GDP = C + I + G + (X – M)
C = Consumption
I = Net Investment
G = Government expenditures
X = Exports
M = Imports
The fundamental equation of a nation’s output. Memorize that, because there will be a test.
It is amusing and somewhat-distressing to see all of the jockeying that people do on a daily basis trying to take credit for this or that, or even worse, re-writing history. Such appears to be the case of late with whatever you care to call “The Tea Party.”
Let’s start with what “The Tea Party” is and is not.
It is an idea. It began in 1773. The idea has survived for more than 225 years and was, somewhere around the original time of the act, represented No Taxation Without Representation.
It is not a singular organization. Nobody (in their right mind) claims that it is. Even the “Tea Party Patriots”, one of the organizations that attempts to coalesce other groups, says on its “about” page:
Tea Party Patriots is a national grassroot organization that provides logistical, educational, networking and other types of support to over 1000 community based tea party groups around the country. Tea Party Patriots national coordinators understand that we are mere servants to the grassroot groups. We understand that we do not set the course for our member groups, as they have developed their own vision and plan for how to address the local and national challenges that they are facing.
I don’t think I could say it any better than this, so I simply cite them.
There it is.
“The Tea Party”, as an idea, began in the 1700s. Nobody now alive is old enough to claim to have been “THE owner” or “THE originator” (note the definite article, for those who are English-challenged) of that idea. More to the point, ideas are not, broadly (with damn few exceptions) able to be owned or controlled. They just are.
Those of us who are honest state quite-clearly that we have, are, and will continue to build upon the idea embodied in The Tea Party (as occurred in Boston.) Indeed, not even Samuel Adams’ ghost, were he to be queried, could take direct credit for the act, as the meeting he was chairing at the time had not adjourned and he was, at the point where Colonists turned idea into act, attempting to regain control of his meeting! History records, of course, that he post-hoc adopted the act and both publicized and defended it. He is, as such, a (note the indefinite article again) founder of “The Tea Party” (reduced from idea to act.)
There are thousands of people across this nation that are “one of the” (note those three words) founders of “The Tea Party” (in the physical sense of a group of people, one of many such groups) or “The Tea Party Movement” (more broadly, some collection of groups) yet remaining inclusive, not exclusive. The dictionary tells us that “found” means to establish, formulate or coalesce. If you were or are one of the people who has put together a sign, waved it in people’s faces, and demanded that the government become responsive to the people – the broad idea that came from 1773 – you are a (note the indefinite article, again for the English-challenged who are disturbingly common among those who claim to possess even ordinary skill in the English language, and a more-convenient and ink-conservative, digital or otherwise way to write “one of the”) “Tea Party Founder.”
As for one of many physical manifestations of that idea, I provide the following as (again, one of many elements of) evidence:
FedUpUSA In New York City, April 25, 2008
Every one of the individuals who marched that day, and in the days before and after, those who waved signs, those who organized, those who said “Taxation without representation: Isn’t that why we had the Revolution?” to a camera – here, there, or anywhere: you have, and if you in the future so act, you are A (again note the indefinite and inclusive, not exclusive article) “founder” as you have reduced an idea to action – whether by speech, by pounding shoe leather or waving signs in people’s faces.
In short, for those who claim that I, or anyone else, has (or has claimed) some “right of control” over what is today called “The Tea Party” I respond with this as my last and final statement on the matter, entirely consistent with that which I have said before: Learn the difference between the definite and indefinite article in the English language, the use of exclusive and inclusive language, the difference between an idea, a group of people, and an action of peaceful protest by a group of people, and then grow up – you can’t own or control an idea and any alleged premise to the contrary is ridiculous.
Now let’s get to why I have raised so much hell in relationship to those who claim affiliation with “The Tea Party” as an idea, including my rant back in October of this year before the election.
Go back and read the top of this Ticker again.
GDP = C + I + G + (X – M)
The fundamental equation that determines what everyone calls “economic health.” The output of the nation and which way it’s trending.
It is my considered opinion and has been since I started writing on this matter in early 2007 almost exactly four years ago, and indeed even before 2007 back in the Nasdaq-bubble-bursting days where I was occasionally quoted in various media, that the intentional distortion of this equation is the mother and father of all frauds upon the public and we are going to eventually have to cut it out!
Here’s the most-recent GDP release with the above terms labeled for you in nice, bold red letters:
So you want to cut government spending (“G”) eh?
Ok, every dollar you cut will reduce GDP by (at least) one dollar. See the above equation.
You prefer instead to tax the rich?
Ok, every dollar you tax (from “the rich” or otherwise) will reduce GDP by (at least) one dollar, as it must by definition reduce either “C” or “I”. Once the government steals your money via taxation you cannot spend or invest (save) it.
