The Coming Slump

Tyler Durden's picture

Submitted by Alasdair Macleod via The Cobden Centre blog,

Governments and central banks have made little or no progress in recovering from the Lehman crisis six years ago. The problem is not helped by dependence on statistics which are downright misleading. This is particularly true of real GDP, comprised of nominal GDP deflated by an estimate of price inflation. First, we must discuss the inflation adjustment.

The idea that there is such a thing as a valid measure of price inflation is only true in an econometrician’s imagination. An index which might be theoretically valid at a single point in time is only subsequently valid in the wholly artificial construction of an unchanging, or “evenly rotating economy”: in other words an economy where everyone who is employed remains in the same employment producing at the same rate, retains the same proportion of cash liquidity, and buys exactly the same things in the same quantities. Furthermore business inventory quantities must also be static. All human choice must be excluded for this condition. Only then can any differences in prices be identified as due to changes in the quantity of money and credit. Besides this fiction, an accurate index cannot then be constructed, because not every economic transaction is reported. Furthermore biases are built into the index, for example to overweight consumer spending relative to capital investment, and to incorporate government activity which is provided to users free of cost or subsidised. Buying art, stockmarket investments or a house are as much economic transactions as buying a loaf of bread, but these activities and many like them are specifically excluded. Worse still, adjustments are often made to conceal price increases in index constituents under one pretext or another.

Economic activities are also only selectively included in GDP, which is supposed to be the total of a country’s transactions over a period of time expressed as a money total. A perfect GDP number would include all economic transactions, and in this case would capture the changes in consumer preferences excluded from a static price index. But there is no way of identifying them to tell the difference between changes due to economic progress and changes due to monetary inflation.

To illustrate this point further, let’s assume that in a nation’s economy there is no change in the quantity of money earned, held in cash, borrowed or repaid between two dates. This being the case, what will be the change in GDP? The answer is obviously zero. People can make and buy different products and offer and pay for different services at different prices, but if the total amount of money spent is unchanged there can be no change in GDP. Instead of measuring economic growth, a meaningless term, it only measures the quantity of money spent. To summarise so far, governments are using a price index, for which there is no sound theoretical basis, to deflate a money quantity mistakenly believed to represent economic progress. In our haste to dispense with the reality of markets we have substituted half-baked ideas utilising dodgy numbers. The error goes wholly unrecognised by the majority of economists, market commentators and of course the political classes.

It also explains some of the disconnection between monetary and price inflation. Price inflation in this context refers to the increase in prices due to demand enabled by extra money and credit. As already stated, newly issued money today is spent on assets and financial speculation, excluded from both GDP and its deflator.

It stands to reason that actions based on wrong assumptions will not achieve the intended result. The assumption is that money-printing and credit expansion are not having an inflationary effect, because the statistics say so. But as we have seen, the statistics are selective, focusing on current consumption. Objective enquiry about wider consequences is deterred, and nowhere is this truer than when seeking an understanding of the wider effects of monetary inflation. This leads us to the second error: we ignore the fact that monetary inflation is a transfer of wealth from the public to the creators of new money and credit.

The transfer of wealth through monetary inflation is initially selective, before being distributed more generally. The issuers of new currency and credit are governments and the banks, both of which reap the maximum benefit of utilising them before any prices rise. But the ultimate losers are the majority of the population: by the time new money ends up in wider circulation prices have already risen to reflect its existence.

Everywhere, monetary inflation transfers real wealth from ordinary people on fixed salaries or with savings. In the US for example, since the Lehman crisis money on deposit has increased from $5.4 trillion to $12.9 trillion. This gives us an idea of how much the original deposits are being devalued through monetary inflation, a continuing effect gradually revealed through those original deposits’ diminishing purchasing-power. The scale of wealth transfer from the public to both the government and the commercial banks, which is in addition to visible taxes, is strangling economic activity.

