Hughesair (Inflection Point)

Retired physician and air taxi operator, science writer and part time assistant professor, these editorials cover a wide range of topics. Mostly non political, mostly true, I write more from experience than from research and more from science than convention. Subjects cover medicine, Alaska aviation, economics, technology and an occasional book review. The Floatplane book is out there. I am currently working on Hippocrates a History of Medicine and Globalism. Enjoy!

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Tuesday, November 13, 2018

GDP, a multiple



A nation is not made wealthy by the childish accumulation of shiny metals, but is enriched by the economic prosperity of its people.
Adam Smith

 “‘(GDP) does not allow for the health of our children, the quality of their education, or the joy of their play... 
“‘It measures neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.’”
 Robert Kennedy
§          Economics defined by one economist, is the allocation of scarce means to the alternative end with the widest margin -- or lack of so doing because there are a thousand reasons not to do what the numbers tell you to do. For instance: lack of understanding, political correctness or a competing priority such as war. -- In any case economics is the process we live by: our home, our business our government and all of those things combined. Tradition, common law, and politics define the framework of an economy, a framework of culture, of civilization — a means of cooperation and an insulation from the violence of a more primitive, no holds barred, survival by tooth and claw existence.

§          Economists study this structure of cooperative interaction, some as political economics, historical economics or statistical economics. Many if not most economists report their views, unfortunately, with a political bias. Historical data tells the more evidence-based story. The US Borough of Economic Analysis, BEA reports economic performance as Gross Domestic Product, GDP, often in terms of percent growth. Looking at only the percentages of growth or shrinkage can create a bias as well. The money supply multiplied by the turnover of money (economic activity, person to person, person to business etc.) defines the GDP, and the GDP is reported by year, by country and by percapita GDP.

§          Business and government look to the GDP as a measure of the strength of the economy. Gross Domestic Product, M1 x V = GDP, a product, circulating money multiplied by the number of times it changes hands in a given period of time, the velocity or turnover rate of domestic trade. The velocity or turnover reflects the energy and health of the economy; it has the greater impact on the product. No-one pays much attention to the turnover rate. That's a mistake because that multiple correlates with productivity and that energy you feel on the street, liquidity times velocity, and that velocity correlates with people's perception of the economy. Velocity also correlates with productivity and liquidity which furthermore correlates with discretionary income. 

§          Energy may also better correlate with those things Kennedy said that GDP did not reflect: children’s health, education, the joy of their play etc. — with optimism instead of depression.

§          The stock market and GDP correlate rather better with the wealthy one percent's perception of the economy while the multiple (velocity, turnover rate) correlates more with the people's experience. 

§          Until recently, our GDP was flat; adjusted it was in slow decline. Economic growth did not keep pace with population growth. For a simplified look at present reality, compare year by year the money supply expressed by the M1, with the GDP and the resulting calculation of velocity, a number not generally available. Note the dramatic drop in velocity in recent years despite an increase in money supply controlled by the Federal Reserve. The energy is not there and you can feel it on the street: depression, obesity, homelessness, drugs, crime, poverty, shootings, malnutrition, and ill health, not to mention a loss of civility. 2018 should be interesting. — disappointing

Figure 1.
Year    GDP(t)      M1(t)    Turnover       Per Capita GDP
2018.  18.67.  3.7277.    5.01.                    $62,872
2017.  19.39.  3.5640     5.44                       60,035
2016,  16.49,  3.2446 ,   5.08                      57,467         
2015,  16.47,  3.0873 ,   5.33                     51,486
2014,  16.15,  2.9212 ,   5.53                     50662
2013,  15.76,  2.6414 ,   5.97                     49849
2012,  15.38,  2.4586 ,   6.26                     49481
2011,  15.19,  2.1618 ,   7.03                     48775
2010,  14.94,  1.8600 ,   8.03                     48374
2009,  14.54,  1.6965 ,   8.57                     47576
2008,  14.58,  1.6034 ,   9.09                     49365
2007,  14.99,   1.3711 ,  10.93                   49980
2006,  14.72,  1.3849 ,   10.63                   49575
2005,  14.37,  1.3869 ,   10.36 
2004,  13.95,  1.3900 ,   10.04 
2003,  13.53,  1.3025 ,   10.39          
2002,  12.96,  1.2187 ,   10.63 
2001,  12.71,   1.1824 ,  10.75 
2000,  12.69,   1.0896 ,  11.65 
1999,  12.32,  1.1265 ,   10.94 

1998,  11.77,  1.0916 ,   10.78 
1997,  11.21,  1.0714 ,   10.46 
1996,  10.74,  1.0707 ,   10.03

Fig. 1 Note the rising per capita GDP interpreted as evidence of prosperity, however, per capita GDP is not uniformly experienced. With 99% of the wealth in the hands of the 1%, this growth applies exclusively to the wealthy. With increasing percentages of the money supply locked up in the hedge funds of the wealth. Furthermore, with growing undocumented populations, it is difficult to calculate the per capita GDP for the 99% of US population. Furthermore, population may be quite understated with 3.4 million living on the street: illegal immigrants and tonally unknowns. 
A much better reflection of the present economy for the average American is seen in the sustained fall in the turnover rate of money, the velocity, from 10.93 in 2007 to 5.08 in 2016.

