GDP Bag of Tricks

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US Economy
Unconventional times require unconventional measures, and with the U.S. economic expansion growing at a truly tepid rate, perhaps it's time to try an innovative fiscal stimulus proposal recommended by an economist about three years ago.

If you’re not happy with the stumbling U.S. economy all you have to do is just wait a few more months. It seems the Bureau of Economic Analysis (BEA) will perform a little hocus pocus on the GDP numbers starting in July 2013. According to the Financial Times, U.S. GDP would become 3% bigger due to the new change in its growth calculations. fff It shouldn’t come as a surprise they are going to change the way this number is reported. When GDP numbers are chronically bad (averaging just 1.45% in the last two quarters) and the labor force participation rate is perpetually falling, our government will do the same thing they did for the inflation data; tinker with the formula until you get the desired result. But lowering the reported rate of inflation wasn’t able to increase the standard of living for the middle class. And neither will fudging the GDP methodology engender an improvement in the creditworthiness of the nation.

The government will make a significant change in the gross investment number, which will now include; research and development spending, art, music, film and book royalties and other forms of entertainment as the equivalent of tangible goods production. The U.S. will be the first nation on earth to pull off this magical GDP trick. fff But the shenanigans played by government may fool some people into thinking that growth in the U.S. is gaining strength. It may even convince some investors that the debt and deficit to GDP ratio is falling. In addition, it may cause politicians to claim that government spending as a share of the economy is shrinking, so it’s ok to ramp up the largess.

However, the BEA and our leaders in Washington have overlooked the most important point, as they so often do, which is that revenue to the government cannot be faked. Even if D.C. desired to count all the sea shells washed up onto America’s beaches as part of our gross domestic product, it would not increase the amount of tax receipts to the government by a single penny. Therefore, it cannot alter the only metric that really counts; and that is our nation’s debt and deficits as a percentage of government income. It will not increase by one penny the amount of revenue available to the government to service our debt and this, in the end, is all our creditors are really concerned about.

Revenue to the government was $2.58 trillion in fiscal 2007. But despite all the government spending and money printing by the Fed, revenue for fiscal 2013 is projected to be just $2.7 trillion. The growth in Federal revenue has been just over $100 billion in 6 years! Nevertheless, our publicly traded debt has grown by $7 trillion during that same time frame. The fact is that the U.S. economy isn’t growing fast enough to significantly increase the revenue to the government, but our debt is still soaring.

It all comes down to this, the U.S. government will not be able to service its debt once interest rates normalize, and that will be the sad truth regardless of what voodoo tricks Washington uses to report GDP. It’s a shame they won’t just implement real measures to grow the economy like reduce regulations, simplify the tax code and balance the budget. At least we can all still purchase precious metals and mining shares to protect our portfolios when the curtain finally comes down on government’s shameful magic act.

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