Many Economists use GDP and Debt to GDP to evaluate the health of the US Economy, its ability to handle the increasing debt load, and to predict the future economic environment. GDP stands for Gross Domestic Product and can wrongfully mislead people into believing that this statistic reflects the productivity of the Nation.
How is GDP calculated? Let’s take a look at the formula that is being used to come up with that number. This is the “Expenditure Method” of calculating GDP:
GDP = private consumption + gross investment + government spending + (exports – imports)
It is very important to note that GDP includes private consumption and government spending. It is certainly no surprise that much of American consumption is made possible with credit spending and it is also widely known that Government spending greatly exceeds revenue. In essence there are two components of the GDP that are debt variables: debt spending by the individual and debt spending by the Government.
When the Bureau of Economic Analysis (BEA) releases GDP numbers the public is conditioned to believe that a greater GDP reflects a growing economy and that this growth reflects economic health. WTF Finance disagrees that a growing GDP reflects economic health when a majority of that economic growth comes from the debt spending of individuals and increased deficits by the Government.
The reasoning that a growing GDP reflects a growing and healthy economy is about as erroneous as the belief that Americans could handle their increased debt during the housing bubble when it was more than obvious that the real estate appreciation and not individual productivity kept them in good credit standing.
WTF Finance reports how markets are moved by the announcement of GDP figures. A better than expected GDP often provides investors with confidence that leads to a rally in the stock market as such an increase in GDP is associated with an improving economy. Given that it is official policy to have a President’s Working Group on Financial Markets (the Plunge Protection Team) interfere with the markets it is no stretch to state that the Government might announce over-inflated numbers in order to boost the stock market. WTF Finance reported how the GDP numbers are often revised down in the weeks after advances in the stock market were made possible by positive GDP announcements that turn out to be overstated.
Many Economists and Government officials reason that the US Debt is at a manageable level. They do so by using the ratio of Debt to GDP and comparing this figure with the Debt to GDP ratio of other Nations. This could be a viable comparison if each Nation had a GDP figure comprised of similar economic variables. However, that is not the case as Americans and the US exceed other Nations in debt spending. WTF Finance reported how this stock market rally since March 2009 can be attributed to an increase in debt spending, a continuation of non-sense lending environment, as well as accounting changes. Fundamentally the US Economy did not improve. It is through the debt spending that GDP numbers have made a comeback and investors now wrongfully believe that the recession is an event of the past.
WTF Finance does not disagree that the US currently has a relative low debt to GDP level when compared to that ratio of other Nations. However, other Nation’s GDP is not skewed to be comprised of the collective debt of both Government and its citizens. If every other Nation had the ability to increase its debt spending it also could reduce the relative ratio of debt to GDP. An individual is in no better financial standing if he continues to credit spend and grow his debt balance, so why should it be any different for the Government?
WTF Finance believes that the United States is in a massive GDP Bubble as the current GDP does not reflect a productive Nation with a balanced economy but a consumer Nation overextending itself on credit. The instant the United States will no longer have the means to deficit spend and American consumers are forced to live within their means is the instant the US GDP will experience a massive contraction. It is only then that the ratio of Debt to GDP would be exposed as overleveraged, unsustainable and it would then become obvious that the US does not have the means to maintain its debt. The notion that the debt level of the US is appropriate given the Debt to GDP ratio is ludicrous as such ratio can only be low as long as the US and the American consumer have the ability to overextend themselves