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The Fallacies Of GDP
Submitted by Alasdair Macleod via GoldMoney.com,
The common error of confusing growth with progress goes largely unnoticed, though it permeates all macroeconomic analysis. There is no better example of this mistake than the fallacies behind the interpretation of Gross Domestic Product. GDP is the market value of all final goods and services in a given year. As such, it is only an accounting identity reflecting the quantity of money in the economy.
Econometricians constructing GDP have devised a sterile statistic that should not be used to set economic policy. It leads to the common error of assuming any increase in GDP is desirable. Statistics like GDP tell a story of an economy based on historical prices but devoid of any qualitative value; and progress, the improvement in the human condition, is what really matters.
Transactions reflecting both wealth creation and also economically destructive state spending are included in GDP without differentiation. Far from the government component of GDP being singled out from the total, it is often welcomed as contributing to economic growth. Macroeconomists, with an eye on the statistical impact of cuts in government spending, discourage governments from making them. The lack of distinction between wealth-creation and wealth-destruction is fundamental to their belief that state intervention is beneficial.
More light can be shed on this issue with an example. Imagine an economy with a fixed quantity of money and credit; further assume foreign trade is in balance, and that the population is stable. Products will succeed, stagnate or fail. People will get pay rises, pay cuts or be encouraged by reality to move from the least successful businesses into more successful businesses. The businesses of yesteryear fade and those of tomorrow evolve. Winners will redeploy resources released from the failures. Annual GDP, the sum total of all production paid for by everyone's earnings and profits, will therefore be unaltered from the previous year: it is a zero sum, assuming that as a whole people's money preferences relative to goods do not change. Without the injection of extra money, people are always forced to choose between items: they cannot add to the purchasing power of their income through extra credit created out of thin air, creating demand that otherwise would not exist.
Progress is, therefore, marked by improved products and lower prices, because as the volume and quality of production increases the total money value of them must remain the same. This is true for both final products and for investment in the higher orders of production. But importantly, GDP growth is nil.
Now we must consider what happens in the case of unsound money; that is to say money and credit that can be expanded by the will of the state and the banks it licences. Over a period of time, this new money is absorbed into the economy, reflected in new transactions that otherwise would not have occurred. The value of transactions attributable to the expansion of money and credit is likely to be a multiple of the new money introduced, as it passes from the original beneficiaries to later receivers.
If we assume this is a single expansion of the quantity of money these new transactions will only be a temporary feature. The prices of goods bought with the new money rise to compensate with a time lag. Having initially expanded, real GDP would then contract as the temporal lag between stimulus and price effect is fully unwound. With all transactions fully accounted for real GDP ends up unchanged, always assuming there has been no change in consumer preferences between money and goods.
The dubious benefit of stimulating demand by increasing the quantity of money and credit has been only temporary. Changes in GDP described above reflect not economic progress, but the absorption of the extra quantity of money and credit deployed. If the matter stopped there, the damage to a properly functioning economy would be limited, but monetary inflation also triggers a transfer of wealth from the majority of people to a small rich minority. This happens because price increases spread from where the new money is first deployed (typically through the banks and financial markets), leaving the majority of people to face higher prices with no offsetting monetary benefit. There is, therefore, a secondary impact: the apparent benefit of increasing the quantity of money is followed by a fall in demand for goods and services because of the wealth-transfer effect, the opposite of the intended result. The economy as a whole ends up worse off than if no monetary stimulus had occurred. This is why extreme monetary inflation is always accompanied by economic collapse.
In the foregoing example, the effect of a single injection of additional money and credit was considered, but once this policy is embarked upon it is almost always continued at a compounding pace. Macroeconomists note only the initial benefits, and when they fade, as described above, they clamour for more. The result over time is that weak-money policies lead to the continual currency debasement with which we are familiar today, together with the build-up of debt, which is the counterpart of expanding bank credit. As the currency buys less, more is required to achieve the same initial effect.
That changes in money and credit do not equate accurately to changes in GDP in practice is partly due to econometricians selecting which activities to include in GDP. They interpose an artificial distinction between categories of spending with the intention of isolating spending on new goods and services deemed to be consumption. This is an error, because these economists are forced into making a subjective judgement that is bound to be at odds with reality. In practice, a consumer can only be described in the broadest terms.
Consumers may spend money on buying assets such as housing, art or stocks and shares: there is no difference between spending on these and on anything else, because they all have a valid purpose in the mind of the consumer. In addition, there are unrecorded transactions on the black market or not recorded from small businesses, as well as transactions in second-hand goods which are specifically excluded on the grounds that the purpose of GDP is to record new production only. Therefore, much economic activity is excluded from the GDP calculation with the complication that money will flow between the econometrician's version of GDP to the wider transaction universe, undermining all the macroeconomists' attempts to link an increase in prices to an increase in the quantities of money and credit.
In conclusion, GDP has nothing to do with economic progress. It is a flawed statistic that imperfectly summarises the money-value of selected transactions over a given period. The fact it is usually positive is a reflection of the temporal difference between monetary inflation and the lagging effect on prices, and has nothing to do with economic progress.
