Thursday, December 20, 2012

GDP update: faster nominal growth

This is a brief post to update one I wrote last month: "Three under-appreciated GDP facts."

Last month I highlighted the fact that nominal GDP growth in the third quarter was surprisingly strong. Today's GDP revision makes it even stronger: inflation (the GDP deflator) was largely unchanged at 2.7%, but real growth was raised from 2.7% to 3.1%. That amounts to nominal annualized GDP growth of 5.9%, the fastest in over 5 years.

The Fed has been aggressively accommodative in its provision of bank reserves to the system, with the objective to boost GDP. Last quarter it would appear to have achieved some measure of success, but it's still a bit early to say whether it was monetary policy which gave us 3.1% growth, or simply the combination of growth in the workforce (about 1%) and productivity (about 2%), both of which are very much in line with historical norms. It's not hard, however, to attribute 2.7% inflation to easy money.

In any event, 6% nominal GDP growth is rather impressive, considering how weak this recovery has been.


Benjamin Cole said...

The Fed is myopically, timidly, secretively, and glacially groping its way to a new kind of monetary policy.

This is a new era. Before, the Fed just cut interest rates to get growth going.

Now, they cannot cut rates anymore. So they are migrating to QE.

I think Bernanke is making the right decisions, just too slowly and timidly. But then, he faces ferocious criticism from a misled American right, a right that is incorrectly conflating growth in federal outlays with an aggressive monetary policy.

The European Central Bank has targeted 0 percent inflation for years, and in that continent governments take a larger share of GDP than in America. Tight money and small government are not the same. Ditto Japan.

Easy or tight monetary policy has nothing to do with the relative size of federal spending.

The relative size of federal spending to GDP is something our fair legislators chose, usually led by our fair President. We elect these guys and we can only blame ourselves for the level of federal outlays.

Welfare slugs, food stampers, federal pensioners, veterans, farmers, rural districts, Pentagoners, urban housing "experts'' etc all line up at the federal trough, and we pay.

I see from the excellent chart provided by Scott Grannis that Nominal GDP is still weak compared to the 2000s.

Lots of room for monetary growth.

And yes, let's cut federal outlays to 15 percent of GDP.

McKibbinUSA said...

Hi Benjamin, consider the reality that no country knowingly enters into aggressive monetary expansion and inflation -- rather, such measures are undertaken as a desperate action of last resort -- the US is not there yet -- my advice is plan for stagnation, and be surprised by growth should it develop -- the US is not going to embark on inflationary monetary expansion unless all other possibilities have been exhausted, and not until the future of America is at risk -- prior to the inflationary 1970's, America was experiencing race riots, anti-war riots, monetary revolution in terms of abandoning the gold standard was under consideration, and human gatherings such as Woodstock were scaring society -- we are not there today...

McKibbinUSA said...

PS: Consider too, that the Fed is no doubt posturing for a migration to digital currencies -- the effect will be to eliminate money laundering as we know it, as well as to eliminate the existence of legal tender for low level criminal activities -- I'm sure banks and rich people will still be engaged in racketeering and corruption, but a digital currency may make inflation obsolete -- additionally, the creation of new currency classes becomes quite easy under digital currency regimes -- huge changes are coming to monetary policy in the coming decades, if not much sooner -- better to buy equities now before they become unaffordable or unavailable to non-accredited investors -- a monetary revolution is inbound...

McKibbinUSA said...

PPS: Sweden is already in the process of moving to a "cashless" society -- more at:

Public Library said...


There is already a great inflation underway. Its exactly the result of digital money. At first hard cash will trade a premium when everyone figures out what is going on. Then it will all collapse and physical metals will be the only safe haven. However, the government will most likely confiscate it using force.

McKibbinUSA said...

@Public Library, my view of the current situation differs form yours -- what I am seeing is deflation -- evidence of deflation includes: a) the long-term declines in real working wages; b) long-term declines in real home values; and c) long-term declines in the employment-to-population ratio -- additionally, I have lived through real inflation as in the period 1973-1983 during which the US enduring an aggregate 85% inflation -- what we are experiencing today is not inflation, but deflation -- the evidence above is my case.

Benjamin Cole said...

Dr. William:

In fact, there is quite a bit of grumbling in Japan, and they are talking about an aggressive and expansionary monetary policy and dumping Bank of Japan independence.

In the USA, a whole Market Monetarism school has evolved, and seems to becoming influential.

People and institutions often fight the last war. The Fed still think the enemy is inflation.

But with Japan as an example, and with global sovereign debt yields all trending towards zero, more people are beginning to regard zero bound as the enemy.

Inflation is theft---from those who keep money in cash under their mattresses. Aside from drug lords and black market types, I do not know who does this.

Everyone else takes a risk in the market place when they invest---whether in property bond or equities, that inflation or deflation may rob or reward.

