On the Peter Schiff show, a guest argued that we have to increase exports so that our economy can grow.
His reasoning:
1. GDP = C+I+G+ [exports minus imports]. Proof: Basic economics
2. Therefore, increasing exports increases GDP. Proof: Statement 1 plus elememntary arithmetic.
3. But with our economy in such a shambles, what can possibly increase exports?
4. Only possible answer: devaluing the currency. Proof: process of elimination and elementary economics
5. Printing money devalues currency. Proof: elementary economics.
Conclusion: We can only save our economy by printing tons of money.
OK, here is a quiz question. What is the key flaw in his argument?
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
All it does is substitute foreign consumption for domestic consumption.
Good point.
I found a different flaw. It's like saying we can increase GDP a hundredfold by measuring it in pennies instead of dollars. Because printing money reduces its purchasing power, so that the post inflation dollar does not measure the same thing as the pre inflation dollar.
Bob Murphy has a great article on this issue and you can get it in his archives. I will give my version here:
The formula GDP = C+I+G+ [exports minus imports] is true for any point in time, but changes in one of the variables will affect other variables and the results from these changes may not create the desired result. The best example of this is that if you increase government spending (This applies with money loaned to the government as well.) that you will increase GDP. This may(really will) not be true as the government to get the money must either steal it directly through taxes or give investors a better return than a private alternative. So the extra spending by the government reduces investment and GDP remains unchanged even with a stable money supply. The same is true with a varying money supply and exports. It is true that a country will export more as its currency loses value. But the effect on GDP may not be as positive as the inflators expect as people attempt to purchase the newly exported goods from foreigners. And to make matters much worse, the devalued money devalues the savings. So even if imports stay the same, the savings are now worth less so GDP may not go up.
The moral of the story here is that theft through taxation or currency devaluation is bad for an economy because of its affects on savings and investment. The only way to grow GDP is to do exactly opposite what the person in the interview recomends which is to increase the value of the currency (And decrease government spending) that will increase savings. Entrepreneurs will get these real savings and grow the economy.
If we print even more money, G can go up, and I bet you C will also go up.
Basically, GDP is a measurement of the economic activity in a region. It obfuscates the relationship between investment and consumption. This says that if C goes up fivefold and I decreases by 95%, and C + I increases as a result, we have economic growth. The problem is that with almost no investment, you will have diminished economic activity in the future.
The real relation between consumption and investment in an economy is that it is a trade-off. Consume now, or invest to be able to consume more later.