The supposed stimulation of an economy by monetary means relies on sloppy analysis and the ignorance of the losers. Unfortunately, it is process once embarked on that is difficult to stop without exposing the true weakness of government finances and the fragility of the banking system. Governments with the burden of public welfare costs are in a debt trap from which they lack the resolve to escape. The transformation of an economy from no monetary discipline into one based on sound-money principals is widely thought by central bankers to risk creating a major banking crisis. The crisis will indeed come, but it will probably have its origins in the inability of individuals, robbed of the purchasing power of their fixed salaries and savings, to pay the prices demanded from them by businesses. This is called a slump, an old-fashioned term for the simultaneous contraction of production and demand. Not even zero or negative interest rates will save the banks from this increasingly certain event, for a very simple reason: by continuing the transfer of wealth from individuals through monetary inflation, the cure will finally kill the patient.

There is a growing certainty in the global economic outlook that is deeply alarming. The welfare-driven nations continue to impoverish their people by debauching their currencies. As Japan’s desperate monetary expansion now shows, far from improving her economic outlook, she is moving into a deepening slump, for which this article provides the explanation. Unfortunately we are all on the path to the same destructive process.

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TeamDepends's picture

It's not a depression anymore, it's a slump!

boattrash's picture

" The welfare-driven nations continue to impoverish their people by debauching their currencies."

Ha! I fuckin' Out-smarted them. I'm down to my LAST $5 Fiat FRN

Screw them!

philipat's picture

No, it's just a temporary thing caused by "Weather"......................

philipat's picture

The deflator is one aspect but the other is the measurement of GDP itself, which now includes hookers and blow. The US 2Q GDP growth was more than half due to growth of inventory. Now, in my experience, manufacturers increase inventories EITHER because they are expecting a boom in demand (Which they're not) OR because they can't sell what they are producing. I would suggest the latter, which suggests that those inventories will get eaten in Q3, thus reducing production and GDP. So watch out for Q3 GDP, unless, as is likely, they will use a different fudge factor (Seasonal adjustments, estimates of various items etc.). The game is to keep afloat for as long as possible. Nobody pays much attention to retroactive adjustments which, inevitably, are downwards.

IMHO, it isn't rocket science. US GDP is comprised 70% consumer consumption so for the economy to grow, consumers must consume more. With real net disposable incomes declining, this simply is not going to happen.

The Most Interesting Frog in the World's picture

Keep it under the mattress. Once governments and banks start pillaging bank accounts not only will your 5 be able to buy double the amount of goods, you will be able to walk around your town with a shit eating grin on your face while everyone else is walking around with a WTF just happened look on theirs.

sylviasays's picture

"Keep it under the mattress. Once governments and banks start pillaging bank accounts not only will your 5 be able to buy double the amount of goods, you will be able to walk around your town with a shit eating grin on your face while everyone else is walking around with a WTF just happened look on theirs."

Keep worthless paper fiat under the mattress? Maybe it would be better to keep something of value (like gold and silver) when paper fiat becomes worthless? 

g speed's picture

It'll be tuff to get the local guy to sell you anything for a coin that may or may not be gold/silver--- he will want you to use what he knows and thats dollars---so you'll have to go find a guy with dollars to convert that (maybe) coin. You will pay an extra little bit (50%) under spot cause he and the others with dollars will know what they can get for their "under the matress" dollars ------I think that was what he was saying---

knukles's picture

Oh come on.  4% real growth, Bazillion% wage gains.  Low inflaiton.
Shit dude, everything is coming up roses!

Whereforeart these numbers accreting from, Priscilla?
Dunno, my Lord, but they are as handsome as you!

TeamDepends's picture

Okay, is it like when your car is riddled with bullets, you slump over the steering wheel?

icanhasbailout's picture

I'll take "Things That Rhyme With Chump" for $1000, Alex

NoPension's picture

I'm not an economist, but I think there is a glaring error in this article. "If the quantity of money were to stay the same, the GDP couldn't change"?

What about the velocity of money? It can can change twice as fast, and double the GDP? No?


knukles's picture

Maybe, but certainly not a maths genius...
Empirically, V is largely a residual....
However, it is subject to massive behaviorally oriented changes periodically.
You know, them once maybe every 50 year statistical occurrences that happen every ten years or so.

Ah, the reality of the leptokurtotic experience of human behavior

garypaul's picture

"but if the total AMOUNT OF MONEY SPENT is unchanged there can be no change in GDP"

Don't misquote!

NoPension's picture

I see. The error was mine.

