Posts Tagged ‘gdp’

Ice Cream for Everyone – Well Maybe Not Everyone

Monday, November 30th, 2009

So unemployment has taken the center stage in politics. It was not really important when unemployment was 9.8%, but now it is 10.2%, double digits changes everything. The answer according to the US political powers is stimulus, more and more stimulus. Even know stimulus has really never worked as designed, maybe this time they will get it right, right?

My belief is that economics needs to be broken down into the smallest piece to the individual US citizen. What works for an individual should work for the economy as a whole.

To date the US government has taken the position that the government needs to fill in the demand holes with stimulus by borrowing money. If the US government borrows 1.5 trillion dollars and then spends it into the economy through stimulus, this “growth” in the economy (gdp) should bridge the gap according to the current powers.

What if an individual did the same thing as the US government? Okay so Suzy gets a pay cut and the she decides to adopt the same philosophy as her government. Suzy takes her credit cards and decides to go on a spending spree matching her lost income. Suzy does not just use her credit cards to pay current bills, but she also uses it to redo her kitchen. Suzy lost $30,000 in pay, but she spent $30,000 on her kitchen and other none essential items to make up for the lost income. Did Suzy make up her lost $30,000 in income? Is her situation better after spending the $30,000? Did she reduce or increase her risk?

The answer to the above questions seems relatively obvious to me. If you lose income a budget is the solution not a spending spree. If 70% of the US economy comes down to the US consumer, shouldn’t our rules be their rules?

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GDP First Look – Robbing Peter to Pay Paul?

Thursday, October 29th, 2009

The 3rd quarter showed a 3.5% increase over the 2nd quarter GDP (Gross Domestic Product). According to the preliminary look at 3rd quarter GDP report the primary contributors where (as quoted by the report):

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.

Let’s take a better look at the above quote from this widely viewed report.

The first primary contributor according to the report was Personal Consumption Expenditures. The report specifically cited that auto sales accounted for a large part of this upturn. Cash for clunkers is actually quoted by the report as a major contributor to these sales.

Exports are the second contributor named in this report as a large contributor. When the Dollar is cheap so are good that are priced in the Dollar. The news is filled with headlines on how the US Dollar is under significant pressure.

Private Inventory Investment is the next contributor on the list. Over the past year retailers have been shedding inventory to attempt to match supply with current demand. The shelves are empty and they need to be restocked if retailers want to sell products to consumers.

Residential Fixed Investment is named as another large contributor. First time home buyers have been scrambling to purchase homes to take advantage of the $8000 tax credit. In September alone nearly 50% of existing home sales where to first time home buyers. Nearly 70% of existing homes sales in September where under $250,000.

So last on the list is Federal Government Spending. It should be no surprise that Federal Government spending contributed a large portion of 3rd quarter GDP. Looking at what the report cited as the primary contributors to real GDP, I would argue that almost all of the GDP growth was from the government intervention.

The report also sighted the following:

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

From the above statement I would gather that consumers made less but spent more. Interestingly this current outcome is what the Federal Government wants to happen, spend our way out. With tight credit and rising unemployment, where does the money come from? Credit is what caused this problem, is it really the cure as well. Drug addicts don’t take more drugs to get off drugs do they.

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The Economic Wave Set

Thursday, May 7th, 2009

Warren Buffet has been quoted as saying that the larger the stone dropped into water the bigger the waves. The stone dropped that started this financial crisis was definitely a large one. Here is my interpretation of the waves that follow the stone dropping. These waves can overlap but traditionally are made up of peaks and troughs.

The “stone” dropped was the Real Estate market bubble popping. The stone impacting the water was in September 2009 when the financial markets all but shut down clogged with bad debt. When the financial system receives a shock as it did in September, the effects are felt in waves.


The first wave typically comes in the form of fear. If you asked the average US citizen what happen in September 2009, most would not be able to detail the actual impact. But this fear causes the average US consumer to stop spending as much and plan for the worst. During this financial crisis the initial fear coupled with real estate prices falling, caused an extreme contraction in consumer spending. Since 70% of US GDP comes from consumer spending, this contraction leads to the second wave.

