How Much US Economic "Growth" Is Due Exclusively To The Federal Reserve

Tyler Durden's picture

For all the rigging of the definition of GDP, which over the past year has artificially been boosted by over half a trillion dollars courtesy of various adjustments adding intangibles, goodwill, and underfunded pensions to headline economic output (and soon, courtesy of European financial innocation, the "benefits" of hookers and cocaine too), all GDP really is - in a Keynesian world - is a measure of how financial credit flows through the economy. One can look at it at a consolidated monetary basis (M1, M2, etc), and then apply various (broken) money velocity factors, but the simplest and most accurate means of capturing the US "economy" is simply by looking at the consolidated amount of liabilities within the US traditional banking system.

Visually this means that US GDP and the total amount of traditional bank liabilities should match up. Sure enough, as the chart below shows, they do.

 

If one were to use this (far more accurate) definition of gross domestic product, one can then do something which is impossible when looking at the conventional mechnistic C+I+G+(X-M) formula: namely calculate to the penny what is the economic "growth" contribution as a result exclusively of the Fed's interventions in the past 6 years.

To do that, one simply has to account for, and exclude, the benefit of the key financial system asset that has been boosted since Lehman courtesy of QE, namely Reserves at the Federal Reserve, which while manifesting themselves in record S&P highs (as we have shown repeatedly over the years), translate into an actual benefit for the economy. Alternatively, if it were not for the Fed, one can calculate how much growth is explicitly artificial, and the result solely of the monetary mandarins of the Marriner Eccles building.

Which brings us to Exhibit A: a chart showing US GDP as well as financial liabilities excluding the benefit of Fed reserve expansion.

Of course, if one takes the track of excluding GDP benefits as a result of Fed intervention, one would have to go back all the way to 1913 and systematically eliminate all those banking product lines which would never have existed had the Fed not blown serial bubbles, with every successive one greater than the previous simply to keep the Ponzi scheme going.

But for simplistic purposes, the chart above will do: the red shaded area shows the direct benefit of the Fed's QE on the consolidated financial system, and by implication, on US GDP.

The net result: while GDP as presented for public consumption has risen to a record nominal high of $17.1 trillion (humiliating Q1 GDP collapse notwithstanding), if one were to exclude Fed reserves on bank balance sheets, and adjusted the resulting GDP impact, it means the US economy has grown by a paltry $900 billion since the third quarter of 2008, and it also means that realistically, instead of $17.1 trillion, US growth output is somewhere in the ~$14.5 trillion neighborhood. Said otherwise, snow may have "crushed" the world's biggest economy by 1% in Q1, but in the last 6 years, the Fed has goosed its 20% higher than it otherwise would be.

Which, incidentally, also explains why while it took the US economy 6 years to recover all the job losses since Lehman, this took place at the expense of 13 million Americans leaving the labor force for good even as US population rose by 15 million. It also means that using a historical average participation rate, US unemployment is over 11%, while underemployment is currently well in the 20% range: a far more realistic assessment of where the US economy really is.

For those wishing to recreate the data set, simply add up all the reported liabilities on Flow of Funds sheets L.110 through L.113