GDP Is Bogus: Here's Why

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

Here's a chart of our fabulous always-higher GDP, adjusted for another bogus metric, official inflation.

The theme this week is The Rot Within.

The rot eating away at our society and economy is typically papered over with bogus statistics that "prove" everything's getting better every day in every way. The prime "proof" of rising prosperity is the Gross Domestic Product (GDP), which never fails to loft higher, with the rare excepts being Spots of Bother (recessions) that never last more than a quarter or two.

Longtime correspondent Dave P. of Market Daily Briefing recently summarized the key flaw in GDP: GDP doesn't reflect changes in the balance sheet, i.e. debt.

So if we borrow money to pay people to dig holes and then fill them with the excavated dirt, GDP rises to general applause. The debt we took on to fund the make-work isn't accounted for at all.

Here's Dave's explanation:

Once I learned about accounting, I figured out why the GDP metric wasn't sufficient. What is missing?


The balance sheet.


Hurricanes are a direct hit to your nation's balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the "equity" part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred. Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased.


We know this because we use the balance sheet equation: equity = assets - liabilities. Equity is another word for wealth.


Before hurricane:


wealth = (house + car) - (home debt + car debt)


After hurricane, you rebuild your house, and buy a new car, using borrowed money:


wealth = (house + car) - (2 x home debt + 2 x car debt)


Wealth (equity) has declined by the sum (home debt + car debt)


So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually matter; that equity is just gone. Destruction is always a downside for equity - even if there is a temporary positive impact on the income statement.


Isn't it interesting that the mainstream economists, who don't use banks, debt, or money in their models, largely ignore balance sheets and instead just looks at the income statement alone? Its almost as if the entire education system was organized so that people paid no attention to banks, debt, and money. Who do you think might benefit from our flock of PhD economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the banks?

Thank you, Dave, for an explanation we never see in the mainstream. And here's a chart of our fabulous always-higher GDP, adjusted for another bogus metric, official inflation:

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IH8OBAMA's picture

It's just on different legers.  No big deal.  Take an accounting course, Charles.


ejmoosa's picture

GDP doesn't matter.  Profit After Taxes Matter.  

YUNOSELL's picture

GDP doesn't matter -- maintaining the Ponzi illusion is what matters

Antifaschistische's picture

In pure Economic Theory, the reason why the debt isn't taken into consideration in the example because (in theory) the capital given up, to fund the hole-digger-fillers was the byproduct of someone elses productivity and savings.  So, you get what is effectively a "balanced".  one mans loss, is another mans gain.

HOWEVER, in Central Bank Counterfeiting Debt Spontaneous Generation...there is no balancing act.  The debt does not represent anyone elses productivity.  So the CB becomes the uneconomic force, driving down interest rates because there is no risk when counterfeiting, crushing would be savers, and stimulate otherwise unproductive capital project work.

Killdo's picture

I have a degree in Economics from a UK university - all they taught us was Friendman's BS - how to steal from teh poor and give to the rich. Friedman - the Hitler of Economics. 

I also have a degree in Psychology (again from England) - we never learned anything about psychopaths there - and they are the biggest problem we face today - a critical mass of psychopaths like Hilary in positions of power. 

Everything I learend (doing both degrees) was basically all about diverting attention from real problems and real assholes we shoudl all be focusing on. 

Orwell wrote 1984 in England for a reason - it's always been a very totalitarian place, ruled by cheap-to-bribe selfish and turned against each other goym

MEFOBILLS's picture

It's just on different legers


If the ledger is making demands, it is a big deal.  If the demands have an exponential at their base, as in debt money equations, then the demands are outside of what nature can provide.

Charles is correct, double entry ledger mechanics include both assets and liabilities.  A debt instrument is an asset to the bank and  liability to debtor.  The bank credit that issues forth from debt instrument is an asset to debtors and liability for banker.  This is why banks want to do away with cash, which is really a mark of bank liability.

(Bank money is not money per-se it is an accounting gimmick that arrises from double entry mechanics.  It is evidence of debt.)

The bottom line is "what is being demanded" from the real producers in the economy.  If the bond/debt holders are taking usury and unearned income, then it is a transfer payment from productive labor to unproductive rent seekers.


Parrotile's picture

How much of that "GDP is no more than churn? a LARGE portion of Australian "GDP" arises from  our favourite pastime - "Selling Houses Australia" (the actual name of one of our most popular Cable TV series!) - after all with one of the World's most inflated housing markets (Sydney and Melbourne in particular), this comes as no surprise.

How much US GDP is MIC spending? Speculative housing construction? Internal "entertainment"?

We're in the final throes of losing all car building capability (Mitsubishi, Ford, Toyota, and finally Holden (GM) have left, despite taxpayer subsidies), yet "GDP" seems relatively unaffected (we'll just rely on Third-World extractive economics - selling the bedrock (Iron ore + Coal) tonne by tonne!)


