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Tuesday, July 26, 2011

Not quite nobody

I believe I have pointed the connection between reduced government spending and reduced GDP on occasion as well:
The entire premise of the alleged "recovery", in the words of Ben Bernanke, has been about pumping asset prices. But they won't remain "pumped" when we take our medicine. They'll go down.

A lot.

How much? Oh that's easy - we know for a fact what the minimum contraction will be. It's right here: That's about 12% of GDP or about $1.8 trillion dollars. Why? Because GDP is simply defined as "C + I + G + (x - i)", and "G" is government spending. Decrease it by that 12% of GDP and GDP falls by (at least) 12%. This is simple math - subtraction.

Yes, we need to do this. Yes, people will raise hell. But it will make, at least for a short time, unemployment worse and pain will increase among Americans. We will not buy those iPhones and cable TV and nights out at the bistro, and the follow-on effects cannot be avoided.

The problem with everyone pontificating on this is that nobody - other than I - is talking about what happens when, not if, we take our medicine. See, we must at some point. But as the chart makes clear up above we've been in an economic Depression we have refused to admit to for the last three years, just as someone on a monstrous multi-year bender will refuse to admit they're addicted to some substance.
Of course, Karl is leaving out the so-called "multiplier effect", for the very good reason that it does not exist despite the Keynesian myth-making. This is probably just as well because if it did, GDP would decrease even more than the 12% contraction in G(overnment spending).

In RGD, I anticipated that the decline in GDP would ultimately approach 35%: Utilizing total credit market debt as a proxy for the relative size of the contractions, I estimate that Great Depression 2.0 will be approximately one-third worse than the Great Depression. This indicates a 35 percent decline in real GDP over a five-year period, indicating a nadir of 9,455 sometime between the end of 2012 and the middle of 2013.

Now, obviously the time frames are off given the reckless decision by the Washington elite to stave off the inevitable declines in total debt outstanding and GDP by the gargantuan increase in Federal borrowing and spending over the last three years. But, once those efforts end, whenever that might be, there is no question that a statistically visible contraction will begin. It is mathematically assured. In light of Karl Denninger's 12% figure, I think it may be worth noting that the contraction of private debt already amounts to 9.7% of its Q3-2008 peak.

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