THE ILLUSION OF GROWTH: THE GOVERNMENT’S GAME OF “SMOKE & MIRRORS”

THE ILLUSION OF GROWTH: THE GOVERNMENT'S GAME OF "SMOKE & MIRRORS"

All financial assets are nothing more than CLAIMS on real wealth. They are not themselves actually wealth. It is critically important to understand this reality of "money".

The money we possess has 1- Use and 2- Utility because you can exchange it for something that you value. The value or wealth lies in what you buy, not in the money itself. Real wealth is the "physical" product you receive -- food, clothes, land, oil, and so forth. If you couldn't buy anything with your money/stocks/bonds, their worth would revert to the value of the paper they're printed on (if you're lucky enough to hold an actual certificate). It’s that simple.

“GDP” is a measure of the amount of goods and services available and financial asset prices represent the claims (it's an absolute terrible measure of real wealth, but it's the one we have been educated by Keynesian economists to accept - read more here and here).

However, look at how divergent asset prices get from even this GDP measure as bubbles develop:

The terrifying concern with the above chart is not the obvious lift in the net worth of US Households but actually the reported Nominal GDP shown in red. It is itself a modern day illusion and is much lower than shown making the problem even more serious (as if the chart isn't scary enough as it stands)!

THE GDP ILLUSION

I wrote extensively about this problem in my 111 page 2017 Thesis paper "The Illusion of Growth", which I encourage you to read in full. I laid out in detail how GDP formula is flawed and is nothing more than a remnant from the era of Sound Money, before the wholesale adoption of "Fiat Currency" regimes by the developed economies.

I more recently featured some work on MATASII from Michael Lebowitz at 720Global where he illustrated (below) that when Federal Debt is removed from the GDP formula we see a completely different picture of the US Economy. One that more closely reflects what a vast number of Americans experience on a daily basis.

The US is in fact in the midst of a depression hidden by poor investigative reporting and "Fake News".

A core issue is that we are treating government guaranteed Consumer Credit and Transfer Payments used by households to support their basic subsistence needs as consumption, without subtracting it from Government Expenditures. We instead actually add it to government expenditures which increases nominal GDP. We can do one or the other but not both. It is called "Double Dipping" and has become very effective in camouflaging problems in our world of Fiat Currencies and unlimited government spending.

A GRAPHICAL WAY OF CONSIDERING THIS

CREDIT EXPANSION

The Asset Prices versus GDP chart at the top of this page fails to illustrate the change that occurs when household assets go up. It doesn't show the liabilities taken on and whether incomes can support the liabilities underlying the assets.

History's largest bubbles have had the exact same root cause: an expansion of credit that causes leverage to go up faster than the income available to service it. Simply put: bubbles exist when asset price inflation rises beyond what incomes can sustain. They are everywhere and always a credit-fueled phenomenon.

OVER-LEVERAGED

What is supporting the GDP formula is a gigantic debt edifice based on the Financialization of the US economy and over-leveraged, rehypothecated collateral values being accepted for further credit creation.

The problem with this chart is the viability of the collateral underlying the build up in total system leverage. If you don't know what "Novation" and "Rehypothecation" are then you simply don't understand the "game" that is going on.