed was printing at the pace of nearly $1 trillion per year. With a gross GDP of just over $15 trillion, the FED was basically printing 6.5% of GDP by themselves. Would the economy have been contracting at 7% without currency debasement?

The answer to this question is open to debate and really depends on the economic multiplier attributed to counterfeit money. If the multiplier is greater than one, for example, then GDP would have been contracting faster than 7% without the stimulus. Of course, the labeling of Fed operations as stimulus is a misnomer, in my opinion. The stimulus story is just a cover for absorbing bad debt from member banks. This topic, however, is not our focus here.

In the long run, I believe the multiplier for money printing is actually negative. Such manipulation prevents bad debts from clearing, thereby preventing resources from moving into more productive hands. Furthermore, the eventual and unavoidable inflationary effects destroy savings, thereby encouraging consumption rather than investment.

Our purported economic recovery does not exist. Real GDP is negative. Unemployment, as calculated in a manner consistent with past decades, is as high as it was during the Great Depression. Money velocity continues to collapse. And Fed counterfeiting efforts have assured us that futures recoveries will be hollowed out by inflation.

 

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