I re-read and understand now. If I spend $50 on shoes, and next week, $50 on food, I spent the same amount, but on different things. No change in spending.
Ah, Bach

Stuck on Zero's picture

If you spend $50M on political leverage in Washington DC you can get any GDP number you'd like.


TeamDepends's picture

Plus a few reach-arounds "on the house".

icanhasbailout's picture

and sloppy seconds with a creature made of excess parts surgically removed from Nancy Pelosi, if you want it

The Most Interesting Frog in the World's picture

Somebody correct me if I'm wrong, but If the currency base does not change and no new net debt is created and assuming an otherwise closed economy with no imports and exports GDP growth would be zero. Correct?

In my opinion, the US has not "grown" in at least a decade. If not for government deficits things would be in decline and if you used a proper and more accurate deflator there would be negative to zero growth on the high end. Massive trade and budget deficits does not equal growth, period.

Matt's picture

You're missing hedonics. A faster iPad with prettier display is an increase in GDP AND a decrease in Inflation, because of hedonic adjustments.

As long as technology gets better, GDP increases. It doesn't even matter if there is a real productive increase, it only matters if there are some marketing numbers of betterness that a government economist can claim is an improvement.

The Most Interesting Frog in the World's picture

My penis gets bigger when she rubs it. I vote this should be added to GDP as well.

Ban KKiller's picture

Have you seen her revised numbers? Growth was down...

g speed's picture

adjusting the adjustment ---

fzrkid's picture

GDP doenst have anything to do with the quantity of money. A real measure of GDP would calculate the goods produced using the physical resources available. The quantity of money merely sets the price at which someone is willing to trade the currency of choice for a fixed amount of their own time(labor).

Hence, the more currency in circulation the less your time(labor) is worth.


Certainly teh velocity of money can change without a a real change in GDP. Inflation accomplishes that as more money must change hands for the same amount of goods and services. The problem with velocity at the lower levels is we dont have any money to change hands. The bankers are getting all the printed loot and they push that into the stock market and that is why M2 velocity is below 1950 levels.

khakuda's picture

It's all academic crap as far as I'm concerned.  The point is that wealth is created not by printing money and transferring wealth but by people dreaming up, making and using knowledge gained through study and experience to provide services to trade with one another.  Alan, Ben and Janet didn't create jobs.  For every borrower the helped, they screwed a saver in an equal amount.  For every homeowner and investor they helped by raising valuation levels on existing assets, they screwed a renter/potential homeowner and investor that was priced out of the market or that bought at too high a price, only to suffer a huge loss.

This is how bubbles happen.  "Hey, let's push up home prices by printing money and leaving rates super low.  Great, builders see rising prices and start building homes to meet the rising prices, figuring demand must by pushing up prices, thus we central planners create economic activity."  Yes, but you sent bad signals to the market and end up with capital misallocation and empty houses.

Central bankers transfer wealth, they don't create it.  They actually destroy it by misallocating scarce resources through the bad price signals they purposefully create.  As such, their role should be limited to "break glass in case of emergency."  When they invent an ipad, maybe they create wealth, but not until then.

andyupnorth's picture

"Central bankers transfer wealth, they don't create it.  They actually destroy it by misallocating scarce resources through the bad price signals they purposefully create." 

And they take a small cut (just a few billion here and there) for their excellent service to their country.

g speed's picture

They don't create wealth however they create the perception of wealth---a case in point--down the road from me in open rural North Florida a lady is trying to sell two ugly acres--(trash trailer and all) for a cool 1/4 million--she thinks she can get it---cause her real estate lady says thats what others like it are going for---"going for" ----   by the way a half mile futher down the road 50 acres sold for 50K last year (7acres dry in pine and the rest wet in oak and gum) ----

A Lunatic's picture

Can I get gruel with that.....?

Atticus Finch's picture

"The welfare-driven nations continue to impoverish their people by debauching their currencies."

You mean of course as in Norway? Of course, they have horrible debauching welfare state. Wait a minute, last time I checked, the country has a surplus. Maybe they somehow abstained from all the trillions spent on psychotic wars against countries and people who are absolutely no threat to the US or NATO.

No friends, it's the welfare-driven problem.

khakuda's picture

It helps to have all that North Sea oil to squander.

