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U.S. government converts INFLATION into GDP

Articles & Blogs - US Commentary

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I have been adamant there will be no “2nd half recovery” in the U.S. economy this year. The residential real estate crisis continues to worsen, as foreclosures are still accelerating, and things won't get really bad until the spike in mortgage re-sets begins next year (see “U.S. mortgage crisis to get MUCH worse in 2010-11”).

The commercial real estate collapse has just started. U.S. banks have simply been “rolling over” hundreds of billions of dollars in bad debt, meaning there is a huge spike in refinancing requirements for this $6 trillion market – just as defaults are soaring to record levels. This market is about four times bigger than the sub-prime mortgage market, thus this will cause much more pain and losses on bank balance sheets than sub-prime losses, with U.S. banks having set aside nothing to cover these losses.

These are the same “stress-tested” banks that Tim-the-tax-cheat Geithner claims are “well-capitalized”.

U.S. unemployment continues to worsen at Great Depression levels, with real monthly job losses still at least 1.5 million per month (see “U.S. economy to lose 20 MILLION jobs this year”), and now state and local governments, along with U.S. retailers are beginning to make their own job-cuts. Falling wages, and falling hours-of-work are making this employment crisis much worse.

U.S. debts have grown so large that it can't even borrow enough money to pay the interest on that debt - so it simply prints money. The Federal Reserve calls this “quantitative easing”. This has always marked the beginning of the road to hyperinflation. At best, the U.S. is guaranteeing itself crippling inflation – for consumers who have already demonstrated they cannot increase their spending to match the inflation rate. This means that U.S. consumers will spend more, while buying less goods.

In June alone, the official inflation-rate was an annualized 8.4% (see “Credit Risk spike means continued collapse for U.S. economy”).

While there will be no U.S. “economic recovery”, I have also conceded that I fully expect the U.S. government to report positive GDP later this year. The reason for this is that the U.S. government will do the same thing it has done all this decade: lie about inflation, and thus pump-up the GDP reading.

A legitimate GDP reading must be deflated for inflation, precisely to avoid confusing inflation with actual economic growth. The only reason the U.S. government couldn't engage in those lies for the two previous quarters was that there (briefly) was no inflation. Stripped of its inflation “padding”, the U.S. government issued GDP reports which were almost honest.

However, with inflation in the U.S. back, so is telling BIG lies about GDP. The U.S. government claimed that the economy 'only' shrank by 1% in Q2 of 2009, but it was only able to produce such a rosy number by pretending there was zero inflation (0.2% to be precise).

As I stated earlier, official U.S. inflation was 8.4% in June, meaning that real inflation was much worse. I have pointed out on many occasions that those who want to see accurate U.S. economic statistics need only visit the site of economist John Williams: He uses the identical methodology which the U.S. government used a generation ago, before it began distorting these numbers with ever-larger fabrications.

Williams has reported that so far this year inflation was running at over 6%, and that was before the huge jump in June. It's a matter of simple arithmetic that with inflation being more than thirty times as large as the ludicrous “deflator” which the U.S. government used to adjust Q2 GDP, that this “statistic” has no connection with the real world.

Sadly, the lies will only get bigger going forward – given that inflation is certain to worsen. As a general “rule of thumb”, subtracting 5% from “official” U.S. GDP will give people a number which is at least a good approximation of GDP, although even that might not be adequate as the U.S. government gets increasingly desperate to 'manufacture' good numbers going forward.

That makes today's official reading of -1% not quite the “good news” which is being trumpeted by the U.S. propaganda machine.

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