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….

4 responses to “Econo-Quiz: Who’s in Worse Shape?

  1. #2 I think you are right. Normal deficit spending is sterilized by the sale of the bond. When the Fed reads it’s MMT and buys the bond back it injects new money in a way the Treasury did not. But it isn’t twice the money debt. It is exchanging one type of bond for another that circulates as currency. Like taking your money out of a CD and putting it in checking.

    #4 Can’t one choose to forego treasure looting, by denominating it in ounces, acres, cords, or poverty (you can’t loot my treasure cause I ain’t got one)? Having one’s treasure looted seems optional. Personally I’m long dollars, but that is cause I think there is going to be a sale. But if I get looted, I won’t say I wasn’t warned. And I’m hedged like crazy. Whatever happens, I am going to be sorely disappointed.

    #5: It has been done. Sign me up.

    • Treasure Looting: Very hard to opt out. You can mitigate and hedge, as you note, but any participation in the cash economy will tax you. Anything you own will also be affected, of course, some positively, some negatively. But, generally speaking, the more debt you have the better off you will be while the music is playing….or while bailouts (and Jubiliee’s) are in the offing. Being long the dollar hasn’t generally been the best position…now? Maybe for a bit, while everyone worries about debt and Europe. My 2 cents. HT

  2. I thought the ECB was defacto bond buying, lending the european banks money and accepting sovereign bonds as risk free collateral. No?

    Are you double counting the US deficit and Fed bond buying? If the Fed buys the deficit, it is still just one unit of deficit. No?

    Shouldn’t you count change in deficit spending and not total deficit spending when calculating GDP growth or contraction?

    Didn’t Scott Winship just show in Foreign Affairs magazine that the US economy is pretty much ok?

    Shouldn’t we all just be socking away those dollars in anticipation of feta cheese and calamata olives on our upcoming Greek cruise?

    • 1. Defacto, yes, the same way the Fed is and/or has been doing here…don’t have a quantity to add on either as yet, but will try to get a number for that. Merely noted that they haven’t yet sunk to the level of outright purchases, but then there are not Eurobonds as yet.
      2. Thought about that but, no, I think not. (See next answer though.) Actually, as I understand it (perhaps wrongly) this action would create twice the debt money as a market purchase…let’s chew on that, interesting problem.
      3. Thought about this too and, to be sure, the year-over-year change is meaningful. My intent here was to reflect the fact that each and every annual debt financed deficit – in it’s entirety – serves to inflate the economy by XX% in that year. Prior efforts to quantify and disaggregate the “excess debt” relative to real productivity growth may well be above my pay grade (or spare time).
      4. Yes, I might have included the reference (here: Perhaps I’ll add a few more comments, but the primary point of this post is to point out that, relatively speaking, the US is not in such great shape, however smug we might feel about Europe’s troubles. Second, these are the reasons that Austrians correctly understand inflation and deficit spending to be an indirect form of taxation and, as such, a transfer of wealth. Behind the smoke and mirrors, our treasure is being looted.
      5. Check, just patching up the canoe I’m going to need to paddle across the Atlantic and Med.

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