There Was No Recovery

“Double Dip.” By now you have probably seen this term somewhere. It appears that the economic recovery is stalling in what is supposedly its second year, and now the economy is poised for the dreaded “Double Dip.”

It is a lie. There was no recovery in the first place. The alleged “recovery” existed only on paper, and only with a great deal of mathematical trickery.

A recession is defined as two consecutive quarters of economic contraction, measured by the change in the gross domestic product, and the GDP is an illusion.

We calculate our GDP like this: Investment + Consumer Spending + Government Spending + Net Exports. If the federal government spends $1 billion on an airport in Pennsylvania that nobody uses, that is calculated as a net positive to the GDP. If the government borrows the money to spend on an airport nobody uses, it is still calculated as a net positive. Boil this down: The federal government stealing money from productive bits of the economy, to spend on unproductive bits of the economy, is calculated as a wealth-creating transaction according to the way the GDP is calculated.

Quantitative easing further skewed the statistics, as the Federal Reserve printed money to lend to the government to spend on airports that nobody uses, or perhaps to bail out a European bank, that money is calculated as a net positive to the GDP.

Then there is the consumer spending, which is about 70% of our GDP as calculated. Imagine two neighbors. One grows his own food, and has $1 million stashed in a coffee can somewhere. His neighbor doesn’t have a job, but racks up $100,000.00 in credit card debt buying consumer goods and another $50,000.00 on cars. According to the GDP calculation, the second neighbor would be “wealthier” than the first one because he spent more on consumer goods.

If we imported $2 trillion worth of depreciating Chinese manufactured goods, (net loss of $2 trillion to GDP), and then sold them at retail for $4 trillion, “adding” $4 trillion to the economy, that would be calculated as a total positive of $2 trillion dollars in alleged wealth, all from consumer goods that decrease in value over time. (Thing jeans. Eventually they wear out and are discarded.)

Now, back to my old friend, the Quantity Theory of Money, MV=PQ. If the Fed prints dollars, increasing the supply of money (M), and use it to finance government spending, increasing the velocity of circulation (V), but the real economy is shrinking, resulting in fewer transactions for goods and services (Q), then prices (P) have to skyrocket. So, even as people buy fewer and fewer things, they are paying more for the basic necessities, raising the amount of consumer spending, and boosting (on paper) the GDP. Hence the “jobless recovery;” with higher GDP numbers (higher (P) prices) despite massive unemployment (significantly decreased (Q) transactions). Suddenly, bleeding to death is calculated as a blood transfusion.

What will happen if Congress raises the debt ceiling? They still need to sell $150 billion worth of bonds a month. What investors are out there to buy them? Unfortunately, there will be only one – the Federal Reserve. More printed money, spent quickly, leading to even higher prices for essentials of life, and as people scrimp and save to make ends meet, they buy less, eat out less, and generally participate in fewer transactions. The (Q) goes down. Businesses close, layoff notices go out. The “recovery” remains jobless, and when the numbers look bad again, along comes QE4, 5, 6, and so on, until America overdoses on inflation.

The real losers in this are actually the Chinese people. They are using land, labor and capital to produce goods to sell to the United States. These goods are bought with US dollars, which Chinese exporters then turn in to their central bank, which has to print RMB to buy dollars much the same way our Fed printed dollars to buy US Treasury bonds. This causes huge inflation in China. As the dollar loses its world reserve status, the Chinese are going to wise up and start demanding other currencies for their goods. Think about it: Would you work really hard if you were paid in a currency you might not be able to spend? They are perfectly capable of consuming their own economic production, and soon they will.

In the end, the numbers are skewed to look like a recovery, while the country gets poorer in real terms. As prices surge, people who don’t get government spending contracts or bailouts or otherwise miss out on the newly printed money (fixed income, savers, stagnant wages,) see their standard of living go down. Zimbabwe-nomics at its finest.

Post Script: I now hereby formally demand that Paul Krugman surrender his Nobel Prize in Economics to me, and I want the prize money in gold.

About the Author

Mr. Waechter is an attorney and a recent graduate of Drake University.

 

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