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REAL GDP

There is one more piece of information worth considering that we can calculate with relative ease. We know that the GDP accounts for all final goods and services over one year. We also know that to a large degree that manufacturing output is being stimulated artificially by Government Spending, mainly through printing. We also know that eventually printing makes it to the market and prices rise. We call this raise CPI (Consumer Products Index).

There are many national and international websites where it is possible to obtain the %GDP and CPI for every year for a given country since the GDP, %GDP and CPI are widely calculated (i.e. "massaged", "cheated", "guessed", "manipulated") data.

We can then estimate the Real GDP as:

Real GDP = %GDP - CPI

The %GDP is an estimate of all final goods and services produced including the effect of Government spending.

The Real GDP is an estimate of all final goods and services produces excluding the effect of Government spending.

In other words, the %GDP represents the real + fake economy while the Real GDP represents the real economy.

If you plot the Real GDP and the %GDP over time, you notice some patterns. Typically you will see something like this:

Percentage GDP versus Real GDP in Business Cycles

This actually makes sense. During the Boom phase as more and more Government Spending "stimulates" the economy, the %GDP rises but at the same time inflation also does so. Therefore during this same period the real economy decreases because of ever decreasing Business Investments since all "stimulus" is focused on Consumer Spending. And so we have a divergence (separation) between the %GDP and the Real GDP. This continues until it cannot continue any longer and we have a crash. Crashes typically destroy all the "fake" wealth and we are only left with the "real" wealth, hence the %GDP drops (more or less) to the level of the Real GDP. At this point market forces eliminate unsound Business Investments (this is the Bust Phase) and subsequently the economy begins to grow again. As at this precise time Governments increase their Spending to so–call "stimulate" the economy and to "get us" out of the recession, the %GDP begins to diverge from the Real GDP once again. Reset. Game over. Next game. Next Boom–Bust cycle.

The Real GDP is one tool that may help you visualize in which direction your county is going. However, be very, very careful indeed. Just because you may have a hint of the general direction, you know nothing about timing. This is so because the economy is inherently non–forecastable and to make matters worse, the Government is interfering all the time.

Debt

A second parameter that can be superimposed to this plot is Government debt. Its behavior is not difficult to guess. During the Boom Phase it is increasing steadily because it is fueling this Phase. At crash time and during the Bust Phase it increases substantially because "something has to be done" but past this Phase it is reduced to a growth rate higher than the previous Boom Phase (in order to be able to "stimulate" growth). The net result is that debt keeps growing. This is the typical behavior of Government debt.

Percentage GDP versus Real GDP in Business Cycles

However, having said this, we must also warn that not all countries are the same. Some actually manage to decrease debt after crashes. This is entirely possible and historically accurate but it is a low probability event. Only selected countries manage this feat. Please remember than when we talk about Government debt we are not talking about budgets, but about the complete, total, absolute, off–books + on–books, no–cheating Government debt.

The debt indicator will provide you with yet another tool to discern in which direction your country is going, but more specifically, in which phase you are so that you may either take advantage of this knowledge or prepare yourself for the inevitable crash.

CONCLUSION

The GDP is a very flawed economic measurement that leads to very mis–leading mis–understandings and hence incorrect economic "remedies". It has been mis–used since it was invented in the 1930's. A much better measurement of economic activity is the %GDE, but we don't have the data to calculate it yet.

The GDE is important because it provides us with sound insight as to how markets work and why what Monetarists (i.e. your Central Bankers) are doing typically generates un–intended consequences.

Real economic growth and wealth comes from Consumer Savings not Consumer Spending. This is the most important lesson economists and politicians loathe to study because it means the end of money printing.

We have also provided you with a tool, the Real GDP, which may guide you in understanding your particular economic situation in terms of Boom–Bust cycles.

Dear reader, we hope that you now understand why politicians and Central Bankers typically got it wrong and why you feel so lost and so disconnected from their statements.

They don't have a clue what it is that they are doing and so you must find your own path. But you are not alone. We are also there. We hope we have managed to provide a small light to guide you along. Or not. Your choice.

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

 

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