In fact GDP will fall by more than one dollar, because the extra limousine that President Obama was going buy and now doesn’t is no longer demanded, and the people who were going to build that car won’t have a job. They will thus demand less, and again, “C” and “I” will fall. The exact amount of this additional loss of GDP is the subject of much complex mathematical modeling by economists and plenty of argument. It is sufficient for the purpose of understanding what is going on, and what has gone on, to understand the basic principle that for each thing not bought someone doesn’t get employed to make that thing.
But, you argue, the economy is recovering!
No it’s not.
Look closely at that graph. $1,700 billion borrowed and spent last year by Government, more or less. Take that $1,700 billion off of a combination of “G” (less government direct spending) or “C” (transfer payments – that is, entitlements of one form or another) as both were direct and intentional distortions to GDP.
The really bad news is what the government has been trying to cover up and why we hit the wall. That’s found here:
That’s the change, quarter-over-quarter (not annualized) for both debt everywhere in the system (according to The Fed Z1) and GDP. For a literal thirty years we have “goosed” GDP numbers by borrowing more and more money – vastly more than the increase in GDP, each and every year.
But every dollar you borrow you have to pay back from tomorrow’s production with interest. We have as a consequence of these actions blown a massive, outrageous and utterly unsustainable bubble in our alleged “GDP” and contrary to the assertions of the left, right, Tea and otherwise in the political sphere, which is where I write from today, it has not been corrected and there has been no recovery.
Back to that basic equation: Paying down or servicing debt by government and private parties, where that debt is held outside the United States, means capital flows that go outside the US and cannot be recaptured in GDP since those funds are not here in the US any more. And before you say “but they export to us” go look at that equation again – “M”, imports, are a subtraction to GDP.
Borrowing for the purpose of consumption or speculation does not constitute actual growth of the common weal of the nation. Borrowing for consumption is nothing more than pulling forward tomorrow’s car, home or hamburger purchase into today. Neither does running a trade deficit that “finances” our budget imbalance. These acts produce a distortion in GDP. When the blue line is increasing in distance above the red line the distortion is getting worse, not better, as net leverage in the system is increasing. When it is constant then so is the distortion. And when the blue line is below the red line it is signaling a return to health, even though such a return will result in a net decrease in GDP as it occurs and the distortion is removed.
Note that none of this has anything to do with how a currency is backed or based, or who controls it. The Ron Paul crowd and similar who argue for “hard money” are arguing for a chimera, whether they realize it or not. So long as one can lend at interest the attempted expansion of borrowing in excess of GDP will occur. It cannot be otherwise because every dollar borrowed must be paid with interest. As a consequence it is a mathematical certainty that “busts” must occur in which debt and output are brought back into balance. We call that process by which the weakest borrowers and lenders go bankrupt and clear the economy “recession”, and when it is intentionally delayed, obfuscated, covered over and tampered with, it becomes more and more severe the longer attempted denial of basic arithmetic continues.
For those on the left or right, Tea Party or Coffee Party, these are economic facts. They are trivially reducible to third grade arithmetic. The fundamental equation of GDP is taught in your first formal economics exposure, no matter where you have it (in High School, College, or right here on The Ticker.)
The turn-down in the economy occurred because private debt accumulation reached its limit of service. On this there is no debate – the American public was unable to pay its mortgages and credit cards. The GDP “increase” over the years from the early 1990s on forward was not purchased with output – the effort of people – but rather with ever-increasing amounts of debt. That debt increase, net-on-net, reached one of three dollars spent in the economy in 2007 before it collapsed.
There has been no net increase in consumer borrowing capacity as household incomes adjusted for inflation have in fact been stagnant or declining since 2000. The only category of personal consumer debt (e.g. ex-housing) that has increased since the decline in credit growth began in 2008 has been student loans.
Government has attempted to prevent recognition of the GDP contraction that must take place to restore balance to the economy. That balance can be restored either by paying down or defaulting (restructuring) that excess debt, and there’s a lot of it. Either will result in a serious contraction in GDP.
In 2000 I argued that the net contraction required was about 10% of GDP. In 2007, if you go back to my earlier writing, I argued that this amount was about 20% of GDP. Today, a quick back-of-the-envelope look at the distortions created since 2007 by the Federal Government and their infantile attempt to prevent the inevitable has added at least 25% to the total damage net-net, and likely more.
Withdrawal of the government’s taking over of private debt addition will result in a contraction of GDP, no matter whether it is done by raising taxes, cutting spending, or some combination of the two.
This is a serious time for serious people. Those who wish to play political “gotcha” and games, along with making demonstrably false statements about how “I was sent to Washington to quit spending more than we make“, but who will not stand before the camera and tell the truth on this matter are not serious people. They are playing politics as we have done for the last 30 years through more and more “deregulation” and “tax cuts”, both of which are simply another way to cheat on the economic realities by goading someone (whether private or government) to go out and borrow more and more money to print up false claims of economic prosperity which they then use to get reelected.
And that is why I tossed, and will continue to toss, the “Tea Cart”, along with that of the “conventional” political left and right.
FedUpUSA, Co-Founder, Karl Denninger – The Market-Ticker