Resistance Begins at Ohm!

Friday, May 6, 2011

Gross domestic Product or gross domestic Spending?

There a few other interesting items this week and I hope I can get this all captured.
First, this is an interesting analysis of our economy over the last 13 years. As the author points out, we tend to think that the nineties were good and then 2001 and then we got good again, then 2008. Starting with the premise that GPD is actually a measure of spending more than making, and pointing out that real GDP growth has been at a lame 2.2% since 1998, whereas public and private debt has risen by over 3 times that rate. Meaning that the illusionary GDP growth above 2.2 percent is just us spending borrowed money. And  Rob Arnott of Research Associates of California states: "GDP that stems from new debt — mainly deficit spending — is phony: it is debt-financed consumption, not prosperity," Take the debt part out and our prosperity is nearly unchanged from 1998.
GDP is our estimator of wealth. In other words, we produce more, we exchange more, therefore we make more and we increase our assets. This faux wealth was spent, not invested. Had we successfully invested it, there would be better returns than 2.2%
This like is borrowing the assets in your retirement account and then expecting the money to be in there later when you retire. Not! If you have $100,000 in your 401K but you borrow $350,000 and go buy stuff, your 401K isn't worth more because of that big IOU to yourself. The money in your pocket isn't earning anything. Spending it isn't earning anything, either. Instead, when you square up accounts, you are in the hole, massively. The $350,000 you borrowed wasn't working for you and neither was any return on that investment likewise increasing your wealth. And the amount your $100,000 earned you isn't going to make the monthly payments, let alone pay it off.
You can't unring the bell and you can't unspend the buck. And if the last 13 years are any indication, we can't grow out of this, either. Instead, we need to turn our attention to how we build real wealth. Not how we transfer it from high income earners to the government, or from Exxon to the government. Because really, after this payment comes due (the space between the blue line and the red line below), there isn't enough to go around anymore. Thoughts on how to do that later.
 Ack! forgot the reference: CNN