Mass Delusions of Cupcakes and Credit

According to the Commerce Department, the U.S. economy grew at an annual rate of 2.2 percent during the first quarter of the year.  Like the economy, something doesn’t feel quite right about this number.  But what is it, really, that should be a surprise?

The clever fellows at PIMCO have been telling everyone of a new normal – low growth, low returns – world since 2009.  Isn’t 2.2 percent GDP consistent with their thesis?

Maybe so.  But that’s if you consider 2.2 percent GDP to be real growth.  Here at the Economic Prism we have reservations.  What we mean is we’re more interested in what this number doesn’t represent than what it does.

In particular, 2.2 percent GDP doesn’t represent growth.  It represents lack of growth.  In fact, a headline GDP of 2.2 percent means the economy is not increasing at all.

More exactly, by our back of the napkin estimation, the economy’s contracting at an annual rate somewhere between negative 0.5 percent and negative 8.1 percent.  The wide differential in our estimate represents the fudge factor in CPI reporting.  Here’s what we mean…

Economies are Shrinking

The Bureau of Labor Statistics’ latest CPI report says prices increased 2.7 percent over the last 12-months.  Subtracting annual price increases from annual growth leaves a real growth rate of negative 0.5 percent.  But, unfortunately, like the government’s unemployment rate, the CPI report is mere propaganda.

According to John Williams of Shadow Government Statistics, real inflation, as of March 2012, is running at 10.3 percent.  Williams’ measures inflation the way it was measured in the 1980s, before the government began fudging the numbers through hedonic pricing adjustments and other nonsense for political reasons.  Subtracting annual price increases based on the inflation rate determined by Shadow Government Statistics from annual growth leaves a real growth rate of negative 8.1 percent.

What number you believe is up to you…we’re simply providing information for your consideration.  More importantly, regardless of what number you use, a 2.2 percent GDP means the economy is not getting bigger…it’s getting smaller.  But the U.S. isn’t the only economy that’s shrinking…

Much of Europe’s already officially in recession.  From what we gather, the economies of Greece, Belgium, Portugal, Italy, Spain, the Netherlands, and Slovenia are all shrinking.  France’s economy is struggling and they’re about to elect a Socialist to their country’s top office.  And Germany’s doing everything they can to maintain essentially zero growth.

On top of that, last week the United Kingdom’s Office for National Statistics reported a first quarter GDP of negative 0.2 percent.  This followed a 0.3 percent contraction in the UK’s economy during the last three months of 2011.  Economists generally consider two consecutive quarters of economic contraction to equal a recession.  By this standard, the UK is now officially in a recession.

In short, Europe’s discovering what happens when their economies take on more debt than their growth supports.  Of course, the greatest reckoning is forthcoming…

Mass Delusions of Cupcakes and Credit

“Mass delusions are not rare,” begins Garet Garrett in his 1932 work, A Bubble that Broke the World.  “They salt the human story.  The hallucinatory types are well known; so also is the sudden variation called mania, generally localized, like the tulip mania in Holland many years ago or the common-stock mania of a recent time in Wall Street […].  This is a delusion about credit.”

Scanning today’s landscape we see mass delusions in cupcakes and, like Garrett’s day, credit.  The first of these delusions – stylish cupcakes with elaborate frosting designs – is mostly harmless.  The second of these delusions – U.S. government debt – will ultimately make the world weep.

Several years ago we first began encountering these ornate cupcakes at children’s birthday parties.  More recently, we’ve witnessed them at weddings and banquets.  The cupcakes are hardly edible…but they look marvelous, particularly when displayed in their intricate cupcake tree stand.  No doubt, this will be a passing fad.

U.S. government debt, on the other hand, has been expanding for decades and new exceeds the nation’s GDP.  What’s more, Fed Chairman Bernanke says he’ll keep the federal funds rate near zero until late 2014 so that the big banks can load up on more credit and foist it on those who don’t deserve it.  One day, perhaps soon, the Fed will no longer be able to run this sham.

That will be when the great U.S. Treasury bond bubble pops, and the price of U.S. financial assets, like stocks and bonds, crash along with the value of the dollar in international currency markets.  As collateral damage, the savings of American citizens will be vaporized as price inflation explodes.


MN Gordon
for Economic Prism

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