IN-DEPTH: TRANSCRIPTION - UnderTheLens - 02-21-24 - MARCH -Today's Flawed GDP Formula


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Thank you for joining me. I'm Gord Long.

A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.

Always consult a professional financial advisor before making any investment decisions.


Today I want to discuss changes underway in our Financial System that are resulting in major monetary and fiscal policy mistakes.  The most egregious abuses of economics that we see today start with an accounting identity — a TRUE statement or equation — but often end with absurd economic claims that the uninformed swallow as gospel, while politicians and powerful capitalize on!

In this session I will focus on one such example, that being the Gross Domestic Product or simply the GDP formula.

This formula is the foundation of national-income accounting, and it’s TRUE by construction. However, the fact is that nothing in this equation tells us how the economy actually works and therefore it is often misused.

Because government expenditures enter positively into GDP, it is believed by many that by increasing government spending it raises GDP.  Simple - right?  Not so fast. …Uncle Sam spending more doesn’t increase the size of the economic pie. It just redistributes existing slices to Uncle Sam, or to whomever Uncle Sam finances.  More public-sector consumption means less private-sector consumption. Today though by government spending $2.50 more it will only boost GDP by $1.00, the real question is where did the $1.00 come from, at what cost and with what consequences? I want to talk about that too!


Whether public or private, the fact is that fiscal or deficit spending doesn’t cause real economic growth.

Consumption is downstream from production. Growth is about increasing the supply of goods over time; you can’t spend if the goods haven’t been produced. Production grows as technology and production processes improve.  Such improvement requires saving and investing rather than consuming. …all the financing in the world won’t boost productivity if it isn’t channeled correctly.  More-efficient producers, not partisan spending, create flourishing economies.

Though the current administration’s “Bidenomics” approach consume s plenty,  it will only produce disappointment, as most manipulative flim-flam plans do!

This isn’t an opinion it is hard reality. To show this I want to take you through the outline shown here.


Let’s start with discussing the critical economic importance (and often ignored) of differences between Savings and Credit.


Savings is a central pillar of a viable Capitalist System. Savings is generated by Real Corporate Profits, Real Personal Net Wages, Real Government surpluses and Real Net Exports. By Real I mean to stress after adjusting for inflation.

It is Savings that can then be invested into Productive Assets. These are investments that create real wealth, remembering that Wealth can only be created by Building or Producing something. Mining it or by growing it!

You can’t print it!



Financial assets are secured by Collateral which is the legal claims on underpinnings linking to Wealth

It is through Savings and its investment in Productive Assets that we achieve a rising standard of living. A Rising Standard of Living achieves getting more – and through Competition – for less!

The capitalist system of Creative Destruction delivers sustained economic vitality.

Adam Smith’s “Hidden Hand” keeps everything working and in balance unless this process becomes impeded for some reason.


In reality, this is no longer how are system is operating!

Today we have increasingly reduced Savings and become more reliant on Credit. Dramatic levels of borrowing are now occurring in all facets of our economic system, whether by consumers, corporations or governments. There is nothing wrong with borrowing. It is more about the degree and how it is being used.

Today Credit is being used dominantly for Consumption.  Today the GDP formula tells us that it is just under 70% of the US economy compared to China in the mid 30s and EU countries in the mid 50s.

Consumption doesn’t create Wealth. It actually destroys it by taking investment away from being invested in Productive assets.

Credit and Consumption also does something else. It encumbers Collateral and increases dependence on increasing sources of unencumbered Collateral.


This chart is the easiest way to see the massive shift that has occurred since the US came off the Gold Standard, the US dollar became a Fiat Currency and Global Balance of Payments were made with Credit  by Credit notes.

Savings in Blue has been replaced by Credit Creation in Black.

What is also telling in this chart is that since the 2008 Financial Crisis Credit Creation is shrinking in relative size and being offset by foreign financing of the US  (in red) and an increasing  reliance on Federal Reserve financing.

We also see that since Covid we see and acceleration in the Fed Dependency as Foreign Investment falls off.


The US has become dominantly a Service Economy and as a consequence US trade balance deficits have increased in size over time. The US has become dependent on the need foreign central banks to have their FX reserves to be reinvested into the US in the form of US Treasuries and US Dollars is slipping.


