Real GDP Growth Has Been Negligible Since 1990

Only if you don't believe that inflation is an increase in the money supply, not a change in prices.

The author's point was that CPI is not an adequate measure of inflation. Inflation is and always has been an increase in the money supply (quantity theory of money).

So in order to truly ascertain "real" changes, the author is suggesting we should be evaluating GDP by the % change in money supply (specifically M2 in this case) rather than % change in prices.

Sorta like suggesting the earth is round when everyone knows it is flat?

But again, you're missing the point. Real GDP is arrived at by using CPI to account for inflation. Inflation is an increase in the monetary supply, hence why the author is suggesting using the change in money supply instead of prices to ascertain Real GDP. To say it has no direct relation is patently false.

Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit. If you turn to the American College Dictionary, for example, you will find the first definition of inflation given as follows: "Undue expansion or increase of the currency of a country, esp. by the issuing of paper money not redeemable in specie."
Henry Hazlitt (1964), What You Should Know about Inflation, p. 1​

Typically, one starts with a hypothesis, and it becomes theory when there is substantial evidence.

This is all just hyperbole. How is the math lousy? Did he make a calculation error? How is it lousy economics? Obviously you have been deeply mislead, but not by this blog post.

I thought the post was fairly rigorous. Where do you find a hole in his theory? The single commenter is in fact, quite wrong in his opening sentence. IMO, there is no other index for inflation than money supply. Price changes are a consequence of inflation, not inflation itself.

I've told you numerous times, Lew Rockwell did not write this.

 

I thought about this a little more last night. Since CPI is a lagging indicator, with changes to the money supply showing up later rather than sooner, I think that CPI adjusted GDP is actually a very useless statistic.

Now monetary inflation based adjustments make a little more sense, because with new credit, comes increased economic activity, which would be directly reflected in nominal GDP regardless of any price changes.

Similar to my argument earlier this year with Mia that deficit spending actually increases tax revenues, by injecting additional credit into the system, which generates more activity, and hence, more taxes.

Of course, this reflects a theory (no substantial evidence yet, although this subject could prove useful) of mine, that we're actually consuming our accumulated prosperity, and are only able to mask it's grossest effects by continually inflating the monetary supply, exporting that inflation whenever possible, and finding ways to cram every single possible dollar into defense spending that isn't skimmed off the top by very powerful business interests.

 

The problem with this analysis as with many of the analyses by the Austrian School of Economics is that it redefines EVERYTHING

The article writer starts off by arguing that the definition of Real GDP is wrong. He declares that using CPI to deflate GDP into constant dollars. He would replace CPI (which is a "bucket of costs" by the increase in money. He used M2 since it is a factor that is published by the government and can be tracked.

CPI is used as a measure to track "affordability":

Components of CPI include items in this list some of which I'll list below:

Food of every sort, ranging from particular fruits such as bananas and apples to cereal, flour, etc.

Enormous list of costs of occupancy including rent, utilities, etc.

Travel costs, etc.


The list of items is enormous.

Of interest there are currently 3 different indixes of CPI. I don't know which one is utilized in the calculation of the real GDP deflator. I do know from actual work experience in the 1980's when calculations were used in my industry for business results that utilized CPI indexes usage of one index or the other was nominal and not germane to different outcomes.

Now if I want to look at overall economic growth, my business growth as an individual or business, the stats on this issue for all economic growth in my state, town, etc. it is helpful and meaningful to deflate that growth in income by any growth in costs. CPI is a replacement for growth in costs.

I might want to replace CPI if my conditions were different. If I were a vegetarian I wouldn't care about increases in meat costs. If I lived at my parents home rent and utility free I wouldn't care about CPI increases in those items.

If my business converted aluminum foil into expensive pieces of art and sold the art for big prices, my biggest concern would be the impact of the cost of aluminum.

If everyone in my state, slept in sleeping bags and nobody in the entire state used linens (a component of CPI) I might want to remeasure the overall health of my states economic growth less the impact of rising prices by restating CPI without an impact of linens.

