US economy

(1) Real Final sales  (RFS) – a better measure of aggregate demand since it strips out inventory fluctuations – grew at an annual rate of 3.6% between 1953 and 1971, double the rate of 1.8% recorded between 2000 and 2014.

(2) RFS actually declined 0.5% in Q1.

(3) RFS has recorded an annual average growth rate of 1.1% since the pre-crisis peak in the winter of 2007-08 (perhaps, December 2007 quarter).

[Of course, the average annualized growth rate of RFS will be higher, if measured from the bottom of the cycle in 2Q2009]

(4) The balance sheet of the Federal Reserve expanded USD42.0bn between 1953 and 1971 – that is annual nominal growth rate of 5.7%. In real terms, it amounted to 3.0% per annum. That is only 0.8 times the annual growth rate of RFS of 3.6% during that period.

(5) Between 2000 and 2014, the Federal Reserve Balance sheet has expanded by nearly USD4.0trn. That is almost 100 times its expansion of the Fed balance sheet in the period between 1953 and 1971. That is a 17% CAGR and a 15% CAGR in real terms, adjusting for the 1.9% rise in the GDP deflator.

(6) That (15% CAGR in real terms) represents 8.3X times the growth rate of RFS of 1.8%. Contrast that with the 0.8X between 1953 and 1971.

(7) Defence spending component of RFS recorded zero real growth between 1953 and 1971. Hence, the 3.6% annual growth in RFS during that period is ‘superior’ to the more recent 1.8% annual growth in RFS between 2000 and 2014 because, during this period, real defence spending grew 37% cumulatively during this period.

I culled out these factual (verifiable) statistics from David Stockman’s blog post after the US Q1 GDP data was released last night. I had not done the verification myself, yet. He has more to say on the ‘Owners’ Equivalent Rent’ vs. Index of Median Rent. The latter would have added 30 basis points to the annual CPI inflation in the new millennium. That is what he says. How much would it have added to GDP deflator? We do not know. Second, he also talks about the index of car prices which has gone up by 1% in the last two decades, according to him. This is due to hedonic adjustments. He calls it ‘hedonic adjustment gone haywire’. Fair enough. But, now all countries have begun doing that. His blog post is here.

Ambrose Evans-Pritchard thinks that the US economy is not on the cusp of a recession. But, the length of the US ‘expansion’ is against him. Certainly, the US economy is not about to embark on a major upswing. My sympathies are neither with him nor with the US economy.

Probably, central banks know that their official indices understate inflation and that true inflation was higher and that the higher actual inflation rate is helping reduce the real value of debt in the economy. Hence, screaming deflation is actually a decoy, to mute the real secret of higher inflation and the real erosion of debt.

He is also implying – well, stating openly – that the Federal Reserve is getting far less bang or nothing for its balance sheet. He wants the Federal Bank to go back to being simply the lender of last resort, in a crisis. Lending freely at penal rates to provide liquidity, in a crisis. That is all that they need to do. This blogger (Yours truly) has a lot of sympathy for both views. In fact, the world and technology have come a long way that a fiat money or paper money may not be needed at all and people can preserve their purchasing power by themselves. Central banks are clearly not helping at all. Time for some radical thinking, before it is too late.

Jeremy Warner in ‘The Telegraph’ thinks that the world is approaching the end-game for both Keynesianism and monetary economics. I think he is right.

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