This Blog Has Moved!

My blog has moved. Check out my new blog at realfreemarket.org.



Your Ad Here

Tuesday, July 15, 2008

Real GDP is Decreasing, 1990-2007

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.

Source Data

Here is the raw data that I use as a source for my calculations.

Raw GDP

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.

YearGDP ($B)Pop (k)Per Cap GDP
19905803.10 25018123195
19915995.90 25353023650
19926337.70 25692224668
19936657.40 26028225578
19947072.20 26345526844
19957397.70 26658827749
19967816.90 26971428982
19978304.30 27295830424
19988747.00 27615431674
19999268.40 27932833181
20009817.00 28243334759
200110128.00 28537235490
200210469.60 28821536326
200310960.80 29096437671
200411685.90 29364439796
200512433.90 29637341954
200613194.70 29919944100
200713841.30 30208745827

M2

Instead of using the CPI as my index of inflation, I use M2. The Federal Reserve publishes M2 statistics.

YearRaw M2
1990-Jan.3176.6
1991-Jan.3296
1992-Jan.3389.7
1993-Jan.3431.5
1994-Jan.3489.6
1995-Jan.3508.7
1996-Jan.3665
1997-Jan.3842.5
1998-Jan.4068.2
1999-Jan.4416.9
2000-Jan.4680.5
2001-Jan.4981.6
2002-Jan.5458.5
2003-Jan.5798.2
2004-Jan.6058.6
2005-Jan.6408.4
2006-Jan.6705.8
2007-Jan.7056.3
2008-Jan.7484.4

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.

M3

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.

Gold

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.

YearPrice
1990$386.20
1991$353.15
1992$333.00
1993$391.75
1994$383.25
1995$387.00
1996$369.00
1997$287.05
1998$288.70
1999$290.25
2000$279.11
2001$271.04
2002$309.73
2003$363.38
2004$409.72
2005$444.74
2006$530.00
2007$639.75
2008$846.75

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.

Calculations

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.

YearRaw M2 ($B)Pop (k)Per Cap M2
1990-Jan.3176.625018112697.21
1991-Jan.329625353013000.43
1992-Jan.3389.725692213193.50
1993-Jan.3431.526028213183.78
1994-Jan.3489.626345513245.53
1995-Jan.3508.726658813161.51
1996-Jan.366526971413588.47
1997-Jan.3842.527295814077.26
1998-Jan.4068.227615414731.64
1999-Jan.4416.927932815812.59
2000-Jan.4680.528243316572.07
2001-Jan.4981.628537217456.51
2002-Jan.5458.528821518938.99
2003-Jan.5798.229096419927.55
2004-Jan.6058.629364420632.47
2005-Jan.6408.429637321622.75
2006-Jan.6705.829919922412.51
2007-Jan.7056.330208723358.50


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.

YearPer Cap GDPPer Cap M2GDP/M2% gainCum % gainAnn %
200745827 233591.962


200644100 224131.968 -0.29%-0.29%-0.29%
200541954 216231.940 1.41%1.11%0.56%
200439796 206321.929 0.59%1.72%0.57%
200337671 199281.890 2.03%3.78%0.93%
200236326 189391.918 -1.44%2.29%0.45%
200135490 174572.033 -5.66%-3.50%-0.59%
200034759 165722.097 -3.07%-6.46%-0.95%
199933181 158132.098 -0.05%-6.50%-0.84%
199831674 147322.150 -2.40%-8.75%-1.01%
199730424 140772.161 -0.52%-9.22%-0.96%
199628982 135882.133 1.33%-8.01%-0.76%
199527749 131622.108 1.16%-6.95%-0.60%
199426844 132462.027 4.03%-3.19%-0.25%
199325578 131841.940 4.46%1.12%0.08%
199224668 131931.870 3.77%4.93%0.32%
199123650 130001.819 2.78%7.85%0.47%
199023195 126971.827 -0.42%7.40%0.42%

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.

YearPer Cap GDPGoldGDP/Gold% gainCum % gainAnn %
200745827 $639.7571.63


200644100 $530.0083.21-13.91%-13.91%-13.911%
200541954 $444.7494.33-11.79%-24.06%-12.859%
200439796 $409.7297.13-2.88%-26.25%-9.652%
200337671 $363.38103.67-6.31%-30.90%-8.827%
200236326 $309.73117.28-11.61%-38.92%-9.390%
200135490 $271.04130.94-10.43%-45.29%-9.564%
200034759 $279.11124.545.14%-42.48%-7.596%
199933181 $290.25114.328.94%-37.34%-5.676%
199831674 $288.70109.714.20%-34.71%-4.626%
199730424 $287.05105.993.51%-32.41%-3.842%
199628982 $369.0078.5434.94%-8.80%-0.834%
199527749 $387.0071.709.54%-0.10%-0.008%
199426844 $383.2570.042.37%2.27%0.173%
199325578 $391.7565.297.28%9.71%0.664%
199224668 $333.0074.08-11.86%-3.30%-0.224%
199123650 $353.1566.9710.62%6.96%0.422%
199023195 $386.2060.0611.50%19.27%1.042%

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.

Summary

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.

4 comments:

Mike said...

This would be even more alarming if you put a coefficient on the "G" (government spending) component of GDP.

How much of government spending in the US actually goes to "production" (things like roads, the postal service and enforcement of night-watchman-state-compatible common law) versus waste (military overseas, victimless/status crime prosecution and punishment, wealth transfer, pork projects, etc)? 10%? 5%?

Fudge around with that factor for a while and I'll bet the story is even grimmer.

barry b. said...

FSK & Mike,

I've been giving this some thought as well. In the last 6 years basically since the invastion of Iraq: we've had unprecedented borrowing from foreign countries, largely for govt. and corps related to the military industrial complex. Also, this was the same period when the financial industry opened the sub-prime housing market and flooded the market with cash there. On top of all of that, we've seen the price of a gallon of gasoline more than double, some of which is certainly due to nothing more than just inflation of the U.S. dollar (due to war and subprime market cash flood). Now the banks AND homeowners need bailing out (according to f**ked up politicians). I think these home owners are thinking "Hey everyone else is got there hand in the cookie jar so why not me too" Well they would have a good point wouldn't they?

Anyway, I we have set ourselves up for quite a problem that can only be solved by more inflation. American household savings are lowest since Great Depression, gasoline is high as hell, credit cards are maxed due to cash withdrawals to cover house not on subprime home owners. The government will certainly have to 'invent' another NEED for printing up money to keep this thing afloat. What will the next big ticket item be? Iraq will continue to be a giant leech on our society but they'll surely come up with another 'bubble' to cover the demise of the sub prime housing industry. Big mess bros...

propertarian said...

GDP is a horrible statistic to measure economic growth, as the Dot-com and housing bubble actually increases the GDP.

A more accurate GDP measure is here, and subtract the "G" component to get a more accurate measure.

All government spending is theft, and people have to work harder to pay taxes, so the "G" component should be subtracted two times.

The more government spending, the higher the GDP. The more inefficient the corporations, the higher the GDP. GDP actually decreases when accounting loopholes, tax evasion and informal economy increase.

And the import and export components are based on a bullionist mercantilistic ideology, and should not be measured.

gold price in today said...

very usefuel thnx

This Blog Has Moved!

My blog has moved. Check out my new blog at realfreemarket.org.