… and it is steadily trending in the wrong direction.  As this chart illustrates it worsens further with each Recession and (excluding Covid) the US hasn’t had a real recession since 2008.


A lot of the pillars of US Capitalism and the “maintenance” to keep it going have eroded!

The shift from Capitalism to what can best be described as “Creditism” is taking a serious toll!

None of these are easily or quickly reversed.


The US is following what is an expected path when Savings fall - are not invested in Productive Assets – and Credit growth stalls because of shrinking unencumbered Collateral and rising risk premiums – with consumption being forced to slow as economic stagnation and stagflation emerges.


Covid was a massive shock to the global system. As I have written and talked about many times, the 40 year period of the “Great Moderation” has come to an end and with it we have a different economy on our hands than we have become accustomed to.


The obvious problems and challenges ahead can be easily seen if we care to look. However, we are not looking at them through the right lens. Our lenses are distorted and opaque.

We can best illustrate the distortion by considering the GDP versus GDI formulas.

A little later we will then discuss the GDP formula on its ownand how, as I mentioned earlier,  the most egregious abuses of economics that we see today start with an accounting identity — a TRUE statement or equation — but then often end with an absurd economic claims that the uninformed swallow as gospel!


GROSS DOMESTIC PRODUCT (GDP) and GROSS DOMESTIC INCOME (GDI) are two slightly different measures of a country's economic activity.

In theory, GDI should equal GDP.

GDP measures the value of what the economy produces, such as goods, services, and technology.

GDI measures what all participants in the economy "takes in", such as wages, profits, and taxes.


  • Different source data yield different results.
  • The difference also varies over time, suggesting that the difference is made up of more than minor accounting differences?


GDP tallies all spending by businesses, consumers, overseas companies and the government by conducting a wide-ranging survey of retailers, car dealers, manufacturers and others.

GDI estimates all income in the form of wages and salaries, corporate profits, interest and dividends and rents.

Pre-computers GDP was available sooner and therefore became the more used reference.  Even today it is still reported a month later.

The median difference from Q1:2010 through Q4:2022 has been 0.09 percentage points. That's close enough for government work for saying real GDI and real GDP, as separately calculated, are the same.

However, in the four quarters ended Q3:2023, the median difference has been negative 1.97 percentage points. That at time was the size of reported economic growth. 


Y-o-Y Growth Rate comparisons show clearly in this increasing spread published by the Economic Cycle Research Institute.


Here are the latest numbers which blow the socks off the difference.

On the left is the GDI reported by the Bureau of Economic Analysis.

On the right is the BEA’s GDP report published with Q-o-Q comparisons.

Q3 2023 has GDI at 1.5% and GDP at 5.0%

Q2 2023 has GDI at 0.5% and GDP at 3.0%

Annual Percentage Changes show

2022 GDI at 2.1% and GDP at 9.2% and

2021 GDI at 6.1% and GDP at 10.1%

These numbers are to match exactly with some slight difference based on data capture.

What is going on here???


What we have is an illusion of growth!

On the left we have what is happening with the GDP elements. On the right we have what is happening with the GDI elements.

One set of data components are basically rising while the other is falling or slowing

The common denominator is debt and how it is impacting either side directly or indirectly!


When you pump an additional $5.9 to $7.5T into the economy it has a profound impact.

When that amount of economic pumping must be borrowed and financed it comes with another set of impacts.

GDP and GDI is screaming this – but of course no one is talking about this.


We do however need to be because is tells us this explosion in debt is not sound growth. It is only growth as seen by a GDP formula that actually more or less represents debt as growth (more on that in a moment).


Debt has been growing for years, yet the GDP formula stills shows growth as slowing.

What gives here?


Let’s now begin to talk about the illusion.


We initially began arguing that GDP growth was increasingly becoming an illusion a decade ago and then in 2017 published our Annual Thesis paper on exactly that subject. It is available for download on the web site.


Our focus then, when GDP and GDI were still relatively close in measure was the double accounting of Debt as transfer payments by the government to the public for consumption. Additionally foreign investment to buy US Treasury debt was double counted in both the “I and “G” of the GDP. Effectively debt was being counted within each of the “I”, “G” and “C” components of the GDP formula. Transfer payments and government debt were never part of the thinking when the formula was first formulated as a satisfactory approximation for economic growth. Likewise the calculation of the deflator used in the formula for Inflation we called into question.


