GDPC - Gross Domestic Production Circus
Why?
Think of someone measuring his strength by how much volume he can lift rather than using a standardized scientific weight for measurement. One day your iron dumbbells are replaced by air filled plastic dumbbells with 3 times the volume of the iron dumbbells (but much less scientific weight in kilograms). Based on this a newspaper reporter writes that your strength has exploded. Great!
This is almost like listening to economists claiming the recession must be over in some countries because central banks have pumped loads of fresh FIAT-money into the system and thereby also helped inflate their GDP numbers.
It looks like GDP is back up raising in a few countries hit by the financial crisis. But how do we measure GDP? Yes by money, but if the money supply in reality has been increasing then the real production could be down even if GDP looks like it is up. Today’s popular inflation measures and money supply measures are horrible at keeping track of the long-term relevant money supply. Talking about GDP measures as if it was scientific weight measures also makes it looks like the central bankers and politicians are in control of the situation. They have accurate measurements of the situations and the tools to tune the economic machinery. I wish!
The central bankers have used their magic wand to make it looks like GDP is doing okay. Politicians and central bankers massive bail out of financial institutions is not the same as increased production. GDP growth in times like these could be illusionary. Central bankers have very limited control over the velocity of money, it could fall further, making the central bankers panic further with their electronic printing press. Or the velocity of money could come up to more normal levels. Together with increased “real” money supply this could cause inflation and or panic out of certain currencies. There are many scenarios and GDP is an extremely inaccurate measure to say anything.
If GDP suddenly should shoot up at the same time as unemployment is increasing this could simply mean a combination of increased money supply together with the velocity of money coming somewhat up from lows. When and if the velocity of money comes back to “normal” then we will see the true and relevant money supply. It is for sure way up. This mean that in the long run a series of fractional-FIAT currencies likely must come down in value one way or the other (this could take months or many years). Relative to what? Use your imagination. Before that happens the velocity of money could fall further, causing the central banks to speed up the electronic printing press (causing even bigger problems in the long run). I do not know where the velocity of money is going, I do not know where the GDP is going, but I know central bankers are running their electronic printing press. The measure stick used to measure GDP is quickly changing its length and this is not captured in central banks naïve and lagging inflation measures.
Growth in GDP does not need to reflect increased production in the economy. Changes in GDP can just as well be changes in the length of the measure stick. That is changes in the velocity of money plus changes in “real” money supply. We know the central bankers have been increasing the money supply + we know the velocity of money likely is highly volatile in times like this. The fear and greed volatility is still high. Small changes in GDP measures could be close to meaningless in situations like this.
