If you're reading this, don't forget to check out the 2010 version of this post!
Official GDP statistics for 2007 are out. It's time for an updated version of my Real GDP Is Shrinking post, which is currently #3 on my "Best of FSK" list. The 2006 version of the post wasn't very popular, probably because I chose an unsuitable post name.
Now that I can easily import Excel files to Blogger, I'm making an updated version of my post with data included.
Contrary to official government statistics, the US economy is shrinking at an alarming rate.
The official inflation-adjusted GDP numbers are calculated using the CPI. The CPI is biased and understates the true inflation rate. If you adjust GDP using an unbiased inflation measure, the US economy is shrinking rapidly.
A common myth is "The US economy is dependent on continuous growth to survive!" This is false. The US economy is dependent on continuous money supply growth. Due to biased inflation measures, money supply growth is misreported as economic growth.
Here is the raw data that I use as a source for my calculations.
I use this page as my source for GDP data.
I use GDP not adjusted for inflation. I'm going to adjust for inflation correctly, instead of using the CPI.
The GDP value is in billions of dollars. The population is in thousands. "Per cap GDP" is GDP divided by Population.
|Year||GDP ($B)||Pop (k)||Per Cap GDP|
Instead of using the CPI as my index of inflation, I use M2. The Federal Reserve publishes M2 statistics.
M2 is the broadest money supply measure still published by the Federal Reserve. Compared to M3, M2 excludes accounts over $100,000 and dollars held outside the USA.
The Federal Reserve ceased publishing M3 in 2006, so I can't use M3. Superficially, the Federal Reserve says it stopped publishing M3 because the data was too hard to collect. That reason is invalid. Instead of publishing M3 weekly, the Federal Reserve could have published M3 quarterly or annually.
The Federal Reserve stopped publishing M3 because they wanted to cover up how bad inflation really is.
When the Federal Reserve stopped publishing M3, it was growing at a rate of 15%/year. Some people have reconstructed M3 from other available statistics.
Even though M3 is no longer available, there's another unbiased measure of inflation.
The increase in the price of gold should track the growth of M3.
Unlike Federal Reserve Points, gold is real money. The purchasing power of an ounce of gold has remained mostly constant for 100+ years. Some people say the purchasing power of gold has been constant for thousands of years. I don't know any reliable source for the price of a loaf of bread 1000 years ago.
For example, the price of a Model T car, quoted in gold, is approximately the same as the price of a car in the present. A modern car has more features than a Model T, but the total price is the same. When comparing goods available now to goods available 100 years ago, the price quoted in gold is usually similar. Of course, no amount of gold would have bought you a computer or cellular phone 100 years ago.
Over a period of several years, the gold price is the least biased measure of inflation.
I used these two sources for the price of gold.
The price is the price on January 1 of that year.
Gold's price has risen substantially so far in 2008. Gold is currently over $930/ounce. (I put this post in my draft queue a few days before finishing it. The price of gold is jumping around a lot!)
There has been extensive manipulation of the gold price. Central banks have nearly exhausted their gold reserves. They are losing their ability to suppress the gold price.
The bad guys really want gold to be discredited as an investment. I am seriously considering the possibility that physical gold is a better investment than stocks! Even though corporations receive massive government subsidies, there also is a massive amount of fraud and waste. Corporate management is more concerned with lining their pockets than creating value for shareholders. It is possible that gold are silver are the only investments that yield a 0% inflation-adjusted return (minus transaction costs)!
Some people are saying "gold is experiencing an asset bubble". The price of gold/$ is skyrocketing. Compared to other commodities, the price of gold is relatively constant. The price of gold/silver or gold/oil is mostly unchanged. It is inaccurate to say "the price of gold is skyrocketing". It is more accurate to say "the value of the dollar is crashing".
If you believe "gold is money", then the price of gold is the least biased measure of inflation.
Here, I share the result of my calculations.
Per Capita M2
Using M2 as my measure of inflation is somewhat inaccurate. If the population increases by 1%, then 1% more money can be printed without causing inflation. Of course, the financial industry still prints this new money and recognizes seignorage profit. If the population grows and the money supply remains constant, then people would naturally experience deflation. This would be an extra incentive to savers. Instead, this benefit is stolen by the financial industry.
Per capita M2 is a more honest measure of price inflation than M2.
|Year||Raw M2 ($B)||Pop (k)||Per Cap M2|
Inflation Adjusted GDP
Now, I'm going to calculate inflation adjusted GDP. I'm going to adjust for inflation correctly, instead of using the CPI.
