In his latest video commentary, entitled GDP propaganda exposed, Peter Schiff comments on the latest disappointing US GDP figures. The first quarter of this year was expected to see a 3% increase, but the GDP grew only 2.5% (source: Reuters). Schiff discusses the increase of 3.2% in consumer spending which appears to be the largest in a couple of years. The question he asks is where consumers are getting the money from knowing that earnings were down more than 5% and the savings rate declined to 2.6% (the lowest level since Q4 2007). Schiff believes that Americans are using their savings and borrowing money to pay for services that are rising in cost (rent, utilities, insurance, education). Those are not signs of a growing economy.
Meantime the most recent inflation rate statistics (as measured by the CPI) appeared to be 1.2%. That is definitely not the price increase that people are experiencing in daily life. Schiff compares the CPI with “the Big Mac inflation” which is an indicator tracked by The Economist. Since 1986, the magazine has been surveying the purchasing power parity among nations based on the price of a Big Mac. It appears that the CPI and the Big Mac inflation have tracked each other pretty well between 1986 and 2002 (average increase of 4% a year). Since 2002 though the price of a Big Mac is up with 6% while the CPI has increased less than 2%.
Schiff analyzes recent news about the GDP makeover. Starting in Q2 of 2013, the methodology for calculating the GDP will be revised. The new GDP will include elements that will make the US economy look some 3% larger. Schiff argues that a higher GDP is not (necessarily) an indicator of a healthy economy.
What do these changes include? According to the Financial Times, billions of dollars of intangible assets will enter the US GDP. “The revision, equivalent to adding a country as big as Belgium to the estimated size of the world economy, will make the US one of the first adopters of a new international standard for GDP accounting.” What will be included?
- Research and development by companies will be counted as investments.
- Long-lasting TV programmes, books and sound recordings.
- Deficits in defined benefit pension schemes (what companies have PROMISED to pay out, rather than the cash they pay into plans).
“This is what the government does: they change the statistics. The unemployment is too big? We’ll calculate it in another way. Inflation is too high? Let’s find a new way to calculate the inflation rate. Now the government wants the economy to appear bigger. Why? Because it makes the debt to GDP ratio look smaller. A lot of people are talking about the debt to GDP or the government spending to GDP. So with a larger GDP, it means that the government spending has come down as a share of this larger number. Of course, this is not the first time that the GDP has got a makeover. Governments do this routinely; they massage the way they compile the data in order to create a false impression that the economy is performing better than it actually is.”
In closing, related to gold, Schiff confirms that his precious metals company (Europac Metals) had a record month in terms of demand. He also confirmed shortages and delays on bullion products that were readily available before.