What are we reckoning with today?
“Market buoyed by strong GDP report,” says a headline.
Yesterday, the Dow managed a strong rise – up 212 points. Oil fell back to $115. Even with a hurricane whipping up the waters of the Gulf of Mexico investors figured oil was a sell.
The dollar rose to $1.46 per euro. And gold rose too – plus $4.80, to $838.
Gold seems to have bottomed out at $784. That might have been the best buying opportunity we will have for many years. Time will tell.
We’re not bothering to guess. To us, gold is a good thing to have when things go bad. And after such a long period when so many things went so well, we suspect it’s time for them to go bad – and in a big way.
Badness in economic terms means either inflation or deflation – or both. And both is what we’re seeing.
“This is the first business cycle ever in which the middle class had less income at the end than the beginning,” says a report at CNN. The report refers to figures put out by the Census Bureau, showing that median real incomes for U.S. families dropped in the period 2000-2007 – from around $58,500 to $56,000.
“Real” is the important word. Most families have more dollars. The trouble is, consumer price inflation has made those dollars worth less.
An interesting nuance came to light as well – one much discussed by Democratic politicians. While the median family got poorer over the period, the people at the top got richer. The wealthiest 1% of the population now has the highest percent of national income in 80 years.
But what are we to make of these latest GDP numbers? The numbers have been lying to us for years; what story are they telling now?
Readers will recall that except for a 6-month period in 2001-2002 the U.S. economy grew during the entire 7 years – usually at very impressive rates. In fact, it was common for American economists to boast about it. They thought they had discovered some magic formula and actually taunted the Europeans for not following their model.
What they had actually discovered was not the miracle of eternal growth, but the mirage of episodic credit expansion. And it was a special kind of super-powered credit, courtesy of the dollar-based monetary system. In effect, Americans could borrow without ever having to pay the money back. They sent IOUs – dollars – all over the world. Since ’71, they couldn’t exchange their dollars for gold. And, besides, the grateful foreigners were so happy with the strong dollar, they were glad to keep them. They used them to stuff their mattresses, build up central bank reserves, and capitalize Sovereign Wealth Funds.
Of course, you can’t really get rich by spending money you don’t have on things you don’t need. So, we – often alone…often mocked and always unappreciated – pointed out that the GDP figures were a fraud. In a consumer economy in the late stages of a credit bubble, GDP growth measured the rate at which people impoverished themselves – not the rate at which they built wealth.
Hardly anyone believed us. (Usually a good instinct…) But now we have the figures to show we were right. GDP grew substantially during the last 8 years. But people actually got poorer.
And now we have more GDP numbers; and again, they’re claiming that the economy is growing. In the second quarter, U.S. GDP grew at a surprising 3.3% annual rate. Economists applauded. Investors celebrated. Politicians and central bankers slapped each other’s back. And many analysts take these GDP numbers to mean that the crisis is over; the economy is growing again – and healthily.
Not so. Most of the GDP growth in the 2nd quarter came from exports. But most of the exports were higher priced agricultural products. Grains went up in price. And U.S. farmers sold a lot of them on the world market.
Nothing wrong with that. But not many people are going to get much out of it. Consumers are still squeezed…and spending less money. Officially, consumer spending went up at a 1.7% rate in the second quarter. If you take into account the rising population, this is barely any increase at all, per capita. And retail sales actually fell in July.
Bankruptcy filings are rising at nearly 30% per year. And even Tiffany’s says it’s hard to make a sale.
So, before coming to a verdict on the economy, we’d like an opportunity to cross examine those GDP numbers…in order to get out the truth. And water-board them too…just for fun.
for The Daily Reckoning Australia