On the other hand growth of money supply whether measured my M0, M1, M2, M3, or whether measured as different nations interpret money supply (the definitions are different) does not measure growth in production against growth in costs.

Its measuring it against some amorphous unknown that may or may not effect costs directly, indirectly, etc.

Costs in different items rise and fall differently from one another. Since I graduated from college, the costs of that private education have increased over 10 fold. Similarly the costs of health care (described in a broad way) have risen similarly. On the other hand, health care includes cures today that weren't available then.

Milk, eggs, clothes, etc. have all inflated in costs, but not by a factor of more than 10.

Frankly, I don't know on an annualized basis what "the money supply" has increased since that time.

But I don't buy the money supply, don't eat it, spend it, recreate with it, use it for travel, etc.

It doesn't impact my life as do costs.

In an aggregate basis, while trying to determine how the entire country is doing an increase in the money supply, no matter which index is used doesn't define how we are doing vis a vis income versus costs

So if the article author wants to reinterpret everything about defining economic life....so be it.

It moves the conversation into a totally different world. In fact by definition it creates something totally different.

I don't know what it creates but it redefines a standard way of looking at real GDP Gross Domestic Product deflated by a cost measure into something else......lets call it Gross Domestic Product deflated by a calculated number that doesn't tell us anything specific about how we are doing

Measuring income (roughly equated with GDP with costs (roughly equated with CPI) is a standard and helpful way of assessing how we are doing.

Another way to do it would be to create a massive Profit and Loss statement for a business. From an individual perspective I could look at the end of a year and see if I increased hard savings from all my income and expenses.

Btw, its nice that you referenced Hazlitt, a prime writer for the Austrian School of Economics and old dictionary definitions of inflation.

Frankly, I want a measure of income versus costs.

Is growth in M2 (or any of the M's as defined by any nation (and the definitions are different)) define costs.

It doesn't.

I suppose Austrian economics feels free to redefine anything and then criticize it.

Frankly that doesn't help. Come up with something that is helpful.

(frankly, I never intended to spend so much time on this topic). I, like the commentator on the original article and Ready To Go, (commenting in this thread) all had problems with the article and the analysis.

However we articulated those differences I find that the article simply tries to redefine something that has use in a practical sense into something that is a useless definition for real life.

 

Earl, your post looks really good.

I'm not so sure this is true. There are a lot of applied Austrian economics already in use, some folks just may not realize it. And redefinition, by definition isn't necessarily a problem, or we would never revise what we know to expand our range of knowledge. My flat vs. round world comment from before for example. I mean, that's a pretty massive redefinition, but it was in fact correct to do so.

I would just offer here, that CPI is used to track inflation. The change in aggregate prices within the index. Affordability has nothing to do with price changes per se. Wages are not locked while prices rise and fall, because labor is also subject to the laws of supply and demand.

Well, the GDP measures economic activity. CPI as mentioned before is used to track the affects of inflation on prices. Money supply figures within the context of this article, are used to evaluate quantity of money theory. Basically, that the economy sets prices not just on productive supply and consumer demand, but the measurement in say, dollars by the amount of currency in circulation. For example, there is demand for 100 apples, there are 100 apples and there are 100 dollars available for apples. We might say that an apple will cost $1. If there was $1000 available for apples (with the same supply and demand), they may cost $10 each. And so on and so forth...

So needless to say, more currency in circulation, will certainly drive up prices over time regardless of whether there are more apples being produced, or more apples being purchased.

Now GDP in a way tracks the volume of transactions measured in dollars. By using the CPI to produce a REAL GDP number, IMO, we will have lagging indications of true economic stimulus through currency injections by the FED, because "new" money does not instantly impact prices. It has to be circulated and the market has to adjust over time.

But the gist of using the money supply is that GDP is a measure of growth, or economic velocity. If I sold 100 apples last cycle, and 110 this cycle, that is growth. I am growing more, and selling more in the same period. Velocity has increased.