§          I recall crossing the Irish Sea from Liverpool to Dublin in the late 80s. The contrast could not have been greater. The streets of Liverpool were dead with a few "punks" sadly idling on street corners. Dublin was full of energy, crowded, with palpable energy - even young urchins attempting a pick pocket; the energy with which they fled thin print dresses flapping behind reflected a joy. Ireland, in a relative short time, went from a depressed economy to one of a leading Western success stories, today with a huge trade surplus and a GDP growth of 23%. You can feel the energy on the street, it’s a reflection of velocity of money, turnover rate, the multiple in the GDP. You can see the same progress in Ireland’s health care, leading the western world in quality by the same statistics that rank the US 34th.

§          The GDP numbers shown, appear to increase steadily over time, but the adjusted GDP shows slow decline. The striking increase in M1 money supply since 2010 reflect Janet Yellen's credit easing in an attempt to stimulate the GDP/economy. Are the banks not lending, or do consumers and small business prefer to pay down over leveraged debt? Low interest rates were good for big business, not so much for the consumer (12-24% credit cards) Any attempt to stimulate the economy must work with one or both sides of the equation, money X velocity = GDP.

§          The Fed. Is limited in its ability to stimulate the economy with low interest rates. You can’t go much lower than zero. The fed can only go so far in printing money or credit easing. The Fed should look instead, or additionally, to a stimulation of the velocity. Now we are talking liquidity and productivity, but on the consumer side of the market. The biggest missed opportunity was the subprime mortgage crisis. During the Bush administration, investment banks managed to get a law passed eliminating bankruptcy protection for homeowners and student loan recipients, setting the stage for yet another banking crisis -- the third in a generation. Fraudulent loans were foreclosed, the bankers having sold the mortgages got rich and the end mortgage holders, the big investment banks were bailed out by the taxpayer. The missed opportunity was for the government, not to bailout the end mortgage holder (big banks and hedge funds) declaring the mortgages invalid andthus 1. allowing the homeowners to remain in their homes 2. with a windfall gain from the canceled mortgage. 

§          This harsh strategy would have first of all punished the bankers Ponzi scheme, and secondly amount to an infusion of capital, taken from the ill gain of the wealthy banks back into the consumer side of the market. Thirdly such a strategy would have prevented many of the 3.4 million now living on the street, refusing to work because their pay checks would be garnished by the banks. 

§          You can paint the same story for student debt, dropouts with high debt, no way to pay it back, no bankruptcy relief and no employment not even counted as unemployed living at home or on the street as an escape. If the government were to cancel the debt, or reinstate the option for bankruptcy relief, it would: one, allow the former students to work, that’s pure productivity and two, put energy back onto the street and yes, at the expense of the debt holder, but they weren’t getting paid anyway -- there may be another tax payer bailout and that’s not productive, It’s all about supply and demand, liquidity on the consumer end of the market, a liquidity lost by the trade deficit, lost jobs and lost manufacturing. 

§          A number that I follow for investment purposes is the Daily Treasury Statement, which lists the treasuries’ revenue by day, by month to date and year to date. The two day % growth year-over tends to correlate rather closely with short term stock market movement. In a sense that number represents the available discretionary income of investors. (may also reflect consumer market liquidity as well, purely conjecture)

§          Tracing the unforeseen consequences of globalism involves multiple interwoven threads. Gaining any quantitative, statistical or proven facts eludes all but the best of our statistical and historical economists. The political correctness of globalism in institutions of higher learning and in the “deep state” silences the political economists; they are not talking for fear of their reputations, their tenure and their jobs. One might add advances in technology and robotics displacing jobs and certainly the higher tech workplace requires more education. Also, vast numbers of service and support positions were outsourced to India and even the Philippians. Fifty years of cold war; war with Vietnam, lead to a liberal rejection of American institutions, favoring international interests and a new world order less sympathetic to the welfare of our own citizens and the stark consequences of that global priority. Additionally, the accumulation or 99% of our wealth in the hands of the so-called one percent -- a condition reminiscent of the monarchies and aristocracy preceding the Industrial Revolution and the American Revolution – sequesters capital unavailable to the consumer market. The most sacred cow, however, remains Globalism with a trade deficit of 800 billion a year eroding our domestic liquidity and wealth – a lost wealth that is in no way replenished by direct foreign investment. 

§          Furthermore, the increased money supply engineered by the Fed went to the banks to lend, not to the people but tofavored customers.The banks make more money with high credit card interest and investment banking than in affordable consumer loans. To give it to the people, as one economist said, you would have to drop it from a helicopter. The recent rapid growth and resurgence of small business will go a long way towards fueling the discretionary liquidity on the consumer side, but the ongoing drain on market liquidity remains unsustainable, further inhibiting the velocity (multiple) and our quality of life. Big business and Banks are nowhere without a high energy and healthy small business and broader home market. Globalism cannot achieve its multilateralism or its liberal democracy without first a healthy home economy.

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