Indeed, I contend that those who risk capital for growth--that is people who invest in equities or property---are "higher" than those who only lend. Ergo inflation rewards people who take chances on productive investments.

There are huge gluts of capital now, no need for higher interest rates. What is needed is huge boost aggregate demand.

That can happen if the fed prints money and buys bonds with it. The bond holders sell and have cash. They can buy assets (good) or spend the money (good).

McKibbinUSA said...

Assuming the US goes over the fiscal cliff, now would be a good time to stage a garage sale in order to claw together money to buy up cheap stocks -- in particular, I would argue that many families could really free up some cash by getting rid of their automobiles and using public transportation instead -- cars cost too much, and the money that goes into cars would be well-invested into value stocks right now -- likewise, a car payment can be converted into gold and silver coins (though I'm not recommending precious metals at this point) -- now is also a great time to cancel the family wireless plan and use those dollars to fund stock purchases -- let's face it, wireless telephones are outrageously expensive -- in fact, I would can Christmas and put those dollars into equities as well -- tell everyone in the family to get a first, second, or third job while they are at it -- now is not the time to miss the opportunity of a lifetime to own high quality value stocks on the cheap -- act aggressively -- act now -- do not look back!

Benjamin Cole said...

atInteresting quote:

“Since peaking in the summer of 2011, most every commodity index is lower, despite massive liquidity expansion by central banks,” and that trend is likely to continue."

mmanagedaccounts said...

Dr. William is bullish on good companies. Me too!

steve said...

taxes on risk takers is going up significantly starting in 2013. the max cap gains rate now is 15% and will probably double (remember O's 3.8%) and that excludes state tax. on the flip side if you lose $ you get to deduct $3K. that, tied with runanway govt deficits which obfuscate gdp growth will cap any market gains and I believe result in at best a letharic stock market. how anyone can be bullish with all these headwinds is beyond me.

McKibbinUSA said...

@Steve, long for me is 30 plus years -- long-term investors will earn handsome returns on cheap value stocks acquired in today's markets -- we are living through a point of in time known as maximum pessimism -- the signal is to buy -- however, I agree that short-term and even mid-term investors are doomed -- moreover, long-term real wage declines, real long-term declines in home values, and real long-term declines in the employment to population ratio spell disaster for the 98% crowd -- long-term accredited investors with means to buy are in a window of opportunity -- everyone else should be under cover or running for their lives...

McKibbinUSA said...

PS: Over the next 30 years, I expect the US will either sort out its fiscal and monetary problems via defaults, or the US will be overthrown by a new government that will deal with the debt via some form of default -- the defaults I am referring to will either be outright or via inflation -- either way, something will give -- the winners and new lords of America will be the equity owners...

steve said...

well doc, I guess we gotta agree to disagree. I see a japan like market in the US with the electorate on the dole and the GOP on the run. candidly, I think we're royally screwed.

John said...


You wrote,
"What is needed is huge boost aggregate demand.

That can happen if the fed prints money and buys bonds with it. The bond holders sell and have cash. They can buy assets (good) or spend the money (good)."

How does this money get into the hands of millions of working stiffs?

Jim said...

You should look at Japan. We are in no better shape. All the numbers you have shown don't indicate the real problems of debt that will crush the economy.

Benjamin Cole said...


Well, at the risk of sounding callous, working stiffs make money by working for it. (Been there done that, btw).

When the bond holders sell bonds to the Treasury, they have cash. So, the bondholders go out to restaurants, they buy a nice car, hire tennis instructors etc.

Jobs are to had making the bondholders happy.

Life is not fair, but life is better when there are jobs than when there are no jobs.

BTW, for holiday cheer, here is a story about Dick Armey, who until recently led a Tea Party Organization in DC.

From Amy Gardner at the Washington Post, here's what happened:

Richard K. Armey, the group’s chairman and a former House majority leader, walked into the group’s Capitol Hill offices with his wife, Susan, and an aide holstering a handgun at his waist. The aim was to seize control of the group and expel Armey’s enemies: The gun-wielding assistant escorted FreedomWorks’ top two employees off the premises, while Armey suspended several others who broke down in sobs at the news.
The overthrow lasted six days and at the end of it all Armey left FreedomWorks with an $8 million severance package. Evidently Richard Stevenson wanted Armey out and the fired staff in and was willing to pay for Armey's exit.
All of Armey's "enemies" now remain at the Tea Party group.

And this tidbit:

ALEXANDRIA, Va. (AP) — A conservative U.S. senator from Idaho who has said he doesn't drink because of his Mormon faith has been charged with drunken driving.
Sen. Michael Crapo, a three-term Republican with a reputation as a social and fiscal conservative, registered a blood alcohol content of .11 percent after police pulled his car over in this suburb
south of Washington, D.C., authorities said.

So, you see, I am not a right-winger, as presently defined in the USA. I hold my nose at both parties.

Good luck in 2013!

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