Re: [A-List] New Economy Bull, an expose

["Annewilliamson" <Annewilliamson@xxxxxxx>]

The Great 'GDP' Hoax



THE GREAT 'GDP' HOAX
by Sean Corrigan


If you look up the Gross Domestic Product (GDP) release, 
you see in black and white that GDP in 2001 was $10 
trillion dollars...and personal consumption expenditures 
were a touch under $7 trillion. 

With "consumption" running at two-thirds of the entire 
US economy, it's obvious: US consumers must continue 
spending money they don't have, lest the whole ball of 
wax grind to a halt. The "recovery scenario" falls at 
the feet of the ever-eager US consumer.

Or does it? We here at the Daily Reckoning think not. 

Let's begin by assuming that what makes us rich is not 
consumption at all. Consumption is merely that fraction 
of our income and assets that we decide to spend today 
in pursuits other than those which will either add to 
greater output in future, or act as a prudential fund 
against unforeseen needs.

Clearly, it is production that matters, for this is what 
ultimately lifts us out of savagery. That this should be 
controversial shows how far we have fallen from the good 
common sense of our forefathers.

For we can play Oliver Twist all we like, holding up our 
plates for more, but unless we offer something in 
return, we are unlikely to be able to rely on our 
portion being replenished at will.

This simple insight was encapsulated by the forgotten 
French economist Jean-Baptiste Say, who expressed the 
idea so clearly they named an economic law after him. 
Say's Law states simply: Supply creates its own Demand. 
Or, to put it in colloquial English, "You want some of 
these here beans? What you got in yer wagon to trade fer 
'em?" 

For the best part of the century, Say's aphorism came to 
be taken as a truism. Namely, it was accepted that if 
you worked to produce a saleable good - or to offer a 
saleable service - you were then entitled to exchange it 
for the fruits of someone else's efforts...at a price to 
be freely negotiated between the two of you.

It was no problem if the wants of vendor and purchaser 
did not coincide exactly, so long as they felt they 
could rely upon tokens of exchange that equitably 
reflected the work needed to produce them. But the 
exchange required "honest money" to be used as a medium. 

Sadly, the idea of resorting to work and 
entrepreneurship as a means to material well-being has 
historically become a poor second to the idea of 
acquiring resources through theft. Robbery is a much 
less arduous task than striving to best serve the 
capricious tastes of consumers in open competition with 
one's fellow entrepreneurs.

And theft is, of course, always most effectively 
perpetrated when disguised as law and underwritten by 
the threat of political violence - i.e., when it is 
committed by the State. 

The 'fiscal-military state', as John Berger describes it 
in The Sinews of Power, or what Austrian economists less 
charitably decry as the 'warfare-welfare state', 
invariably allows those at the pinnacle of political-
military power to disrupt commerce by siphoning off a 
tribute every time goods pass over the shop counter. 

Levies used to be exacted by sheer brigandage and the 
overt threat of physical force; now, the means are more 
subtle. Laymen call them: Debt, Taxes, and Paper Money.

One of the sad facts of such impositions is that they 
always lead to undue hardship. The entrepreneurial 
bourgeois and the diligent artisan alike have to carry 
to market not just goods for their own utility, but also 
goods sufficient to support a posse of bureaucrats, 
court lackeys, armored hooligans, tax gatherers, 
assessors, monopolists, subsidy-mongers, and welfare 
dispensers, as well as the power elite and their 
financiers themselves.

If these parasites sufficiently weave themselves into 
the social fabric - as nearly a century of fiat money 
and creeping collectivism has largely accomplished today 
- the impoverished and bewildered creators of wealth cry 
out for help. In their anguish they foolishly come to 
mistake the shaggy pelts of the wolf pack for the robes 
of a gentle shepherd whom they trust will tenderly 
deliver them from their miseries.

Thus, Government frustration of the market process 
inexorably leads to the call for the government to "Do 
Something"...to counteract its own malfeasance. As an 
astute 18th-century Briton put it, "Armies beget taxes, 
taxes beget unrest, unrest begets armies."

In this way, the Great Depression came about. The Great 
Depression was not caused by the breakdown of free 
market capitalism, as the state's apologists have 
maintained ever since, but by the suppression of the 
market's workings throughout a decade of monetary deceit 
and a consequently unsupportable credit expansion. 

And it was made worse by the frustration of the 
international division of labor through high tariffs. 
And by the unwillingness to settle inflationary war debt 
and punitive reparations left over from World War I in a 
timely and realistic manner.