Mind the GAAP's picture

Debt doesn't matter.  Mr. Yellen will just continue to CTRL+P us out of any unpleasant ledger sheets.

The Wizard's picture

Debt doesn't matter.

Just ask Congress, they will tell you. There are only a few in the House and Senate focusing on the debt when it comes to the budget.

MEFOBILLS's picture

Public debts where the interest is recycled to Treasury do not matter.  Private debts, which destroy Says law by eliminating money circulation, do matter.  Public debts are actually required to pay off the usury on private debts.  See Godley's sector equations.

For example, when Bill Clinton's economy was creating private debts with housing bubble, the public debt was being paid down.  The source of money was private debt formation, then the run up in housing prices, while public debts supposedly being retired, or the excess funds were being "lock boxed" according to Algore.

Paying down public debts is stealing from the private sector, and allowing banks to put a debt hook in the mouth of citizens.  Ultimately, this scheme led to the 2008 financial crash.  Housing prices and stock prices have since been held high with QE.  Bill Clinton is thus one of the worst presidents because he was a Shabos Goy listening to ((Rubin)).

QE is the creation of ledger money at the FED (a corporation), which swaps for debt instruments within banking reserve loops.  This then pushes the price high of TBills or buys MBS, etc., giving the appearance of market demand.  TBill price high, interest rate low.  This then induces sheeple public to go to the bank and take out new low interest loans, thus keeping private debt accumulation game in progress.  Private banks business model is to push debt instruments, so they can make interest income and transaction fees.

Always look at where the debt instrument is lodged and what it is demanding.  Debts can also be legally erased, and have been many times in history.  For example, the Nazi debts were erased after WW2.  Japan post WW2 was allowed by the U.S. to effectively erase the old Imperial debts by monetizing them into new money.

FreeMoney's picture

Debt doesn't matter...

That explains the utopia of Venezuela.

Debt is slavery.

FlKeysFisherman's picture

I read an article a few years ago about the government changing the GDP formula to count products manufactured overseas as US GDP as long as the headquarters was based in the US.

It's beyond a farce.

SeuMadruga's picture

Indeed. Might stands for something like Gimmicks to Deceive the People...

economessed's picture

The hopium epidemic is transacted in distortions.  Thank you for making the obvious so obvious - we are a nation without a strategic plan, void of effective leadership, and we continue to borrow-away our future choices and prosperity. 

SRV's picture

Left out immigration... the simplest means of producing artificial "growth" in order to lull the plebs to sleep.

NeedleDickTheBugFucker's picture

Idiots like Krugman spouting one person's "liability" is another person's "asset" which 99% of the population accept as the gospel compounds the problem. Regrettably, the analysis used is determining "affordability" = can I afford the daily / weekly / monthly / annual payment.  The concept of repaying the principal is lost in the ether.

ptoemmes's picture


One could calculate how much a dollar of debt gets you in GDP increase, but once you accept 100% in ratio above you are f*cked.

Oh, and don't forget off balance sheet "debt".



Cluster_Frak's picture

GDP includes government spending. It's like counting spread of cancer as body growth.

medium giraffe's picture

Yeah, yeah.  Everything is awesome, CHS.  Look at stawks ferchristsake!  The Uranium market is doing great too,  look at all of the foreign investment!

yogibear's picture

Who cares if it bogus. It's an economic Fantasyland existing on infinite Federal Reserve printed fiat. Just BTFD and be rich.

Trillions more in stealth QE coming to throw into stocks.


venturen's picture

It is all fun and gams...till you are Detroit or Greece...which were small and saveable....going to get harder to paper over the wholes of the money whores

1stepcloser's picture

digging and re-filling the same whole is bogus?

Parrotile's picture

Normal Australian "Road Repair" strategy there, mate!

Don't fix the underlying cause - just patch over the cracks (and repeat when they recur)

Consuelo's picture



CHS's rehashing the obvious has actually gotten better over the past 2 weeks or so.   There now seems to be some 'originality' in his posts.   Good job Charles.

messystateofaffairs's picture

GDP is what working people earn by freely trading goods and services in a total free choice market. Everything else is BullshitDP.

The only value government can add to GDP is the cost of protecting private property from theft, which is a joke, since they are the largest thieves of private property

darteaus's picture

At the end of the day, something of value must be created in order for something of value to be consumed.

smacker's picture

Sometime around the mid 90s or so there used to be a website dedicated to exploring fictitious "GDP" and reporting truer figures. I had a look for it a while back but couldn't find it. {sigh}

The general conclusion was that official GDP stats were a heap of baloney for numerous reasons including the one described in this article. Since around the 80s GDP in real terms has been flatlining and mostly reducing, hence the need for political elites to misrepresent it and find ways of bigging it up. It also explains why the masses have taken on more debt: to uphold their standard of living in a world where wealth is polarising.

Some of the crap included in GDP calcs to boost figures are completely off the wall.