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Thirty years ago I weighted 150 and now I have progressed to 200?
Yeah, me too. There seems to have been a reset of the basic body balancing mechanisms.
Great article.
I've been bitching about this for years.
Y = C + I - G + NX
Simon Kuznets would approve.
Simon Kuznets argued that the G part of the quation was double counting.
Isnt' the GDP measured in dollars? Aren't those dollars brought into existence by issuing credit and leveraged in value by fractional reserve banking practices? So isn't the GDP as bogus as the dollars it is measured in?
The ministry of propaganda (BLS) chains dollars to a specific year, 2009, to adjust for inflation.
In a nutshell, GDP is misleading because it measures transactions , not production. If you spend $1billion smashing factories you increase GDP by $1b but also destroy and reduce production. If i sell you a hat for $1 and you then sell it to fred for $1 and he then sells it back to me for $1 the result is - I still have a hat, nothing has changed, but GDP has increased by $3. It measures activity but not whether that activity is productive. And since much Govt activity is destructive then as GDP rises productivity reduces - as the statistics bare out.
David Billings has written two books, with a third on the way, which attempt to distinguish "nominal wealth" from "actual wealth."
http://economicactualism.com/
In my view, GDP is merely one of many different forms of misrepresentation through which our fundamentally fraudulent financial accounting systems operate.
I REPEAT some of what I just previously posted here: How One Accounting Rule Wrecked The Middle Class
It would be theoretically possible to develop human accounting systems which were consistent with the physically existing accounting system of nature, namely the conservation of energy, flowing through energy systems. However, when one pursues that path of regarding human beings and civilizations as general energy systems it becomes clear that those actually match the principles and methods of organized crime, and therefore, the ways that human beings practice monetary accounting is actually a manifestation of organized crime, where the SOURCE of the public "money" supply is that governments ENFORCE FRAUDS by privately controlled banks.
Given that everything that thereafter is done within those monetary accounting systems, based on its SOURCE ENFORCING FRAUDS, of course, everything afterwards manifests as a Bizarro World, or Wonderland Matrix, which appears backwards and absurd. However, from any practical point of view, it is politically impossible to fix those problems, due to the intense paradox that the existing systems developed through the history of successful warfare being based on backing up deceits with destruction, to become the current political economy being based upon enforced frauds.
To have a monetary system where its accounting could be rationally reconciled with the natural and industrial world, where energy can not be created out of nothing, nor sent to nothing, would require admitting and addressing the ways that money is measurement backed by murder. However, it is now quite politically impossible to do that, since the established systems are based upon being able to continue to take for granted that more than 99% of the people act like incompetent political idiots, and want to stay that way.
In theory, "We the People" run the murder system, that backs up the public money system, which should also be run by "We the People." However, since most of "the People" have been reduced to Zombie Sheeple, the public "money" supply has been about 99% privatized, while the public murder systems are headed in the same direction, as the democratic republic's rule of law is systematically destroyed due to the best organized gangs of criminals capturing control over the political processes, which continues to be possible because of the ways that the vast majority of "We the People" have become nothing more than Zombie Sheeple. The vicious feedback loops through the FUNDING OF POLITICS have driven the political processes to become extremely unbalanced forms of organized crime, due to the vast majority of people not understanding that, because they have been conditioned to not want understand that, while the real FUNDING OF POLITICS has resulted in every branch of government, and every social institution, being systematically subverted by the effective privatization of the public "money" supply driving fundamentally fraudulent financially accounting systems into worsening vicious feedback loops ...
The overall existing systems are and must necessarily be based on the methods of organized crime, because those are what actually match human beings living as entropic pumps of energy flows. However, the intense paradoxes with respect to those systems have been the ways that those were done with the most social success through the maximum possible deceits and frauds. Hence, the currently established monetary system based upon governments ENFORCING FRAUDS by privately controlled banks.
To not have accounting be so extremely fraudulent would require including accounting for the force that backs up the fraud. However, those who were most successful at actually backing up their frauds with force were most socially successful in promoting their bullshit social stories about that, whereby the meaning of pretty well everything was inverted and perverted, such as that the words "money" and "dollar" now mean nothing remotely close to what those words meant a couple of Centuries ago. Similarly, the intense paradox is that despite human beings basically living as entropic pumps of energy flows, the meaning of the word entropy was inverted, and that reversed meaning then ended up being taking for granted by almost everyone, who generally was used to taking for granted the biggest bullies' bullshit world view regarding everything else.
Theoretically, it would be possible to develop a monetary accounting system which endeavoured to become as consistent as possible with the physical science regarding the flows of energy, and which respected the conservation of energy. However, in order to do that, enough people would have to understand that they were tricked into thinking about the concept of entropy backwards, so that they thought in absurd ways, because those ways were what enabled the established systems of legalized lies and legalized violence to enable financial success to become based upon enforcing frauds.
