Econo-Quiz: Who’s in Worse Shape?

A)  The US:  with nominal GDP growth just downgraded by the World Bank to 2.2%, inclusive of deficit spending running at roughly 10% of GDP (and who knows just how much other misc. behind-the-scenes devaluation and Fed bond buying, reportedly running as high as $600 billion last year – or roughly 4% of GDP), and official inflation running at 3.0% (as of December 2011, with food at 4.7% and energy at 6.6%)….or
B)  The Eurozone:  with nominal GDP growth also downgraded by the World Bank to –0.3%, inclusive again of deficit spending averaging an estimated 6.2% (still looking for a proper aggregate forecast for 2012), with little or none of it being financed as yet through ECB purchases, and inflation officially reported at 2.7%….
Answer:  Not accounting for the debt/GDP issue and focusing solely on the state of the real economy, the US is actually in far worse shape since “real” GDP growth is actually a bigger negative after accounting for deficit spending (which is inclusive to nominal GDP) and inflation…more on that below.  Still, based on these data, I’d peg the US at somewhere in the range of –12.8% real GDP growth and the Eurozone probably in the range of –8.0%. 
Now, due to the Fed’s bond buying – a factor that has not yet been introduced (so far as we know) in the Eurozone – the actual rate of inflation (i.e. real dollar devaluation) may well be much higher than measured by the CPI (big surprise) and could well be running at 7%-8%, perhaps higher, here in the US.  
Why? Well, aside from the various accounting tricks that the BLS employs with the CPI data, this higher number includes the added “stimulus” of Fed-created money being used to finance those bond purchases, last year to the tune of 4% of GDP.  So, personally, I’d rather augment the CPI at 3% with a 4% “Fed Factor”, resulting in a “dollar devaluation” rate nearer to 7%….could be higher, of course. 
On that basis we’re probably losing “real” GDP a rate that’s a bit closer to 17%.  We don’t necessarily feel all of this today…that’s the whole point of continuing to run those deficits.  Still, these account balances continue to accrue.
And, in the mean time, we worry about the Euro….

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