Fake It Until You Make It

July 31, 2013

One of the most laughable of all government statistics is Gross Domestic Product or GDP. Obviously, GDP is a very political number, given that it is the main way economists, policymakers, and to a somewhat lesser extent, the public, interpret the direction and velocity of the economy. It is one of the main ways we determine if the economy is growing or contracting. In many ways, GDP is one of the main components of what determines economic history and it was already a grossly distorted measuring tool before the latest tinkering job. Then the Commerce Department decided that this already ostentatious display of porcine cosmetology needed some more attention and another trip to the beauty shop.

What Was Already Wrong

As many already know, GDP wasn’t without its current flaws. The biggest of these flaws can best be explained on a smaller scale, then applied to the national accounts. Imagine a family who makes $100,000/year working. This same family, however, has a voracious appetite for spending and spends $150,000/year, borrowing the additional $50,000.

Now most thinking people would look at the above situation and deduce that you wouldn’t want to count the full $150,000 spent as the family’s GDP because there is now $50,000 worth of debt on the family’s balance sheet and that is a reversible transaction because the debt must be paid back – plus interest. So in net, it is a negative event. The borrowed money is spent, mostly on depreciating assets, while well in excess of the amount borrowed must be paid back at interest. See where I am going with this? A portion of all wages earned moving forward must be used to pay down the debt until it is gone.


Should we really be counting the borrowed money that is spent as economic output and if that amount increases, call it growth? Now, what about the family that does this persistently? Most thinking people would say ‘no’, that would not be an honest or accurate depiction of that family’s output. However, mainline economists and policymakers are not thinking people and that is if we’re being conciliatory and nice. If we’re being more honest, they’re fraudulently misrepresenting the state of the economy. Businesses and individuals use these metrics to make important decisions regarding their finances and if the inputs are garbage, then thus will be the outputs. Unfortunately, it gets worse.

The New (and improved?) Methodology

Evidently someone decided that the current methodology needed revising. Too bad they didn’t also decide that it had way too much of a Keynesian bias and, since that didn’t work out so well in Europe, that we needed some more transparency. Instead we’re getting less. Now, before we take a look at the changes, I must say that some of them do make sense and some of them make absolutely no sense. Left in place as well is the fact that the spending of borrowed money is still counted as ‘growth’. This ludicrous bias has already totally invalidated the GDP metric just in and of itself.

1) Research and Development now included in GDP. The obvious idea here is that this is investment and should be counted on the ‘positive’ side of the output equation rather than just spending. I am inclined to agree with this in premise, but fear that there is way too much room for more ‘fake it until you make it’ type adjustments. Think about BLS and its ‘CESBD (birth/death model) adjustment to the unemployment figures. I can easily see Commerce adding something similar. “This is what we think businesses spent on R&D last quarter”, or something along those lines. Or perhaps what is counted as R&D. Is it just R&D or is it expenses that might be very loosely tied to R&D or might otherwise not be considered a consequence of R&D at all?

2) Artistic Originals. Anyone want to venture a guess for what the capital value of a TV show might be? How about a movie? If any portion of this whole methodology change is absolutely RIPE for adjustment, this is it. Money spent on production of artistic works will count as investment for the purposes of deriving GDP. Does anyone think the bucks spent developing a greeting card should be included in GDP? I’m thinking of calling the Commerce Department and reporting the costs I incurred developing my current migraine just considering these changes.

3) Pensions and Pension Contributions. Here is where it goes from shady to completely absurd. The way it was done prior is that the amount of money that companies contributed to pensions was counted towards expenses and thus had a deleterious effect on GDP. The prior measurement ignored whether or not the plan was solvent, which nearly all are not. The new methodology counts what companies and governments have promised to pay rather than what they contributed. The Financial Times put it this way:

“One odd effect will be an increase in GDP, estimated at about $30bn in 2007, because employers promised bigger pensions than they funded. Measured federal government spending will fall, because it has funded its plans better, while state and local government spending will rise because they have promised more than they paid.”

