Real Gross Domestic Product

The Bureau of Economic Analysis released their numbers yesterday for the fourth quarter of 2005. As expected, the GDP was up 1.7% for the quarter. Not bad eh? Multiply that by four and you get a number in the neighborhood of 6.8% for the year. Now if you read that article and came to that conclusion you would have no problem believing that the economy is doing wonderfully well, which is what the new Fed chairman Bernanke reported in his last speech before congress.

I know it sure doesn't feel that good does it? Everything costs more, the old paycheck doesn't go as far as it used to, and the pay raises just are not happening any more. Maybe you have a nagging feeling in the back of your mind that is telling you that something just doesn't make sense. If so, then good for you. It doesn't make sense because it just isn't true.

Let's take a closer look at the numbers. First, here is the equation for estimating real GDP. Real not being "real" but being calculated after inflation.

Current dollar GDP- Inflation = Real GDP

Ok, so according to the economists at the Bureau of Economic Analysis, the inflation rate is running at about 3.5%. Current dollar GDP for fourth quarter 2005 comes in a 5.2% annualized, so 5.2 - 3.5 = 1.7. Amazing.

Here's the rub. We all know that the inflation numbers are massaged so that they come in lower than the actual rate. Why? Because the inflation numbers are used to index entitlement payments and the higher the inflation rate, the higher the payments and the faster the government has to print money.

Let me give you an example. Here in my small semi-rural county the calculated inflation rate last year was 4.7%. I believe that to be low and I've heard various folks claim that the actual rate may be closer to 6 or 7%, but I digress. If you plug 4.7% into the equation above, you get a much weaker number. Something around .5%. Not nearly as strong sounding as the published number. If you plug an actual inflation rate, free of all of the manipulations that are currently done, into the equation, you get a negative GDP. Negative GDP means recession.

Why not tell it the way it is? Because the Fed could not continue to print money and bump interest rates up if the economy was in a recession.

Now the real question is this. How can a group of highly paid economists come to a conclusion such as the one above, even in light of the fact that it is obviously in error? It all has to do with who writes your paycheck. The government wants it done a certain way. They have a vested interest in keeping the general population's anxiety level below a certain threshold. You sure do not want the people to figure out that something is up and stop spending money that they don't have now do you?

With that in mind, I read a very interesting article written by an economist who is not paid by the government. His name is William J. Williams. He writes that we are already in a recession...no surprise there, and that we need to prepare for a "hyperinflationary depression." Mr. Williams makes his living studying the numbers that the government publishes and then publishing the true numbers.

For example, he states that if we calculated unemployment the way we used to, the actual number would be between 10 and 12%, not 4.9%. The U.S deficit would be closer to $11 trillion if the government were not hiding liabilities much the same way Enron did before they crashed and burned.

Williams poured over the government's 2005 fiscal statements and found that the total obligations at the end of September were $51 trillion. That is over four times the level of GDP. He further believes that there will be hell to pay because of all of the "adjustments" that the government makes to the actual numbers to make things look better on paper.

Sounds amazingly familiar to what I have been saying here for the past year doesn't it?