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Why GDP Numbers Are A Farce!

Listening to some of the clowns at Davos prattle on with myriad broken theories, while simultaneously using statistics as weapons in their intellectual tantrums, it struck me that most people have little idea what actually goes into government numbers such as CPI, GDP, unemployment levels, etc.

In theory GDP or Gross Domestic Product should give us a picture of the total economic output for a given country. Economic output is good right?

Sure, if what is being produced is stuff that is actually in demand.

Our problem lies with what "ingredients" go into the pot that makes the stew called GDP. I'm going to only focus on one. That of Government spending.

Government stimulus packages get spent on all manner of different things. One can debate whether they are good, bad or downright stupid (Cash for clunkers anyone? Roof repair?), but whether or not you agree with how the money is spent there is a more important and critical element to be understood.

When a government spends money on anything they are doing it with either (a) stolen money (aka - taxed) or simply created out of thin air, or (b) borrowed money.

Both of these scenarios present problems. Stealing (taxing) capital from people leaves them unable to utilize that capital for themselves. Aside from this being unethical, if history is any guide it is tough to argue that the theft typically results in any net benefits that exceed the costs. If it did we'd all be bowing to a Stalinist and speaking Russian.

Borrowing money can be economically beneficial where the net output exceeds the costs of borrowing in much the same way as a business can borrow capital in order to increase productivity, expand market share, etc.

In a nutshell the government cannot escape the laws of the universe including that which every businessman must contend with, namely producing a return on capital that exceeds the cost of capital.

Printing up new money dilutes existing capital just as the issuance of new shares without attendant increases in revenue/asset values dilutes shareholder value. Borrowing money leads ultimately to more taxation or money printing and likely both. Government spending therefore is a net drain on an economy, any way you look at it.

Are there any situations where Government spending could be of benefit?

Leaving aside the fact that it can only take place by way of either theft or borrowing, as discussed above, the answer is… wait for it… YES it can. It is possible for government spending to achieve a net benefit. The question however becomes: could private enterprise provide the same service at a profit that does not require taxation or borrowing?

For example, a school or hospital built to satisfy real demand, or a water treatment facility to purify water supplies to cities or villages. These are beneficial projects with real need attached to their creation (not a bridge to nowhere).

A city built for which there is no demand however, is more than a waste of capital, since it is going to take additional capital to maintain it. When the entire ridiculous concept is eventually scrapped, only after sucking enormous amounts of capital in, it is going to take additional capital to pull it all down.

As if this was not bad enough there are unintended consequences for ill-conceived projects. For example, the fact that the land used for certain government projects cannot be profitably used for other purposes. Productive farmland being used for the building of cities such as that in the link above.

The net result has been a decrease in the productive use of land and capital, and an increase in the unproductive use of capital. All of which has been done by force rather than mutual consent of the parties that are trading with one another.

GDP measures what is produced, even if this happens to be empty malls and bridges to nowhere. It has nothing to do with what is in demand, sold or used. This is where its usefullness as a legitimate measure comes into question.

A government can force its GDP growth rates higher while actually impoverishing the people that it is supposed to be acting for or on behalf of. This puts a positive spin on GDP numbers, but says nothing about real wealth creation.

In a purely government-controlled society or economy it would be possible to have high GDP numbers while the population starved to death. In short, GDP growth only tells part of the tale. If we look at government debt to GDP growth we get a clearer picture of what GDP growth actually means.

Below is a chart showing the relationship between debt and GDP in Japan. If GDP was growing at the same rate as Government debt then we would have a flat line. Clearly not the case.

Japan Chart

Why do you guys keep picking on Japan?

The problem here lies with a naive populace that has been taught to accept everything they hear from "official sources" as the Gospel. "Our government would never lie to the people," Japanese Joe Saki.

Mark has a friend that is dating a Japanese woman. He's having a hard time of it, simply because she is so subservient (she is in her early 40′s) that he finds it hard to hold a mutually interactive conversation. When the subject of Fukushima came up she said the government would never lie to the Japanese people. Everything is fine. When he asked her if she thought that there could be other possibilities (like the government not telling the truth all the time) she couldn't even process that option.

Why is it that everywhere I look, whether its TV, newspapers or pretty much any mainstream media outlet there is this complacency and acceptance that what the government says is actually true? And it's not just average people that believe it. Turn on one of the bobble head info-tainment business channels and you'll be privy to a whole host of folks that should know better.

"Government spending boosts economy," was a headline I read the other day. Huh!!

Nobody blinks an eye. What if we had "Man castrates himself in bid to become a father."

Would people realize it was absurd rubbish or accept it?

Mark and I are hard at work looking for opportunities in far-flung places that don't need to fudge GDP numbers, employment stats or any other measure of prosperity. Not that we would trust them anyway, or more over even care. Where we're playing you can see the prosperity and growth yourself, on the ground, it's obvious.

Places like Mongolia, Myanmar, Sri Lanka, Cambodia, Chile, Indonesia and more.

- Chris

"Depressions and mass unemployment are not caused by the free market but by government interference in the economy." - Ludwig von Mises