So the incentive here, at least from a GDP perspective, is to promise big pensions while contributing less. There’s an outstanding idea. Someone should get the ACME nose funnel award for that one.

4) Miscellaneous adjustments. The new methodology changes the way costs to run a bank account are managed. The advertised benefit is that it will smooth out volatility in banking expenses. Big whoop. The real reason this is being done is because these costs are counted in the PCE (personal consumption expenditures) index, which the not-so-USFed and many policymakers considered to be the preferred measurement of price inflation. Anything to keep that low is good. It allows the government to rip-off Social Security recipients and anyone who receives any type of transfer payment. Low price inflation measurements are a great excuse to suspend cost of living adjustments.

Here’s a better one. The costs associated with buying a house will no longer be counted as expenses, but will add to GDP because they’ve been re-classified as an investment. I could agree with counting costs as an investment if the purpose of the purchase was to use it as a rental property. Otherwise, this is a fallacious concept.

Revisionist History?

Another component of the new methodology is that it is being used to re-write history; at least to a certain degree. The data series from 1929-present has been recalculated, adding a half trillion dollars to GDP. The graphic below depicts the impact of the new methodology on particular periods of time.


Notice the obvious effect of softening the 2007-2012 time period. It would have been instructive if they’d included how much of the great depression was wiped away by statistical subterfuge. Tell that to the people who lost everything during that period. Same for all those folks who are living in tent cities because of foreclosure, job loss, etc. Tell them ‘Hey, it really wasn’t that bad; we had the wrong methodology’. If someone could figure out a way to return some of these folks to a semblance of their former lives, then I might be impressed. Otherwise this is more of figures lie and liars figure. The Commerce Department is the government agency equivalent of the ‘fed’. If it needs some growth, it sends a couple of lackeys to the computers and they change a few formulas and Shazam! An extra half trillion in ‘growth’, much of it created from essentially nothing.

Potential (and likely) Ramifications

The not-so-USFed has been printing money by the terabyte for the last several years in an attempt to stimulate the economy. This is a joke. The money is going to the banksters and thinking people know this too. However, there is a more dangerous side to artificially inflated GDP numbers. The enhanced ‘growth’ metric is going to put more pressure on the central bank to back off on its ongoing monetization effort. We got a real live demonstration of what happens when Bernanke even runs his mouth about backing off on the punch bowl. This entire system is propped up with funny money, forged statistics, and fraud. Ending or even curtailing any of it will result in very nasty consequences – especially for the little guy.

Does anyone really think it is an accident that the banksters cut themselves in for a share of your checking and savings accounts through the US FDIC’s adoption of the bail-in resolution mechanism at the end of 2012? When the next spec bubble goes ‘pop’ you’ll get the shave and a haircut and they’ll get the two bits. The pieces of this puzzle have been slowly but surely falling into place before the ink was dry on the $787 billion TARP bailout bill. The shuck and jive required to cajole our representatives into approving something that the public was 99-1 against was too inconvenient. It proved far easier to clandestinely change the status of bank depositors to unsecured creditors, and then adopt the bail-in as the preferred method of solving future insolvencies.

The biggest problem with all of this is that there aren’t nearly enough depositor dollars to wipe away the staggering mountain of OTC derivatives. Once again, this should serve to demonstrate that this has much less to do with money and much more to do with control. Control of future output. Control of land, labor, capital, and scarce resources. There are various ‘isms’ to describe both the condition in which we currently exist and the direction we’re heading. I’ll let you fill in the blanks and decide if this is a state of affairs you feel comfortable leaving to your children and grandchildren. If so, then rest easy; your work is done. If not, then your work has only begun.


Andrew W. Sutton, MBA Chief Market Strategist Sutton & Associates, LLC 


Andy Sutton is the Chief Market Strategist for Sutton & Associates, LLC – a Registered Investment Adviser in Pennsylvania. His focuses are econometric modeling and risk management. The firm specializes in wealth preservation and growth and recognizes the validity of non-paper assets in achieving a balanced approach. The firm is also currently working with a growing clientele towards avoiding the risks outlined above.

The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins

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