As we said then and are saying today,    GDP isn't measuring wealth, it's measuring spending -- production which is sold.

GDP counts the dollar value of our output, but not the actual improvement in our lives, or even in our economic condition.

Example:  If you dig holes and fill them, it’s considered GDP.   In fact, you could build a missile, blow up the Golden Gate bridge and every house within 5 miles of it, and it shows up as GDP. The missile cost money and the government paid for it.

Essentially, GDP is measuring the pace at which we’re replacing private wealth with government waste.

We are actually destroying wealth at the fastest rate since 2008.

What has changed is that since we wrote our Thesis paper, incremental debt is increasingly becoming less effective in flowing through the formula.

What I mean by that is that it now takes

$1.55 in BUDGET DEFICIT to generate $1 of Growth or

$2.50 in NEW DEBT to generate $1 of GDP Growth

Less and less of the debt actually ends up as Consumption. That is because more and more of it is cobbled up as interest payments by the recipients of the debt: consumers, government and corporations.

Federal Government debt payments have surged to over $1T per year and soon to be ~$1.5-$2.0T. This is on a ~27T economy.

At $1.5T this is 5.5% when GDP growth is decidedly lower than that. Debt is growing faster than the economy.

The GDP formula is not measuring Economic Growth but some other abomination.


As I mentioned earlier, mainstream economics talk as though GDP is identical to wealth.

Even the Fed own writings say “, and I quote:

When assessing the amount of a government’s debt held by the public, it is customary to measure it relative to GDP. GDP serves as a rough proxy for the economy’s TAX BASE—that is, its capacity to pay back the debt ( i.e. default risk).

That's close enough when it's private firms or individuals producing more to sell more — in that case, rising GDP means the country is getting richer. Because more stuff is being produced.

But it's actually the opposite when it's government spending.

  • Because government's job is taking wealth and lighting it on fire.
  • That means when GDP is growing from government spending, it's not measuring wealth.
  • It's measuring dissipation of wealth at best, destruction of wealth at worst. 


So translating that brave and stunning GDP into the real world, we're destroying wealth at rates not seen since 2008.

This actually lines up with what we've seen in job growth reporting. Job growth last year turns out to actually have been government and government related social service jobs.

In some states it was literally more than all the jobs created -- in other words, the private sector is shrinking.

All these government jobs, of course, are unproductive -- they are consumption. As important as they are and contribute to our abilities to be prosperous, they are not directly, dollar for dollar making us more prosperous as a society. This is another reason why the amount of new debt to create new growth is increasing.


On a national basis it is exploding.


The BEA’s job report is another statistical distortion at work (this one I believe intentional) versus being created by a formula derived and premised on Government Debt being restricted by Sound Money and a non Fiat Currency.

Private Sector Jobs are falling while Government directly related jobs are growing. This does not include Government contractors from Defense to increasingly almost all areas in the US economy employing people based on government funding.


… it is now quickly accelerating. Remember these people and contractors spending money on consumption which pushes up GDP.

It all has an eerie feeling like how the centrally controlled former Soviet Union and CCP controlled China managed centralized planning to increase economic growth? How did that work out for the USSR and time will tell for China?


What we are increasingly witnessing is the”taking” of wealth earned from productive activities and squandering it on government spending.  Governments have never been successful at increasing productivity. That has been the hallmark of US innovation by the private sector.

It seems governments’ job is to create regulations. Regulations that often only get in the way and actually impede productivity.


  • A recent study by the National Association of Manufacturers estimated that federal regulations alone cost large manufacturers with at least 100 employees an average of $24,800 per worker annually. That’s roughly half the salary of the typical blue-collar employee. In other words, these onerous regulations increase the cost of hiring American workers by 50 percent.
  • It’s even worse for small businesses with less than 50 employees, where regulation costs a staggering $50,100 per worker annually. In that case, the employer’s labor cost is now roughly doubled.


Though real growth has increasingly become an illusion as measured by GDP we have still been able to muddle through the last decade.

Frankly, it has actually been growth from China that has saved the developed economies from their serious realities. On four separate occasions it has been China that has saved the global economy from the realities of its illusion of real growth as debt exploded and central bank balance sheets likewise exploded in size.

However, now China with an economy built on Capital Formation is starting to feel its own economic pain of unsound principles of finance and public policy.


