Professional Documents
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True GDP
by Alpha and Vega, an Investor and a Trader
May 3rd, 2010
In this issue:
1) The Credit Card Analogy
2) What is GDP?
3) Why isn't Fiscal Stimulus Real Growth?
4) What is the US' True GDP?
5) Where is the Stimulus Going?
Over the last two quarters, US real GDP grew at an annualized rate of 5.6%
and 3.2% respectively. Wow! Over the last 3 and half years, US real GDP grew
a total of about 1.5%. Not bad for the worst economy since the Great
Depression. Unfortunately, the US government had to spend an incredible $4.1
trillion to produce this $200 billion in growth. Without this new government
spending, real GDP would have shrunk 30% (if nothing else had changed).
How should we think about this fiscal stimulus? Is it more accurate to say that
GDP has grown 1.5% or shrunk 30%? I believe the latter is more accurate and
will demonstrate why.
What is GDP
“Real GDP growth” is defined as GDP growth minus inflation. GDP =
consumption + investment + governments spending + exports - imports. The
important thing to notice is that if the government increases spending by $1,
GDP automatically goes up by $1. So why doesn't the government just increase
spending by 10% every year and give us permanent 10%+ GDP growth? I'll
explore that question in the next section.
First I want to distinguish between “real gdp growth” and “true gdp growth.” I’ll
define the latter as real GDP growth minus fiscal stimulus. I’ll show why GDP
growth generated by stimulus isn’t real growth so much as a temporary loan that
the economy will eventually pay back with interest. Then I’ll look at growth in
the US and roughly estimate the “true GDP growth” number.
A final note – I’m not arguing against Keynes’ style fiscal stimulus; it may
prevent far worse economic outcomes. Heck, if I was out of a job and starving,
I’d probably use my credit card to buy food. We just need to recognize as
investors that growth in government spending is fundamentally different from
growth that comes from consumption and investment.
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