TeamDepends's picture

Welfare Oil, the richest kind!

Luau's picture

Norway is about as relevant to the welfare state debate as North Dakota is relevant to US jobs numbers: Looked at solely in a vacuum, everything appears fine and dandy. Looked at in relation to everything else and you start to see the problems with using Norway or North Dakota as a baseline. Good job continuating the meme though, I'm sure it provided you with boundless satisfaction to look down at the peons and whisper "Norway." 

starman's picture

The money printing thats been done for five years now is not to fight inflation!

It is to avoid deflation!

Seer's picture

How much longer will folks be writting lengthy articles trying to explain the OBVIOUS?  It's not currency or money or virtual shit that is the deflator here- it's a LACK OF PHYSICAL, as in insufficient resources to keep the exponential growth curve ramped.  And it's our "economic system" that has to have growth, so, all the folks with hands on controls have to make up a ton of shit to make it look like all is still sailing along.

Wasn't it Putin (or some Russian politico) who purportedly scoffed at the notion of Russia being penalized/fined $50 billion (can't recal the actual figure), saying that that was pretty much moot with war.  The bookkeeping issues, the currency devaluations and such, well, it's all meaningless in the face of resource shortages (which will lead to war).

If you want "growth" then it'll cost you a war.

Clueless1's picture



The Impossible Hampster.


Warning!  Contains references to evil, socialist terms like 'Math' and 'Ecology.'  Also, there's a big rodent, so the skittish may want to check that they have the saftety on.

Luau's picture

The question isn't  "can growth be infinitely sustained," because it is evident that it cannot be. The meatier question to ask is "does Earth's GDP at present represent the fullest extent to which we can grow? The answer to the second question is as self-evident as the answer to the first. It is true that very, very soon the West (most importantly Europe; North America has lots of expansion left to do) will have to make some very difficult choices between growth and culture.

22winmag's picture

You could shorten your own lengthy comment with three words: INFINITE GROWTH PARADIGM.

Bossman1967's picture

When you kill the insurance industry and the top sales people say not worth it and retire as I have. Who is going to take up the slack in the upper middle spending. I am not spending anything for the first time in my 46 yr old life. So let them keep manufacturing shit we will no buy and they will learn that you cant stop the free market system and the elites be ok. So experiment on my middle leg. If gdp is 4 percent then Im a monkeys uncle. Thats being nuce

espirit's picture

The only tangible collateral (metals, housing, etc) worth stealing is in the hands of the former middle class, and it will pried from their cold dead hands.

This will be accomplished in a multi-tiered phase of depressed economic activity, internal strife, and/or global war over resources.

Embrace being poor, it makes you less of a target.

Ban KKiller's picture

For a"youngster" you are spot on! Tune in, turn on and drop out...

AdvancingTime's picture

Much of the economic landscape is beginning to look like something out of  "Alice And The Looking Glass" A bizarre  and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality.

Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. What was once the "long run" or "distant future" may be getting much closer. More on this in the article below.


esum's picture

eh.... what about the VELOCITY of money...(same amt same gdp?)

what if the money /capital is fleeing the country?

what about if 1/2 the people dont work and wont ever work...

what about if you add 20 million illegals who live outside the "system"

what about if there are no mfg jobs... just burger flippers

taking money out of banks is a start...

not using credit cards is another good thing


Notsobadwlad's picture

Globally there is no reason for a slump because, as industrialization expands around the world, more people have more ability to buy, consume and use things.

However, locally; in the US, Europe and Japan the aging and deindustrialized populations are turning into have and have-not societies. Value adding producers and savers are punished and value extracting parasites are rewarded.

The inflating of usable commodity and other asset prices in the mature, parasitic economies seemingly manifests itself as rot and corruption in its later states... as we are seeing now.

However, one must ask, can we lift up the world without lowering ourselves? Those who run the world have either decided that the answer is no or they are too incompetent to figure out how to do it. So, one way or another we, as a whole must eventually lower ourselves, with lifeboats provided only to the minority who are intimately connected to the power structure (another form of late-stage corruption).

So, there will eventually be a slump, when the parasites who run the systems have decided that they are ready to parasitically extract the most for themselves... but one should not believe that anything could not have been foreseen or happens by accident.