Measuring Recession

Using nominal GDP, or GDP deflated by the CPI, as the principal guide to the state of the economy is a common mistake which will eventually prove very costly. Having convinced themselves that GDP measures economic progress, government statisticians have suppressed evidence of price inflation, giving the illusion of economic growth. Policymakers appear unaware that they are leeching ordinary people and their businesses of their wealth to the point where an economic and monetary collapse becomes inevitable. This article exposes how the authorities use GDP and the CPI to conceal the true deterioration of an economy.


When an economy turns from expansion to contraction there is an order of events. The first signs are an unexpected increase in inventories of unsold goods, both accompanied with and followed by business surveys indicating a general softening in demand. For monetarists, this is often confirmed by an inverting yield curve, which tells them that at the margin the short-term rates set by the central bank are becoming too high for business conditions.

That was the position for the US 10-year bond less the 2-year bond very briefly at the end of August, since when this measure, which is often taken to predict recessions, has turned mildly positive again. A generally negative sentiment, fuelled mainly by the escalating tariff war between America and China, had earlier alerted investors to an international trade slowdown, expected to undermine the American economy in due course along with all the others. It stands to reason that backward-looking statistics have yet to reflect the global slowdown on the US economy, which is still buoyed up by consumer credit. The German economy, which is driven by production rather than consumption is perhaps a better guide and is already in recession.

After an initial hit, a small recovery in investor sentiment is understandable, with the negative outlook perhaps having got ahead of itself. But we must look beyond that. History shows the combination of a peak in the credit cycle and tariffs can be economically lethal. A brief return to a positive yield curve achieves little more than a sucker rally. It may be enough to put further monetary expansion on pause. But when that is over, and jobs begin to be threatened, there can be no doubt that central banks will ramp up the printing presses.

So reliant have markets become on monetary expansion that the default assumption is that an economy will always be rescued from recession by an easing of monetary policy, and furthermore that monetary inflation will prevent it from being any more than mild and short. We see this in the performance of stockmarket indices, which reflect perpetual optimism.

There is a further problem. Other than a rise in bankruptcies, unemployment and negative indications from business surveys, there may be no statistical evidence of a slump. The reason this is almost certainly the case is we are dealing with a combination of funny money and statistics which are simply not fit for measuring anything. The money and credit are backed by nothing, and when expanded by the banking system simply dilutes the quantity of existing money, which if continued is bound to end up impoverishing everyone with cash balances and whose wages and profits do not increase at least as fast as the surge in the quantity of money.

Indeed, the official purpose of the expansion of money and credit is to somehow persuade economic actors that things are better than they really are and to stimulate those animal spirits. You’d think that with this policy now being continually in operation that people would have become aware of the dilution fraud. But as Keynes, the architect of it all said, not one man in a million understands money, and in this, he has been proved right.

For five years, the ECB has applied negative interest rates on commercial bank reserves, and commercial banks have paid €21.4bn to it in deposit interest. Since it introduced negative interest rates, it has injected some €2.7 trillion of base money into the Eurozone economy, increasing M1, the narrower measure of the money quantity, by 61%. Almost all of it has supported the finances of Eurozone governments.

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