This is something I have wondered for a little while. We are always quoted the numbers for GDP and the stock market as whether the economy is doing well. I understand the problem with aggregates, but what I am wondering is
If an increase in the GDP number or the increase in the stock market averages is related to either inflation or an increase in the money supply. For instance, (and I know this is probably an oversimplification and there are more things to consider) if GDP grows at a rate smaller than inflation, can it still be considered growth?
The answer is that there are Lies, Damn Lies and Statistics. I would not trust any of these numbers to invest my own money.
First and most important: Inflation is an increase in the supply of money and/or credit, not an increase in some price level. Increasing prices are a symptom of inflation not the inflation itself. So once you get the correct definition of inflation you can compare it to the correct definition of GDP or a good stock market measurement. The stock market measurements like the inflation indexes are measuring a symptom and not the cause. The stock market measurement contains financial companies and goverment contractors that ruin the statistic. Moreover, these stock market indexes are but a tiny sample of the number of stocks listed. There are 12000 stocks listed on the NYSE and there are at least twice that number listed on the open exchanges. So like in the case of using price levels to determine inflation you are using fragments of the exchange markets to determine market behavior.
The only statistic I see as valid in my opinion the long term trend of the ratio of the increase in TMZ True Money Supply (here on the Mises Website) measured against increases in GDP. Interestingly enough this is dropping. It was once as high as $4.60 dollars in GDP growth for every $1 of new money created. I think it is now down to less than $0.20. (I heard quoted a ratio that it takes $7 in QE to make $1 in GDP. I think this is too high but lets go with it.)
Econometrics are essentially useless except as historic indicators with the very MASSIVE caveat that they be calculated somewhat consistentyly during the time period in question. Like prices, they have no predictive power and can't actually tell you anything about the fundamentals of any given situation. They can just tell you whether A or B did this or that at that time in history; people in trading area a bought this much stuff; the fed raised the money supply by this much; sales in this or that sector went up or down by this much; etc. Stuff like that. Without a theory to tie it together, it's useless.
"For instance, (and I know this is probably an oversimplification and there are more things to consider) if GDP grows at a rate smaller than inflation, can it still be considered growth?"
No, I would say not.
GDP is the velocity of money times the supply of money. So all things being equel, an increase in the money supply creates an increase in GDP. But all things are not equel because the new inflated money supply buys the same amount of stuff that the old money supply would have bought. So unless the velocity of money increases by a greater percentage than the money supply is inflated, there is no true growth.
swalsh81,
For instance, (and I know this is probably an oversimplification and there are more things to consider) if GDP grows at a rate smaller than inflation, can it still be considered growth?
Growth of what?
I'm pretty sure you subtract the inflation rate from the increase in nominal GDP to get the increase in real GDP, which is why the growth numbers are off. Apparently we are growing at a rate of 2% per year, but inflation is underestimated by quite a bit; for example, food and energy prices are excluded from the Fed's calculation of "core inflation". The Boskin Commission is another big reason why we underestimate inflation. By some pre-Boskin calculations, US inflation is measured at about 7%.
According to Peter Schiff and other proponents of gold and silver, if you measure indexes like the Dow Jones in gold (or other commodities), it's in fact falling in value. Now this may be a flawed measure insofar as speculative demand for these goods in turn is influenced by inflation, but it is more accurate, in my view, than trying to measure the "value" of the stock exchanges using dollars.
Freedom of markets is positively correlated with the degree of evolution in any society...
I can't remember the explanation, but De Soto claims that GDP does not accurately measure growth (something about not accounting for the intermediate stages of production) and that systematic stock market booms are not possible in an economy with a fixed money supply, but rather are a surefire sign of credit expansion.
Good question. It's one of those terms people bandy about without stopping to think what they're actually refering to. The answer to just what the hell is economic 'growth' would sure have a bearing on whether or not GDP can even approximate a measurement of it.
if GDP grows at a rate smaller than inflation, can it still be considered growth?
Sorry if someone else already posting this, but that's why GDP is usually inflation-adjusted. Not that the GDP deflator is a great measure, but it at least attempts to fix the problem.
I understand the problem with the word growth being bandied about. I was referring to it in the basic media/Krugman sense of higher GDP necessarily meaning growth. I also know that there are many more things that affect it but I was just asking about one particular part, specifically money supply vs the supposed "growth" or economic "health" numbers in stock averages and GDP.
This article by Kel Kelly lays it all out: http://mises.org/daily/4654/How-the-Stock-Market-and-Economy-Really-Work
Ultra short version: GDP cannot possibly rise without new money being printed, because where is the money to spend that will increase GDP? If this year GDP was, say, a trillion dollars, that means there is a trillion dollars of money to spend. How can more than that be spent next year?
Kelly goes on to point out that all other possible sources for increased GDP, such as increased velocity [meaning the same trillion passing faster from hand to hand], dishoarding, and everything else put together, is just a drop in the bucket that could not create a non trivial rise in GDP.
So that whenever the GDP rises it only happens because of new money being printed, be it physical or digital or bank checks with no actual cash to back them up. And even though the GDP number crunchers supposedly take inflation into account when calculating GDP, they obviously, by the above reasoning, must be making mistakes. It's as if someone would come up with 2+2 =5 and claim that his results have been double checked for errors in arithmetic.
Kelly uses the exact same reasoning about the stock market as with GDP. If it rises, it's merely nominal and from money printing, because where else could the money come from?
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Smiling Dave: This article by Kel Kelly lays it all out: http://mises.org/daily/4654/How-the-Stock-Market-and-Economy-Really-Work Ultra short version: GDP cannot possibly rise without new money being printed, because where is the money to spend that will increase GDP? If this year GDP was, say, a trillion dollars, that means there is a trillion dollars of money to spend. How can more than that be spent next year? Kelly goes on to point out that all other possible sources for increased GDP, such as increased velocity [meaning the same trillion passing faster from hand to hand], dishoarding, and everything else put together, is just a drop in the bucket that could not create a non trivial rise in GDP. So that whenever the GDP rises it only happens because of new money being printed, be it physical or digital or bank checks with no actual cash to back them up. And even though the GDP number crunchers supposedly take inflation into account when calculating GDP, they obviously, by the above reasoning, must be making mistakes. It's as if someone would come up with 2+2 =5 and claim that his results have been double checked for errors in arithmetic. Kelly uses the exact same reasoning about the stock market as with GDP. If it rises, it's merely nominal and from money printing, because where else could the money come from?
I'm having trouble believing this. USA's GDP in 2008 was 14.3 trillion and in 2009 it was 13.8 trillion. This was a period of inflation.
How does this contradict Kelly or my summary? We are arguing that higher GDP implies inflation, not that inflation implies higher GDP.
For instance, if a meteor hits the USA, destroying everything but the govt printing press, which keeps on churning out mountains of money, then the few survivors will experience monetary as well as price inflation, but GDP will be close to zero, since everything was destroyed. But that doesn't contradict Kelly's argument.
Put another way, we are arguing that you cannot make an omelet [=higher GDP] without breaking eggs [=printing money]. But we are not saying that every time you break some eggs you get an omelet.
But then, do you have a problem with the GDP measure or the inflation measure or both?