Economic Meltdown (seconda parte)

[kandrathe]

*Total* government spending crashed during the crisis. The increase in federal spending ("stimulus") didn't even bring it back to previous levels. Government spending and revenue are down, not up, if you include local and state. That's contractionary - the "G" in Y = C+I+G+Nx does not discriminate.

Most of the government spending contraction is due to state and local issues where they cannot borrow, or print money to replace declines in sales, income, and property taxes while demands from the newly impoverished are skyrocketing. In 2009, and 2010, the Federal government engineered ~$200 billion "stimulus" to give to states to make up for their annual deficits. But, the changes in the state/local and federal components of the GDP are not significant in comparison to the decline in business spending and personal consumption. And... I'm not convinced that when the government takes the money from the people in the form of taxes and then spends, that it duplicates free market investment. The government tends to subsidize certain already inflated services such as health care, education, and the military. As we saw in the so called stimulus spending in 2009, the government chooses poorly when it comes to finding investment that will actually stimulate growth. Had I been your benevolent dictator, I would have made better choices and I'm not really the brightest bulb in the investment category. In simple terms, buying a bunch of bread will sustain a community, but investing in new farm equipment will increase their production capacity. Most of the stimulus was sustaining, and not investing.

US GDP Components

The biggest problem in the economy and GDP equation would be business spending, and employment (impacting personal consumption). What the stimulus did not do enough of was to actually stimulate business spending, and that requires leadership to inspire confidence in the economy. Instead, we were handed more restrictive laws in health care, and in Dodd/Frank. Both incredibly bad bills which don't actually do what they were "sold" as resolving, but both added greatly to the size of government.

I couldn't find a handy chart of GDP components, so I made one from the recent BEA.gov data.

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P.S. I also found analysis of 2001 Q1 real GDP on BEA.gov. The following image shows the percent of contribution of components and their net change from Q1 2010 to Q1 2011. The biggest decline in the government area was Federal Defense spending(blue highlighted area) mostly due to the draw down in Iraq.

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I think one thing that is confusing is that GDP continues to be calculated in "inflation adjusted dollars", however the devaluation of the US dollar has not been factored into the GDP calculations since the resultant inflation has yet to be realized. So, consumers and businesses are dealing in the current deflated currency (too many dollars) for our purchasing power. The aggregated CPI masks the inflation on the street. Once demand returns (pursuing too few goods as measured in the velocity of money), the actual devaluation will appear as inflation. Here is a great article summarizing my views on this. Consequently, I have little faith in the government supplied CPI, GDP, or unemployment statistics. They seem to be engineered to lead the electorate down a primrose path, whereas business and the investor class are not fooled. The author makes a case for investing in gold, but as we discussed earlier, I believe gold carries too much passion and not enough stability. Keeping your savings in an commodity index fund, or a diversified basket of stable commodities would be a better hedge against currency devaluation and inflation.

And, since QE1 and QE2 were so effective in stimulating the economy, why not QE3? So, there will be more devaluation shortly, and a bigger risk of runaway inflation in the future.