The second wave is usually a direct result of the first wave. When consumers spend significantly less, companies are forced to reduce inventory to match this new reduced demand. This reduction in inventory typically causes high unemployment. High unemployment leads us to the third wave.

The third wave again is usually a direct result of the second wave. High unemployment with reduced consumer spending leaves a supply surplus. Actual goods surplus is reduced by lowering prices to what consumers are willing to spend to spur demand. With less demand overall for goods and services, square footage becomes a surplus, which is commercial real estate.

I believe that near term future of the US economy is largely dependent on the third wave. If the consumer can put aside their reduced wealth, fear of job loss and return to over consumption then the economy should start to recover (for the short term). If the consumer cannot jump start the economy, then commercial real estate could be the next stone dropped and we would start all over.

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Who Leads the Economy?

Tuesday, April 28th, 2009

The US economy is made up of two fundamental events which are expanding and contracting credit. While an economy is expanding credit typically it is a time of prosperity. When an economy is contracting usually it is a labeled a recession. The economic cycle of expansion and contraction describes an economy as a whole.

To best visualize this cycle you should imagine a wave. As you go up the wave credit is expanding which typically means more spending; when you go down the wave credit is contracting which leads to less spending. Since US consumer makes up about 70% of GDP, it is logical to imagine the consumer is the water that makes up the wave. As the old saying goes, “Life is full of ups and downs”. People are typically either going up or down the wave.


The world is made up of cycles. The sun comes up and then is goes down and seasons change. Peoples clothing and surroundings may change but history usually repeats itself.
Individuals have short and long cycles. Groups of people also share cycles. These groups could include 2 individuals to millions or even the entire world’s population.

Gustav Le Bon in his book “The Crowd” cited that individuals are smarter than the crowd. With this assumption one could argue that the larger the group included in a cycle the slower the cycles is to repeat itself since it will take the crowd longer to move to the next part of the cycle than an individual.

Individual’s private finances most of the time go through periods of expansion and contraction just like the economy as a whole. Actually if you believe that individuals are smarter than the crowd, then you should also believe that individual’s finances lead the broader economy, since they are more efficient at moving to the next part of the cycle.

With the current economic crisis the price of real estate skyrocketed to a point where more and more individuals no longer saw value and stopped buying. With less buyer and more sellers, real estate prices started to plummet. Once the first domino falls, the rest eventually do. Since the housing bubble was so widespread and included so many people, both in the USA and abroad, the cycle should take that much longer to progress.

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What Happens if the Economy Gets the Flu?

Monday, April 27th, 2009

Every couple of years the term “Flu Pandemic” makes headlines. The term refers to a global medical disaster where a large part of the world population gets the fast spreading flu. Every year the flu kills thousands; during a flu pandemic it could kill millions. A side effect of this type of crisis is felt in the world economies. Fear of illness keeps people in their homes and out of the malls. Sick people miss work that leads to less productivity.

Several agencies have done research for the USA into the potential economic impact of a flu pandemic. Their research has estimated that the US GDP could contract from 4% to 6% in a severe flu pandemic. They also estimated that if there is a mild flu pandemic it could shrink GDP by 1%. The report also noted that the effect in other countries could be much worse. The real impact is the loss of life the side effect is the contraction of economic growth. The report does indicate that economies should snap back after the crisis from pent up consumer demand.


A global flu pandemic would make a time of prosperity difficult let alone its effect during a time of crisis, as we are in right now. The economy is at such a fragile point that even a pandemic scare could have a measureable effect.

With Wall Street and Washington citing glimmers of hope, a flu pandemic, or even a scare, could sidetrack their hopes for the near future. At this point, the health of the people who make up the world economies should be the concern then worry about the economic side effects.

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Was it Real Growth or just Credit? The Last 30 Years

Sunday, March 29th, 2009

The following two charts are disturbingly similar side by side:


First is the Dow Industrial Average over the last from 1928 till 2006:

Dow Industrial Average 1928 till 2006

Dow Industrial Average 1928 till 2006

The second chart is total US debt as a percentage of GDP from 1923 till 2006:

Percentage of Total US debt to GDP

Percentage of Total US debt to GDP 1923 till 2006

In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.

In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.

The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?

I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?

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