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THE NEW GDP

It is clear that if we want to understand the economy a better measurement of manufacturing capacity or wealth is required.

Before we go any further, let's remember that we abide by Austrian Economics and as such we reject all mathematical models simply because they don't work. We cannot use these models to forecast anything. However, having said that, we must also point out that studying economic statistics is a viable method to gain insights as to the mechanics of an economy. There is an insurmountable difference between those two concepts and we want to be perfectly clear about them.

Therefore the search for a new–and–improved GDP was on. The person that first developed and expanded this new concept was an economist called Mark Skousen through his books and articles. Most of what follows is based on his efforts, for which we are very much grateful.

ENTER THE GDE

Definition

The GDE (Gross Domestic Expenditure) is the market value of all the goods and services manufactured by a country in a year.

This definition does not seem that different from the GDP although it is. If you look closely you may notice that one word is missing: final. The GDE is the sum of all goods and services manufactured by a country over a year.

Where is the difference? The GDP deals mostly with end user goods and services, the GDE deals with end user and manufacturing goods and services. These manufacturing goods and services are the ones that manufacturing companies produce for other manufacturing companies which will eventually make consumer goods. These so–called "intermediate" goods and services are typically Business–To–Business goods and services, such as raw materials (ore, grains, bulk paper, etc.) and bulk services (such as product transportation and distribution or storage facilities – think bulk transport through trucks or trains).

And so the GDE can be understood as:

GDE = GDP + Intermediate Goods & Services

Or as:

GDE = Use (Goods and Services) + Make (Goods and Services)

Meaning

The GDE operates much in the same manner as the GDP was though to do, but it provides a much better picture as to the current economic state of a country.

The %GDE also provides a much better picture of the direction the economy is going towards.

Note: before you rush to check websites for your county's GDE, we need to tell you the bad news: No country calculates GDE as of yet. The USA will begin to calculate a flawed version of the GDE called GO (Gross Output) by spring 2014. We can only hope that other countries will do the same… eventually. Meanwhile, we are stuck with the GDP.

Composition

Just as with the GDP, it is instructive to ask how the GDE is composed? The answer:

  • 50% Business Spending (Private Investment + Intermediate Goods & Services)
  • 40% Consumer Spending
  • 10% Government Spending

Operation

This new (and more accurate) composition provides a completely different insight as to how the market operates in real life.

It is primarily Business Spending that increases the GDE and thus economic activity. But this spending does not happen in final goods and services; this spending happens on Business–To–Business spending. This spending is investment on production means (R&D, manufacturing facilities, raw materials, machines, etc.), not on consumer goods.

But there is yet another crucial and hidden difference. Consumer Spending and Government Spending is mostly immediate. People buy consumer goods to be consumed. If they spend this money, once spent it cannot be re–spent (except for the Governments who can continue printing). Business Spending on the other hand is different. Spending for investment purposes is long term and it is self–sustainable. Because it is self–sustainable it will produce wealth and with it profits, which will enable business to keep spending in investments.

In other words, Business Spending produces wealth while Consumer and Government Spending mostly consumes wealth. But the wealth of consumers depends primarily of the wealth business are manufacturing because consumers are not creating wealth. Consider this. An employee owes a good salary to the wealth the company is producing and selling to customers. Without this wealth, the salary would be much lower or nil!

And so we now come to the inevitable conclusion:

Consumer Spending is the consequence of the wealth created by Business and not the cause of such wealth

Therefore, the golden rule for economic prosperity is now turned upside down and reads:

For economic prosperity to increase, Business Spending must increase.

This is a diametrically (completely) opposing view to Monetarist's view. Basically what this rule is saying is that if one wishes to have lasting economic prosperity, one must maximize business investment; more precisely, manufacturing investments. This is so because such investments produce new and, more importantly, lasting wealth.

But how can we maximize Business Investments? Simple, through making available money to be lent to business. We can do this in two ways. We can print the money, which will distort economic signals and lead Business to Mal–Invest and hence to the creation of booms and busts. Therefore this process is not conducive to the increase of wealth. Or, we can stop printing and therefore induce people to save. These savings will then send the correct market signals to Business to Invest in the correct manner and provide money to be lent to them. This latter process will generate the most effective manufacturing investments possible which will be in synch with real market needs hence ensuring sustainability and the continuous increase in wealth.

GDE Growth In No-Print Markets

Analysis

What this means is that if we want to have lasting economic prosperity, we need people's savings and not printed money. This is the exact opposite of the conclusion and remedy that Monetarists arrive at and implement!!

What Monetarists are doing by printing and fomenting spending guarantees lower wealth!

GDE Fluctuation With Government Interference

Look at what happens when Monetarist push people to spend and they print out of thin air.

Consumer Savings are spent in consumption and Government Spending provides cheap money and incorrect economic signals to business who mal-invest. This creates a Boom. Eventually, when the printing stops, the inevitable Bust is achieved. However, now we are in a far worse conditions to get out of the economic recession because all Consumer Savings are gone! The engine that would otherwise revive the economy in a lasting manner is spent! The only thing that's left is Government Spending (printing) and this leads only to more Booms and Busts!

Business Cycle

All modern business cycles are produced by Central Banks printing and manipulating the economy. However, in a No–Print Economy as there are no artificial (and hence erroneous) market signals, Business Investment gets it right most of the time. This means that more wealth is created and in turn more real savings. Down the road, those real savings are used to increase Business Investment and so on. There is no "Bust" phase because savings increase naturally all the time.

This is not magic; this is simply Free Markets in operation.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to GDP: Keynesian's Voodoo Economics - Part 3

 

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