Government Lies (Where We Are - Part 3)

In the previous post, we reviewed how GDP = private consumption + gross investment + government spending + (exports - imports)

We closed by asking how the Gross Domestic Product could be up 3.5%? For starters, it's not, it's 2.2% and it could be revised further downward. For the sake of argument, let's pick the 3.5% number apart.

Stimulus
This from the Congressional Budget Office regarding the impact of the American Recovery and Reinvestment Act-

[The] CBO estimates that in the third quarter of calendar year 2009 ... real (inflation-adjusted) gross domestic product (GDP) was 1.2 percent to 3.2 percent higher, than would have been the case in the absence of ARRA.

If we take this into consideration with our data on GDP - The only reason we're reporting growth is because of the stimulus package.

With the auto sector contributing 1.7 percent that the “Cash for Clunkers” gave us of the 3.5 percent growth (typically about 0.1. or 0.2 percent) we are left with 1.8 percent. Now if we count the cost of the CFC program at an average rebate of $4000, we subsidized to the tune of $24,000 per new stimulated purchase. (Cars that would not have otherwise been bought if not for the rebate.). But will this really help in the long run? These vehicles have debt associated with them. And like the debt before it, it too will need to be repaid.

If I was to give you $5000 to buy a refrigerator and you came back with a loan on said item of course we would have some ‘activity’ and a new fridge, but we’d be broke! Worse yet, we’d be further in debt. How can this possibly be helping? Perhaps it is calling to the Keynesian animal spirits. At the very best we are moving sideways which is hardly an improvement overall.

Our true economic status has been masked by stimulus.

John Williams on Federal spending -

If you eliminated all federal expenditures except for Medicare and Social Security, you'd still be in deficit. You have to slash Social Security and Medicare. But I don't see any political will to rein in the costs the way they have to be reined in. There's just no way it can be contained. The total federal debt and net present value of the unfunded liabilities right now totals about $75 trillion. That's five times the level of GDP.

FDIC
FDIC is running in the red. There's even rumors that they've already tapped the U.S. Treasury to the tune of $80 billion. (Their limit is $500 billion)Think you’re getting any money? Really? If so, perhaps the more relevant question is - do you think it will be worth anything? Can we just keep borrowing? From the Chinese? They’re buying gold not T-Bills. India too.

Deflation/Inflation
As Ambrose Evans-Pritchard notes:

Data from the European Central Bank shows that the M3 broad money supply has contracted over the last six months, confounding expectations that ultra-low interest rates would soon boost monetary growth. Loans to the private sector fell 0.3pc from a year earlier, the first such decline since the data started in 1983. The M3 figures include a wide range of bank accounts...

The picture is even starker in America where M3 has shrunk at an annual rate of 6.5pc over the last three months, a pace of contraction not seen since the 1930s. US bank loans have plummeted since May.

and

“Former European Central Bank chief economist Otmar Issing recently said what current officials aren't addressing: -Nobody can be sure that we have a self-sustaining recovery. The challenges facing the ECB are tremendous. "Money multipliers have collapsed everywhere. What M3 is telling us is that confidence is missing. I don't see any way to stabilise M3 in such circumstances.”

In the face of this situation, the government is left with little choice but to inflate.

State Budgets
State budgets are in big trouble -

The GAO now estimates that, if programs are maintained at current levels, state and local revenues will fall short by an average of 7.6% annually over the coming decade. To close the yawning gaps in their budgets, states are currently relying on stimulus funds and budget cuts. But fewer federal funds will be there to help as the country begins to pay down the huge national debt.

The growing demands on the states are not taken into account by the GAO study, by the way, which only considers the cost of maintaining current service levels. The future scenario for state budgets, then, is likely to be more dire than the GAO predicts.

As stated on the Real Effect on November 24, 2009 -

Of course the Feds will raise the debt ceiling, they're not that dumb. However state and local governments don't have the benefit of an unlimited checkbook. Basic boil down - the consumers are broke, this is breaking the states and the Fed will back some amount of state debt. This is and will lead to a Federal debt bubble. This is the last line of defense and when this bubble breaks, all hell will break loose.

GDP = private consumption (Personal: down + Business: Down) + gross investment (down) + government spending (up) + (exports - imports).

If spending across all sectors is down and governement is spending more money, less efficiently, where does this get us?
Stay tuned for the stunning conclusion.