There is no way around the basic underlying issue that the debt controls are backed by the death controls. In theory, both should be public responsibilities, whereby competent citizens supervise the combined money/murder systems that they empower. However, obviously, more than 99% of those citizens are NOT competent, and therefore, the public powers have become more and more privatized, due to the successful application of the methods of organized crime through the political processes.
EVERY STATISTIC, like the GDP, manifests inside of the overall context which is a fundamentally fraudulent accounting system. The article above was correct: In conclusion, GDP has nothing to do with economic progress. HOWEVER, the article above enjoys presuming that there could be some sort of "sound money" that was not based on measurements being backed by murders, and so the rest of the implied "solutions" were merely more bogus bullshit, because they do not go through enough radical paradigm shifts in the ways that political economy is being perceived.
As a goldmoney proponent, I expect that author of the article above does not recognize that any gold standard money would actually be the measurement of gold backed by murder. Similarly for any other kind of "money" backed by any other commodities. Reliance upon the principle of the conservation of matter has become too old-fashioned a way of approaching the principle of the conservation of energy, which now includes matter as a form of energy, as demonstrated by the atomic bombs, that now back up the globalized electronic frauds, which are the established systems based upon governments ENFORCING FRAUDS by privately controlled banks, within which context all of the economic statistics used to guide economic behavior are based on taking for granted that there is that fundamentally fraudulent financial accounting system.
There is ONE human system, since there is ONE energy, which transforms through different systems, all of which NECESSARILY match the principles and methods of organized crime. That is how and why we ended up with governments becoming the biggest form of organized crime, controlled by the best organized criminals, the international bankers, or banksters. The ONLY things that exist are the dynamic equilibria between the different systems of organized lies operating robberies. Those have become the banksters' enforced frauds, as symbolic robberies, which have driven extremely unbalanced social polarization, as well as destruction of the natural world. HOWEVER, there are no genuine solutions which can exist outside of the context that the only sound and honest money must still be one whereby measurement is backed by murder.
What do you expect from a statistic that was invented to show how great the government was doing.
Good read, Thanks.
G ross
D omestic
P rintingpress
And by G ross, we don't mean to say without deductions, but rather, "groooosssss!"
GDP is the non-proven oil reserve of the non-Opec countries. With a touch of seasonality and an eyeblink to their debt/gdp ratio's.
At last. Someone who understands what I've been banging on about for years: GDP is a fictitious metric and doesn't reflect true economic progress. Far from it.
As Alasdair rightly says: "...economically destructive state spending are included in GDP".
Wages paid to public sector apparatchiks are included in this fake metric and as anybody knows, they add nothing to wealth creation.
Yes, I know he's a globalist but he's got a fairly good take on GDP
https://www.youtube.com/watch?v=QUaJMNtW6GA
What a load. Everything after "Imagine an economy with a fixed quantity of money and credit" can be dismissed.
Credit is based on human trust, and is by nature variable and often cyclical. Credit existed even before money or currency. A gold standard for controlling currency supply will not change that. Credit supply can rise and fall many times the currency supply, and generate social and economic devastation, without changing the issued currency supply one iota.
The author further discredits himself by referring to government control or manipulation of "money and credit", like they are one unit. Let's assume "money" is the combination of government issued currency plus credit (since most of his initial statements are false under other definitions). The US government controls the "issued currency" part, by printing money, buying securities, or issuing debt. None of these directly change credit at all.
(Note: The government CAN manipulate credit through financial regulation, but none of those techniques affect the issued currency supply that the author subsequently refers to.)
I read it the fellatio of gdp
Government only counts or measure that which they desire to steal or kill.
Liberty is a demand. Tyranny is submission..
I said,,
We apparently went to the moon in 69
Read the fucking thing...
Need to comprehend what you read....
Credit being based on human trust requires three things:
1. REAL savings,
2. Collateral,
3. Expectation of repayment.
None of the above exist in thw West. Real savings are not required since banks can congure money out of thing air. Collateral is optional or even NOT required or desired, especially in the USA. There is ZERO expectation of repayment in the west.
There is no credit in America, there is a money printing ponzi that has taken the name of credit.
All we are waiting for is to see how the unwinding manifests itself.
Life sure is interesting.
Squid
Credit being based on human trust requires three things:
1. REAL savings,
2. Collateral,
3. Expectation of repayment.
None of the above exist in thw West. Real savings are not required since banks can congure money out of thing air. Collateral is optional or even NOT required or desired, especially in the USA. There is ZERO expectation of repayment in the west.
There is no credit in America, there is a money printing ponzi that has taken the name of credit.
All we are waiting for is to see how the unwinding manifests itself.
Life sure is interesting.
Squid
it's also fucking stupid. if there is a factory that makes 100 widgets for $100, and there's a factory that makes 1 widget for $100, and it's the same fucking widget, GDP-wise it's the same. but you are ignoring everything that matters and focusing on the fact that one market is just way fucking overpriced and full of itself.
macroeconomic analysis is a fallacy in and of itself. Of course it's phallic to most of the voting citizens.