Monday, 3 February 2014

The Phony U.S. GDP Growth

According to official statistics published Friday, U.S. GDP for Q4 2013 hit another record high.

GDP grew 4.2% in 2013.

But, GDP is measured in US dollars, that is, in (fiat) money. Since the end of 1981, the amount of US dollars has surged from about USD 1.74 trillion to just under USD 11 trillion at the end of 2013, an increase of about 5.9% annually (see here for more stats).

All else remaining the same, the more money in circulation the higher GDP will be. If we adjust GDP for the increase in the money supply since 1981, GDP falls significantly and the growth rate with it.

More precisely, the money supply adjusted GDP falls by more than USD 9.3 trillion in Q4 2013 compared to reported GDP, equal to the increase in M2 money supply since 1981. Note also from the chart that the current adjusted GDP is lower than it was back in 2006! As for growth, the annualised growth rate in GDP since 1981 falls from about 5.3% using the reported numbers to a mere 2.8% when adjusted for the increased quantity of money. Moreover, the growth rate from Q4 2012 to Q4 2013 falls from the reported 4.2% to just 0.6%.

Looking at longer term growth rates over a five year period, the GDP growth rate falls from an annualised rate of 3.3% as of Q4 2013 using the reported figures to a negative yearly growth rate of 1.0% using the money supply adjusted GDP figures.

And what about GDP per capita? The US population has grown since the early 1980s, from about 230 million to the current 317 million (here). Dividing the money supply adjusted GDP numbers by the population results in an even worse picture of the US economy than for the aggregates above.

In fact, the chart above demonstrates that money supply adjusted GDP output per capita is lower today than 13 years ago!

Finally, the five year annualised growth rate in the adjusted GDP per capita has been in negative territory every month since the first quarter of 2009.

Noting of course that GDP from the onset is a faulty measure of true economic growth (e.g. here), the above attempts to demonstrate that the official GDP growth reported is not growth at all. It's rather phony GDP growth driven wholly by an increase in the quantity of money. And the quantity of fiat money issued in an economy is NOT of course what makes its citizens financially prosperous. The above analysis might also help explain the still relatively high unemployment rate in the U.S.