One single example is that in the UK, wages paid to Civil Servants are included in GDP. So when Gordoon Brown put ever more of them on the payroll it increased GDP, even though his army of apparatchiks were consuming wealth, not increasing it. Dozens more examples exist.

GDP figures are no more believable than official CPI (inflation) figures or crime figures come to that.

OverTheHedge's picture

With governments taking ever more out of the economy, and constantly expanding the public workforce, it makes no sense NOT to include civil servants in GDP.  In not too many years they may remove private enterprise entirely, as it will be a brake on GDP growth.


SeuMadruga's picture

hum...Government Domestic Plundering ?

smacker's picture

The public workforce (aka Public Sector Workforce) are not the same as Civil Servants. The former mostly work in productive jobs (eg state owned industries like the BBC etc) but the latter mostly work inside .gov or for .gov agencies.

farmerunder's picture

Suprisingly from a recent MSM article - "The more diabetes, divorce, incarceration, wars, natural disasters, the higher the GDP". That is line of the year! Therefore our Govts will do all in their power to raise these magnificent GDP contributors

Zorba's idea's picture

The reserveless FED...making chicken salad out of chicken shit since 1913. 

William Dorritt's picture

Keynesian Economics was created to support the Socialist policies of his party in the UK, govt spending to buy votes being one of them.


Net worth of the Country and each Citizen and units produced would seem to be better measures.


Wall Street and Govt have one thing in Common: they love Financial Magic

DemandSider's picture

Trade deficit spending is NOT Keynesian economics. Keynes was extremely anti trade deficit, especially this kind of 30 year chronic trade debt we've been piling on. (See Rome and The Ottoman Empire) FDR's Keynesian spending was effective largely due to the last bill Hoover signed, The Buy American act of 1933.

William Dorritt's picture

Britain was still a mercantile power with an Empire in the days of Keynes, and the factory workers likely voted Socialist.

WTFUD's picture

Been saying for years that the US GDP is nonsensical. Some supposedly bright people have pointed out that Russia's GDP is a multiple of 10 lower than the US, but i called BS on that. Even the UK is supposedly double that of Russia when all we do is creative accounting. Meh!

white horse's picture

Tell this to Krugman.

Blue Steel 309's picture

When has reality ever influenced the opinion of a Jew?

DemandSider's picture

The U.S. has been buying more than it sells the world for over 3 decades, and some genius just figured this out?

sbenard's picture

I remember reading about 3 years ago that government economists changed the way they calculated GDP. Using the same data, the new calculation yielded a 50% increase in GDP. I learned about it here on ZH. The people who concocted the new method are simply seeking to deceive people into believing that we are prosperous, when we aren't. 

We doubled our national debt over the past decade, but we didn't double our GDP! 

indygo55's picture

They need to create a bigger GDP number for a lot of reasons. One is so they can claim the US is larger then China. If the real numbers were given I think China would be larger (its already close) and the US would be number two in the world. Its a psychological point that the US must always be number one but its a lie. As always. 

surf@jm's picture

They also claimed the Titanic was unsinkable.........

Look how many believed them.......

P4K's picture

For most people, it looks more like this:


Before hurricane:


wealth = (house + car + insurance contracts) - (home debt + car debt)


After hurricane, your insurance company writes you a check, and you rebuild a better house, and buy a better car, using the insurance company's money:


wealth = ( better house + better car + insurance) - (old home debt + old car debt)


Wealth (equity) has increased by the sum ((better home-old home)+ (new car-old car).


Insurance companies are slightly worse off, but they have been accruing the liability for these claims all along, so they credit (sell) investments and debit accrued contingent liability. This reduces the size of their balance sheet, but the equity holders' residual claims on assets remain the same with lower leverage--it's like using cash to pay down debt (although they would no doubt be better off if hurricanes never came). I guess you could argue that their selling of debt investments would also increase interest rates and borrowing costs, but we all know by now that interest rates only go down no matter how much private interests sell.

For the uninsured, it is a disaster; and if the federal government picks any part of the tab, it puts the federal government in a weaker financial position.

However, if the vast majority people in the affected area are insured, it is a net benefit for the local economy as the reserved insurance money flows in--creating increased home and auto values and lots of jobs for contractors, repair shops and car dealers.

For the economy as a whole, it must be a long-term negative of some sort, but the spending, rebuilding, and renewal in the short-term make the local economy feel better than it did before the storm.


rwe2late's picture

financial debt ignored,

and any "loss of inventory" to the environment is ignored

(fisheries destroyed, water depleted or polluted, forests razed, etc)


yep, GDP is a fine yardstick  - sarc

Hipower's picture

JOOS COOKING THE BOOKS! Same as it ever was.

rphb's picture

For everyone interested, I made a graph where I combined the two offical graphs from the FRED into one, where I simply subtract the debt from the GDP:

William Dorritt's picture

Exactly, we are borrowing the money to keep the illusion that our standard of living has not collapsed.