Economics Questions

Re: Inflation, GDP and the Stock Market

Smiling Dave — Sun, 02 Dec 2012 00:33:55 GMT

But then, do you have a problem with the GDP measure or the inflation measure or both?

I know about the flaws in the way the govt measures inflation; they are readily available. As for GDP, I have seen less about the flaws in actually computing it than about how GDP is a very flawed measure of economic growth. In other words, I don't know about flaws in actually measuring the length of someones nose, but I do know about flaws in thinking nose length is an indicator of intelligence.

Re: Inflation, GDP and the Stock Market

idol — Sun, 02 Dec 2012 00:04:30 GMT

But then, do you have a problem with the GDP measure or the inflation measure or both?

Re: Inflation, GDP and the Stock Market

Smiling Dave — Sat, 01 Dec 2012 23:42:12 GMT

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.

Re: Inflation, GDP and the Stock Market

idol — Sat, 01 Dec 2012 19:35:29 GMT

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.

Re: Inflation, GDP and the Stock Market

Smiling Dave — Sat, 01 Dec 2012 04:06:31 GMT

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?

Re: Inflation, GDP and the Stock Market

swalsh81 — Sat, 01 Dec 2012 03:38:21 GMT

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.

Re: Inflation, GDP and the Stock Market

Wheylous — Fri, 30 Nov 2012 23:16:25 GMT

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.

Re: Inflation, GDP and the Stock Market

xahrx — Fri, 30 Nov 2012 22:51:38 GMT

Growth of what?

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.

Re: Inflation, GDP and the Stock Market

Zlatko — Fri, 30 Nov 2012 21:42:17 GMT

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.

Re: Inflation, GDP and the Stock Market

Jon Irenicus — Fri, 30 Nov 2012 20:11:21 GMT

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.

Re: Inflation, GDP and the Stock Market

idol — Fri, 30 Nov 2012 19:57:01 GMT

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%.

Re: Inflation, GDP and the Stock Market

z1235 — Fri, 30 Nov 2012 18:54:16 GMT

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?

Re: Inflation, GDP and the Stock Market

dude6935 — Fri, 30 Nov 2012 18:48:12 GMT

"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.

Re: Inflation, GDP and the Stock Market

xahrx — Fri, 30 Nov 2012 18:27:52 GMT

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.

Re: Inflation, GDP and the Stock Market

Bogart — Fri, 30 Nov 2012 17:41:05 GMT

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.)