In the midst of the Depression, the ever-opportunistic 
Keynes stepped forward, seeking to persuade people that 
Say had it all wrong. In fact, Keynes said, it was 
Demand that created its own Supply ("Please, sir, may I 
have some more?"), and that all we needed was to give 
people extra money, unbacked by anything, and prosperity 
would be restored simply through spending.

Keynes was wrong.

The fact is, GDP can give us only a very partial insight 
into the mechanisms at work. Consider the BEA's Input-
Output data. For 1998, when these were last compiled, 
GDP stood at $8.8 trillion, and personal consumption was 
$5.9 trillion. 

Manufacturing seemed to be fairly inconsequential at 
$1.5 trillion in the GDP numbers and made a smaller 
contribution than either finance ($1.7 trillion) or 
services ($2.1 trillion).

If you look at what was actually being made and sweated 
over within the economy...what provided the jobs, on the 
one hand, and the opportunity of profits, on the 
other...then the picture is quite different from the 
less than perfect one you hear blathered by "experts" on 
CNBC.

In fact, the total gross output of the economy now comes 
to $15.4 trillion in turnover. And manufacturing - at 
$3.9 trillion - suddenly swells to being the largest 
constituent of them all. 55% greater than finance, and 
10% larger even than the much-vaunted service sector.

Manufacturing emphatically does matter. It now becomes 
responsible for fully a quarter of all productive 
activity. And here is the crucial point: 60% of that 
provides an input for other industries, and 60% of that 
fraction goes back into the other stages of 
manufacturing itself. Only 25% is destined straight for 
consumption and a lowly 15% to the GDP-defined "fixed-
investment" category.

Armed with this fresh perspective, ask yourself whether 
you are ready to continue to accept blindly that we are 
living in a "service economy"...or that all will be well 
"as long as the consumer keeps spending"...or that 
businesses merely have an "inventory problem," not a 
fixed-capital problem to overcome.

Under the Keynes version - espoused uncritically by 
central banks, Wall Street "analysts", and politicians 
everywhere - if business falters, do not be alarmed! We 
can simply send people to the shops waving their new 
Federal Reserve purchasing coupons, and urge them to 
Spend, Spend, Spend!

We are told by the Inflationists that currently there is 
overproduction and that prices are falling. If we do not 
take care, consumption will falter unless we induce the 
Fed to prop up demand by expanding the supply of money.

Granted, there is possibly specific overproduction. 
Distortions of the credit system have seen to that 
(thank you, Sir Alan)... so there may be a surplus of 
automobiles and disk drives and broadband capacity, 
among many others. But do we really have everything else 
we want for the asking?

Do we have the best shoes, the finest clothes, limitless 
energy with no harmful waste products, instant medical 
treatment, the highest standards of education for our 
children, delay-free means of transport - in fact, all 
the delights of an earthly Paradise? Of course not. 

Extra fiat money can do little to substitute the time-
consuming recuperative process. It cannot give the 
outfoxed chessmaster two moves to his opponent's one to 
avoid a mate, nor can it teach infantrymen instantly to 
ride cavalry chargers to repel the foe. It cannot create 
wealth - for wealth is only minimally coincident with 
today's mockery of money. 

It can, however, arbitrarily transfer ownership of what 
wealth still exists. It can lock sub-par businesses in 
place and suck their creditors deeper into the mire 
alongside them. It can foster an unwelcome competition 
for resources which elevates their costs beyond the 
reach of truly productive businesses. It can choke the 
garden with the weeds of those undertakings which are 
only able to flourish under these highly artificial 
conditions - the "housing boom" springs to mind.

Unfortunately for the legions of Inflationists, there 
are no shortcuts to betterment, but there are all too 
many diversions, distractions, and dead ends. 

The most misleading road map in the world is the one 
used at 20th Street and Constitution Avenue in 
Washington, deep inside the Marriner S. Eccles building: 
the GDP.

Cheers,

Sean Corrigan,
for The Daily Reckoning


Sean Corrigan is the founder of Capital Insight, a 
London-based consultancy firm which provides key 
technical analysis of stock, bond and commodities 
markets to major US, UK and European banks. Corrigan is 
a graduate of Cambridge University and a veteran bond 
and derivatives trader from the City. Corrigan serves 
with distinction as The Daily Reckoning's 'man on the 
scene' in London's financial district.

Capital Insight
http://capital-insight.com/aff.asp?affID=agora01

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