When I introduce say, $100 billion in new currency into an economy of roughly $14 trillion, we will have $100 billion in nominal growth, regardless of whether prices have adjusted. And because CPI is a lagging indicator, REAL GDP cannot be accurately adjusted.

FED activity can be somewhat tracked in order to calculate what has been created or destroyed in the monetary supply. The idea however that the money supply doesn't impact you significantly however is not accurate. If we both have the same amount of money and I double it by printing more, your purchasing power relative to mine has dramatically fallen. Cost/Price are opposite perspectives of the same number. The price is what I charge as a seller, and the cost is what you pay as a buyer. You can bet darn sure that your costs will rise with an increase in the monetary supply, all other things considered equal (quantity theory of money).

I really don't think it is that extreme. We're still using GDP. We're still adjusting nominal GDP for inflation to arrive at REAL GDP. The difference is the indicator we are using to determine inflation. Do we use the price index, or an index of the volume of money? The price index, as mentioned before measures the affect of inflation on prices. The monetary indices measure the amount of inflation introduced to the system (see my reference to Hazlitt's book a post or two back).

Purchasing power. Agreed. It means much more to you or I if our purchasing power is growing or shrinking than the aggregate growth in the economy. After all, we might have good jobs in a growing sector. Factoring lousy jobs in shrinking sectors may not be relevant to us.

Well, as I mentioned, it was fortiutious because I had the PDF open and was printing it for a friend when I was writing my reply to you. I thought the mises.org link would tip it off as being Austrian. as far as the dictionary definitions being old, the book was originally written in 1960, then reprinted in 1964. Do you really believe that we have changed several hundred years definition of inflation in the last 40 years? And if so, who accomplished this feat?

Like "who wrote something", judging an idea or concept by it's "age" instead of it's quality is a shortcut, and hinders real discussion. I've asked numerous times to be judged by the merit of my ideas, not my credentials, and likewise with the Austrian school, to be judged by the merits of it's ideas, not how many Nobel Prizes, or how many books, or how many scholars, or how many other Nobel Prize winners were influenced by it.

An idea can be good or bad, whether presented by a professor or a pauper.

Ok, but that is something different. GDP measures economic activity, not profit and loss. More activity (profitable or not) is assumed to be growth, and less activity, shrinkage.

Well again, we're back to quantity theory of money. If you received an average salary with the same lifestyle quality, and it was $1 per hour, needless to say a cup of coffee would be significantly less than $1. And likewise, if your hourly wage was average, and paid @ $500 per hour, a cup of coffee could easily be $15.

Your work hasn't changed. The type, quality or taste of the coffee hasn't changed. Your social position is unchanged. But man oh man, there is a lot more money out there chasing the same volume of goods and being paid to the same number of workers....

I appreciate you took the time to write this long and thoughtful response in good faith. But I have to disagree. The idea that inflation is caused by an increase in the money supply is neither new, nor particularly radical. I realize many people have been socialized to believe that CPI measures inflation, but it does not. Inflation affects savings, foreign exchange, wages etc. Just evaluating inflation by prices doesn't tell the true story of it's effects and nuances.

So in that regard, there really isn't a redefinition so to speak. Although, innovation is normally a process of redefinition and challenging accepted norms. We certainly didn't know everything we claimed to 100 years ago, and 100 years from now, they will probably say the same thing about now.

 

Haha.

I'm glad you liked it Guerilla. It still seems like an article that is misleading at best and uses a worthless methodology. In the end the article and analysis are used to debunk current methodologies and promote an economic/political perspective. The methodology of the article doesn't tell us anything of value. Therefore its effort at debunking current methodologies is based on a misstatement.

In the 1980's and 1990's the fed was finding that economic conditions in the US were not in sync with existing theories about money supply impacting inflation.

While virtually all economic theory recognizes that increases in supply of money should impact prices, tracking of this data doesn't currently provide good hard answers.

Again, despite what you have suggested economic activity is hard to track and understand in its aggregate.