Central Banks around the world are well aware of what I just discussed. It is at the root of why so many of them have started buying Gold.


Their shift and rate of accumulation suggests they see something quite troubling.

Gold may be an archaic relic but they know it is the only sure thing that can be assured to be accepted as Collateral in troubled time. Unlike paper claims it is not based on someone else’s debt.  In troubled times this is the only thing that matters.


You should now be able to see why the world is now pricing US debt as measured by the US 30 Treasury against US Credit Default Swap costs.


… And those Credit Default Swaps are steadily rising in cost!


I said at the beginning that the US and global financial system is changing.


As Fiscal Policy moves towards increasing levels of what I have always referred to as “Helicopter Money”, potentially flowing directly to consumers, Velocity of Money will begin to turn up … and with it a broader based impact on Price Inflation.

During the initial waves of Price Inflation during the 70’s the economy was fundamentally more capitalist. That is more money was saved and reinvested into productive assets (labeled here in the GDP formula as “I”). Again, this has been steadily changing with advancing sequential waves of Inflation and Deflation.

“I” generated money for Consumption “C”, while net exports were positive adding more money to the economy. This resulted in Consumers getting more for less and Standards of Living continuing to rise even with Price inflation.


The developed economies’ GDP formula was forced during Covid into a Regime Change of massive and unprecedented Monetary and Fiscal Deficit Spending for bailouts and economic stimulus.

Monies flowing towards bailing out and the subsidization of failing Zombie corporations, the destruction of small business unable to survive pandemic lockdowns and industries such as transportation and hospitality were completely crippled during Covid lockdowns.

With inflation having increased prices (such as food by over 18% since Covid), Consumers are getting less and less for more and more while standards of living have stagnated or falling as the result of policies and spending that are further increasing Inequality to levels not seen since the “Gilded Era”.


What this means is that government can be expected to become increasingly more dominant via debt financed spending.

Consumers most likely will increasingly witness receiving what the Government determines, awards or rations

Standards of Living will likely become increasingly “Universal”, except of course for Government Officials and the Crony Capitalists  from BigTech,  Big Pharma, MSM to the new Billionaire class.

If we are not extremely careful WWII Italy’s Mussolini’s marriage of Government and Corporations which he then labeled Fascism may become an eventuality for many countries including the US.

Many believe that is already occurring and use different labels when talking about the far –left or far-right!

This sort of economic philosophy never survives as it inevitably leads to Currency debasement, economic stagnation, stagflation and eventually Hyperinflation.


We touched on some of these unfolding trends in this year’s Thesis Paper: The emerging Regulatory State which we encourage you to read.


The problems I have been discussing here are not isolated to the US. It is a global problem impacting almost all fiat currency based developed economies.


What can we conclude?



    • Wealth is the Collateral the Claims are Supported by Collateral Shortage, Third Party Risk, Rehypothecation & Derivatives


    • Shown by the increasing difference in GDP v GDI


    • Which is hiding the Expansion /Overlapping of Claims


    • Risk of Accelerating Debasement of Claims


    • Bond Duration Premia, Equity Risk Premiums (to Come)


    • Former Soviet/ CCP Single Party Regulatory State


There is some positive news in the US if we can urgently begin to address the real problems with real data.

The US has a massive spending problem that must be addressed with the realization that deficit spending is no longer creating growth but destroying wealth and reducing unencumbered collateral

What can also make major differences are in the areas of:

 PRODUCTIVITY: New technological advances, such as artificial intelligence, could fuel a productivity-led boost to long-run economic growth.

SAFE HAVEN ASSET: Events abroad could also increase the foreign demand for U.S. Treasury notes as a safe asset, helping to stave off projected increases in long-run U.S. interest rates.

ENTITLEMENTS REVAMP: A complete re-evaluation of US entitlement programs - Social Security, Medicare, Disabilities and a multitude of other Social Programs.


As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.

That day is still in the future so take advantage of the opportunities as they currently exist.

Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.

The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.


I would like take a moment as a reminder

DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.

As negative as these comments often are, there has seldom been a better time for investing.  However, it requires careful analysis and not following what have traditionally been the true and tried approaches.

Do your reading and make sure you have a knowledgeable and well informed financial advisor.

So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family.

I sincerely thank you for listening!