February 22nd, 2013 1:34 PM by Nick Rapplean
One of the major indicators that most of us pay a great deal of attention to is Gross Domestic Product (GDP). This, in brief and oversimplified, is the amount of money being created (and spent) by the nations economy. The assumption is that when the GDP rises usually expressed as a percentage, or how much more the economy grew this quarter than the quarter before the economy is growing.
The GDP figure, though, is extremely flawed. Consider, for instance, the fact that the tropical storms that began this year turn out to be, by the rules of computing GDP, good for the growth of our economy. Why? Because they are occasions for the spending of money primarily on the repairs of the astonishing amounts of damage done by the storms.
Now, an economic indicator that somehow suggests a big benefit from vastly damaging storms is, at best, very weird. What is the benefit from having to put a lot of money to work not to create more money or better living conditions, but to return an area something like its former livable state? The answer to that question, we suppose, is that workers are hired, etc., but none of that is advancing the quality of our lives and building our income stream.
Of course, when we experience a weather-related tragedy such as this, were actually losing a great deal of money over the long term. The GDP figures can mislead us in this regard. And they also tend to get mangled as the economic dislocations caused by natural disasters skew the data. Employment figures, as we saw, go haywire. Were still waiting for them to settle into a sensible range.
There’s more.
Guess what happens when were all optimistic about the economy and, because of our renewed confidence, were ready and willing to buy up expensive automobiles among other things. We build up the levels of debt in our nation. And is that a good thing? Not really. Viewed simplistically, what we do is pay for a bunch of luxury items with money well earn at some point in the future. That leaves us poorer; really that is, well have to pay off the expenses later.
No, this doesn’t require a degree in economics to understand. But it gets a bit more interesting at this point. Note what famed investor Rob Arnott has said on the subject:
GDP is a terrible measure. It measures spending, not prosperity. So the family with the BMW, their GDP, GFP, Gross Family Product, just soared because they just spent money they didn't have. To the extent that we're engaged in deficit spending, we're spending money that we don't have. We're creating an illusion of prosperity that has consequences. That debt has to be paid back eventually and it leads to a lowering of future GDP in order to bolster current GDP, and puts us on a trajectory for really disappointing GDP growth in the coming decade.
Arnott prefers GDP net of new debt as an economic indicator. It avoids the problem of seeming to create wealth whenever we are actually creating debt. And what even a cursory glance at the figures for GDP net of new debt show us seems to me extremely important.
Total debt throughout the economy has declined in real terms (adjusted for inflation, the same way GDP is calculated). Yes, the federal government is running huge deficits. But consumers, businesses, banks, and local governments have been shedding an unprecedented amount of debt. [Morgan House, Investment U]
How quickly we forget, it seems. We have, for about half a decade, been deleveraging our economy, gradually paying down debt and building up our liquidity. Notice, for example, the amount of cash most corporations hold. This helps to explain why the number of jobs has grown so slowly. This just isn't the sort of economy we've grown accustomed to over the course of our lives.
But it just may be a healthier economy than many dour economists tell us it is. Debt as a share of GDP has actually been declining since 2008. We are moving in the direction of economic health and, perhaps magically, we are doing so with only a minor slowdown in the overall economy.
Perhaps slow is the operative word here, and perhaps slow leads to sustainable. We probably shouldn't look for booms in any economic sectors, including housing, but we shouldn't be continually running from problems that just aren't as grave as we keep telling ourselves they are.