The simple equation with apples doesn't work precisely in real life. There are alternatives to apples. With $1,000 in a market with 100 apples rather than $100 it doesn't mean apple prices will rise to $10/apple rather than $1/apple. Buyers may purchase other items....and possibly the price will stay the same, go up some amt. or frankly who knows.

Inflating the amt of money in a real world situation doesn't imply a specific increase in the cost of items by a direct factor.

If it does, find the evidence.

Finally, several things about the use of CPI.

If it is a lagging factor, so what. If evidence that supports prices reported in cpi are consistently delivered at the same time frame then the analysis is consistent.

If we were living in a period of hyper inflation, all analyses would be worthless. The price of apples would skyrocket between the morning and evening.

I, and most of the world that operates prefer calculations that provide meaning rather than promote theory without substance, that incidentally don't reflect real conditions.

 

For a blog post that has only generated a few hundred views, a fairly dead thread on DP and only one blog comment, I think you're putting a lot more into this blog post than the original author did.

While you may call the article misleading and worthless, you're not providing specific examples to back up those assertions.

You say that the methodology doesn't tell us anything of value, and yet I argue it does, if only because monetary inflation is a more relevant indicator because it lacks the lag of CPI. In this sense, it is an improvement, albeit not a perfect one.

If you're going to let your opinion of Austrian economics and libertarianism color everything produced from thinkers from those schools, then it's pointless to comment with "misleading, misstatement, worthless" because now your bias is asserting itself.

I'm making a case, quite clearly, that this should be approached on it's merits. Now if you can unemotionally conclude there is no merit, that is fine. But some of your assertions are inaccurate, such as CPI being an indicator of affordability. When they show the graph on TV, they show a CPI graph (usually core or headline) and then call the graph results inflation.

Well, first CORE CPI was introduced in the 90s, so that skewed everything. Not to mention, that much of the inflation is exported in the form of foreign debt. Those sovereign wealth funds in Saudi Arabia and China are repositories of American monetary inflation, held offshore and out of circulation. In 1980, we were the world's largest creditor nation. Today we are the world's largest debtor nation. That is a LOT of inflation being held outside the US.

But nonetheless, I addressed in my last post that the inflation doesn't only impact prices. I forget what I listed, but there were several things, to which I should add, mal-investment. Inflation definitely affects the economy by producing over or mis-investment in certain industries as the new found (sic) wealth in the economy is misinterpreted for real demand by way of productive gain.

Oh, actually I agree with you on this. Which is why I think macro economists are usually full of a lot of hot air. The micro is easier to observe, and possibly understand although, not perfect. The macro is based upon generalization upon generalization, until we no longer adequately account for human action.

Not to be condescending, but I kept the example simple for the sake of mutual understanding. I would be happy to provide more complex examples if necessary.

What you are saying is correct, and somewhat obvious. But the concept behind the example is still true. Buyers could buy other items, but the assumption was that supply and demand are fixed. Because if Jesus Bernanke floats down on a cloud and presents everyone with an additional $1,000, prices will rise if for no other reason that the basket of goods available cannot match the increase in money simultaneously. It takes time to produce goods, from r&d, to growth/production, time to market, etc.

This in fact is my example relating to the blog post in the argument for CPI vs. M2 (or whatever..). CPI is a lagging indicator, the rise in prices occurs AFTER the injection of money. In some cases it is diluted, it might be destroyed, hoarded, put into capital production, consumed on goods outside the CPI basket (beer and hookers) etc.

My point remains, if the GDP is $14 trillion, and I pump another $14 trillion dollars into the economy via credit and the printing press, but CPI doesn't reflect most of that influx for 6 months, has the economy grown in the interim? And if it falls on the cusp of a reporting period, might GDP be over-reported both nominally and realistically?

With a big enough printing press, I could make the economy any size I want. and I could grow it nominally, forever. In fact, if I time my (ever increasing) injections just right, CPI will always lag, showing never ending and consistent real growth as well.

I don't believe that has been my position. On the contrary, inflation can manifest itself in more ways than cost, which is precisely why GDP should be adjusted for inflation, not for cost changes.

Yeah, but it's a lagging indicator....

