Revising The GDP Again, Or Keeping Up Economic Appearances

by: Rachel Mills

As happens every so often, government bean counters at the Bureau of Economic Analysis (BEA) have decided that the way we've been calculating GDP in the past is wrong, all wrong and we must "fix" it. We must incorporate Hollywood magic (literally, by adding in Hollywood royalties and such) and we must count R&D costs as investments, placing them in a whole different column, a trick that no other country currently employs. And some other changes.

These "corrections" in how GDP is calculated, we are told, will reflect more accurately (and more positively) how well our economy is really doing, in spite of what you may be experiencing in your neck of reality.


Official unemployment dipped slightly to 7.5% from 7.6% (Yay!!!) and yet labor force participation is still down to 63.3%, the lowest since 1979. (Oh.) Debt-to-GDP has exploded to 105%, the highest since WWII, when as recently as 2008 it was a mere 40.5%. A year ago independent rating firm Egan-Jones cut the US credit rating a second time to AA, its third highest rating, citing "the lack of any tangible progress on addressing the problems and the continued rise in debt to GDP." (And then the SEC did this to them.) China is quietly divesting itself of our debt. Perhaps they saw this little alarm bell.

Our numbers look terrible, folks. Must be something can be done…

What if a worsening debt-to-GDP ratio made ratings downgrades avoidable no longer? What if we weren't able to borrow to make up our spending shortfall? We're already printing like mad. We're coming up with all the new taxes we can muster and we know the anemic economy can't bear much more. We would have to actually deal with the fact that we spend too much on extra-constitutional things. And every one of those wasteful dollars has a constituency attached that will scream bloody murder if we threaten their gravy train. See: Sequester.

Politicians hate screaming constituents. Better to mollify everyone with a quiet little numerical massage. This new calculation is expected to massage our economy upwards by about 3%. Ahhhh… that feels better.

But it is becoming more and more difficult to stave off real and painful solutions.

I spoke with John Williams, the economist behind Shadow Government Statistics and he concedes that the new way of calculating GDP, due for arrival July 31 of this year, would indeed improve the debt-to-GDP ratio some, but not significantly. He says the ratios would be back to where they were before in two months.

But I speculate that maybe we're desperate enough to need those months, in conjunction with other accounting and political maneuvers to cover up the reality of our debt as fast as we can. We need all the time we can buy in any form we can buy it to keep up with our unquenchable thirst for more spending and thus more debt. The 2014 midterm elections will be upon us before you know it. The results will determine what, if anything, in Obama's agenda he will be able to accomplish.

As they say in politics - It's the economy, stupid. Obama needs that economy to look good. Well… as good as possible.

And while economic concepts clearly escape Barack Obama, manipulation of economic statistics is absolutely a tool available to him by virtue of being president.

Williams notes that the BEA has been overtly politicized since the Johnson administration, when, not happy with their economic numbers, Johnson kept sending them back until he got what he wanted. Similar things have been happening ever since. This is why any statistical calculation that politicians can influence are worse than worthless to anyone but politicians. Smart investors and businessmen ignore them. They need to make decisions based on reality, not political fairytales.

But hey. I bet quite a few of us are so tired of depressing economic news that we'll be salivating to see just about anything that's rosy. And, long about August it will appear that our economy just soared by about 3%.

The takeaway is this: the US government is not serious about real solutions to real economic problems. What they are interested in is more smoke and mirrors, more clever accounting, more backroom deals, anything that enables more debt. And that's a ticking inflationary time bomb. The dollar is trying hard to win the currency race to the bottom. The good news, I suppose, is that there is a lot of competition in that race.

I'd hang on to my gold if I were you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.