Per capita GDP and per capita M2 are copied from my previous tables. "GDP/M2" is my index for how much the US economy is growing or shrinking. "% gain" is the % gain relative to the previous year. "Cum % gain" is the cumulative percentage gain from that year to 2007. For example, in the row for the year 2000, the "Cum % gain" is -6.46%. This means that the US economy shrunk by 6.46% from 2000 to 2007. "Ann %" is the "Cum % gain" converted to an annualized percentage.
|Year||Per Cap GDP||Per Cap M2||GDP/M2||% gain||Cum % gain||Ann %|
The data in this table is really disturbing. From 1998-2007, the US economy was shrinking at an annualized rate of 1%. The cumulative growth from 1990 to 2007 was less than 0.5% per year.
If you use M3 instead of M2, the results are really depressing. When you use gold as your inflation index, the results are also depressing.
This table has the same format as the previous table. "GDP/Gold" is the per-capita GDP in ounces of gold. "% gain" is the 1 year gain in the size of the economy. "Cum % gain" is the cumulative gain/loss for the time period. "Ann %" is "Cum % gain" converted to an annualized value.
|Year||Per Cap GDP||Gold||GDP/Gold||% gain||Cum % gain||Ann %|
There has been substantial manipulation of the gold price. Even so, the conclusions are surprising.
If you use gold as the index of inflation, the US economy has been in severe recession/depression every year since 2001. The US economy has shrunk a total of 45% in that time! The US economy is shrinking at an annualized rate of more than 9% per year! The rate of shrinkage of the US economy is increasing!
This chart only goes to 2007! I didn't include the substantial run-up in the price of gold in 2007, and so far in 2008! If you extend this chart to the present, the US economy is in a severe depression!
If you go back to the 1990s, the results aren't as bad. In the 1990s, the world's central banks were selling off their gold supplies to manipulate the price of gold downward. Recently, they have nearly exhausted their gold reserves. They are no longer able to manipulate the gold price as much.
There are price variations in any given year. My analysis covers several years. Over that time, any short-term fluctuations should be smoothed out.
Contrary to official government reports, the US economy is in really bad shape. All my data comes from official sources. With just a little independent thinking, you can manipulate government data to tell the true story.
Government policymakers/terrorists use the CPI as their measure of inflation. The CPI is biased and severely understates inflation. Relying on this corrupt statistic, they see an unfairly optimistic picture of the US economy. If you use the CPI as your index of inflation, then money supply inflation is misreported as economic growth.
I only performed this calculation for the US economy. Many of my readers are located outside the USA. I suspect a similar calculation in other countries would show a similar result. The economy in Canada, the UK, the EU, and Australia is probably just as bad.
If you use M2 as your index of inflation, the US economy has been shrinking at a rate of 1% per year since 1998. If you use the price of gold as your index of inflation, the US economy is in a severe depression. If you use gold as the index of inflation, then the US economy has shrunk by nearly 50% since 2001!
The results for gold-adjusted inflation are particularly depressing! I didn't even include the huge run-up in the price of gold from January 1, 2007 to the present! The price of gold has increased by nearly 50% since January 1, 2007! If you correct for that, the picture of the US economy is truly bleak.
Criticism of Using GDP
One valid criticism of this post is "GDP is a meaningless statistic." However, GDP is the best broad measure of the US economy that's widely discussed. There's also GNP, which is highly correlated with GDP.
The GDP doesn't accurately measure true economic activity that occurs in the USA. Suppose a lead-painted toy is imported from China for sale in the USA. If the toy has a value of $3 when it comes off the boat, and a retail value of $20, then this counts as $17 towards US GDP. All the US corporation did was import, market, transport, and sell the product. The US corporation didn't really add any tangible value, but most of the value of the sale counts towards GDP. Such a practice is only sustainable because China and other countries are willing to trade tangible goods for a piece of paper.
The size of real GDP pretty tightly correlates with the evil power of the State. The "grey market" and "black market" economy is not included in official GDP. That is fine with me, because that wealth isn't being used against me!
People find this post interesting because my source information comes 100% from mainstream sources. By doing a correct analysis with the numbers, I get a true picture of economic growth in the USA. The CPI is a biased measure of inflation. This causes money supply inflation to be misreported as economic growth. If I use M2 or the price of gold as the index of inflation, this paints a different picture of the US economy than what mainstream sources indicate.