If the FED injects $10 billion in new credit into the system in September, and IIRC typically it takes 6 months for monetary inflation to completely manifest itself in price changes, GDP would rise $10 billion as it is spent on bubble gum, invested in the stock market, purchases world series tickets etc... but the adjustment for this increased economic activity that was not brought about by productive gain, but rather inflation would be unaccounted for in REAL GDP because the CPI wouldn't report the effects until the following year.

Not to mention that CPI is not the full extent of the effects of inflation.

Not necessarily. Hyperinflation doesn't usually occur and then naturally settle over time. It's hyper. We would probably see prices skyrocket, stay high, rise one or more times, and then the currency would be worthless, and black markets would emerge. That is what has happened in other countries that have destroyed their currency. In Zimbabwe for example, everyone is a millionaire!

Are you saying that Real GDP as it works now with CPI is any more meaningful than using M2 or another monetary growth measure?

If so, why?

I'll buy the argument that real or nominal GDP doesn't reflect real conditions. I think people use GDP too much as a crutch, and when it's challenged, such as in this blog post, folks get nervous. GDP is a big crutch in economic arguments for folks interested in maintaining the status quo, such as market bulls and politicians.

A small thing that's interesting here for me, is that by using a different measure of inflation, a radically different result is achieved, which if one is being honest and non-partisan, might beg the question, which inflation measure is wrong, CPI, M2 or both?

Good discussion btw.

 

If your theory is that an increase in money supply will increase inflation and artificially expand your economy then please explain how Japan is printing money like its going out of style, interest rates near zero % and an economy that hasn't done anything in the last 10 years with inflation near zero % also.

 

Nominally. And it's not "my theory". It's widely accepted fact.

Carry Trade. Like us, they export/outsource their inflation.

To be honest, the Japanese have low rates, but they haven't been pumping liquidity in endlessly. GDP is largely unchanged, but so are prices.

If you asked me, I would rather have tiny growth and price stability, than what we have now.

 

The US trade deficit and dollar hoarding by China and Japan have a deflationary effect on the US.

 

Here's an interesting video no the end of the middle class:

http://www.youtube.com/watch?v=akVL7QY0S8A

 

Excellent lecture for sure. I love how these lectures are cataloged and available to everyone in the world.

But will my "it's all good" forum buddies watch it and perhaps gain some knowledge or perspective? Doubtful.

 

Soooo.... guess who PM's me today?

FSK, from FSK's Guide to Reality, the blog that prompted this thread. Apparently he noticed DP in his analytics, and came over to see what all the hubbub is about.

From the PM...

In the reader mail post, FSK takes some of you to task. About 60% of the way down the page, the post begins with...

This thread on digitalpoint.com is discussing my post on Real GDP Has Been Negligible Since 1990. I have an updated version of that post now, using M2 and gold as my inflation index. Surprisingly, the updated version is getting very little traffic, according to Google Analytics?! I thought the updated version was nicely done with tables illustrating my calculation?

My favorite part...

One pro-State troll said (paraphrasing)

The initial poster said that FSK's analysis is valid. Two people have responded saying that FSK's analysis is wrong and misleading. Two is greater than one. Therefore, FSK is wrong.​

That's the whole problem with democracy, summarized.​

On the CPI

Oh yeah, please go comment on this guy's blog, there is no guarantee he will come back to read here, and I'm not going to defend everything he says.

 

Some more food for thought....

I might take his advice. Then you guys can go back to having a big pro-statist party for yourselves!

Anyway, his blog looks pretty interesting to me, kudos to Earl for digging this thread back up so I could get this message from FSK and check it out in detail.

Oh yeah, and in his reader letters post, here is a better explanation of how we export inflation to other countries...

 

So what happens when China puts $1Trillion in US dollars on the auction block?

I think we all know the answer

 

Precisely what these sovereign wealth funds are composed of. Accumulated and exported inflation. Excess dollars. Monetary inflation.

When/if those dollars are ever released into the wild, things are going to get craaaaaaaazy!