Why GDP Calculations Are A Joke

Note, in this article the terms: ”fake money”, “debt based fraud”, “funny money”, “debt based money”, and “violently imposed fiat currency” all refer to US Federal Reserve Notes created in an uncollateralized manner.


GDP supposedly refers to the market value of all goods and services produced within a country in a given period. It is often considered an indicator of a country’s standard of living.

The mainstream media often raves about how great it is when GDP rises, as if this is somehow a legitimate measurement of economically productive growth. GDP as a measure of productive growth becomes patently preposterous when the Federal Reserve artificially induces a credit expansion and the Federal Government is responsible for 40% of a nation’s GDP spending.

Let us look at what constitutes the GDP calculation:

GDP = private consumption + gross investment + government spending + (exports − imports)

The part of this calculation that turns GDP into a flaming joke is the addition of government spending and the fact that it is primarily consumption based. Ask yourself if it makes sense that a production indicating performance measure is based based on consumption. Only in the mind of a self-deluded kleptocrat are the two related. Given that we live under a corrupt violently imposed fiat fractional reserve centrally planned monetary system, we have to take this into account when looking at the value of the GDP calculation.

In a hard money free banking system that does not use violently imposed fiat currency or centrally planned interest rates, the spending of money (a real physical commodity that is scarce) necessarily can not occur until man labors to produce money in the first place. Since man needs things to live on before he needs money, first an economy will produce things, then each man will trade the things he produces for other things that he values more. Money as a trade intermediary follows the production of real goods and services, it does not precede it.

The effort required to produce the money is what gives the money its intrinsic value, against which all other goods that are swapped for it are measured. If it takes 100 man hours of labor and resources to produce one ounce of gold, then any good that requires an equivalent amount of labor and resources to produce will be worth one ounce of gold. If gold becomes more scarce and difficult to obtain, it will take less and less gold to equate to the value of other products.

This tells us that in a sane and rational economy that experiences efficiency increases due to technological advances and population growth, the normal tendency of prices in terms of gold should be deflationary. That is to say, if the cost required to produce gold does not fluctuate much and the supply of gold is conserved, yet the cost to produce other goods such as cars drops dramatically due to robotic technology, the “price” of a car in terms of gold should experience a constant deflation. Thus, less and less gold should equate to the value of a car in the long run. If the productive capacity of an economy expands faster than the supply of gold, all prices in terms of gold will deflate. This is entirely normal and healthy.

Anyways, the point I’m getting at here is that the spending of debt based money does not stimulate more production, it can only direct what is produced in an economy. Economies are finite in their productive capacity, which means if someone prints up billions of dollars and spends them into an economy, the economy necessarily can not experience an increase in productive capacity in response to the demand surge for whatever is bought with that money, it is simply going to divert more of its already existing finite production capacity to those areas where demand is greatest.

As Michael Pento of Euro Pacific points out:

To be able to consume one must first have produced. If you consume without having produced, you are spending either borrowed or printed money. And the money that is being spent isn’t used to purchase capital goods, which can expand the productive output of the economy.

Think of a country’s productive capacity in terms of a pie graph, with each slice of the pie constituting a given productive sector of the economy. Shrinking or growing the size of the pie graph would equal a change in productive capacity, while changing what is produced inside of that economy would alter how big each sector’s slice is.

The current GDP calculation assumes that an expansion of credit actually grows the size of the pie. As I just demonstrated above, this is entirely fallacious. The most it can do is change how big each sector’s share is by directing production based on how the new money is spent.

In other words, if more of the new credit is directed to the purchases of houses, then another sector of the economy must contract by an equal amount in order to meet the demand for housing construction. The only way the pie actually gets bigger is if more people join in the production of things AND the amount of available resources to produce things is expanded OR technology increases the efficiency of those who are already producing.

Any time a sector of the the pie changes its share based on demand, unemployment MUST RESULT as physical resources are diverted to a different sector of the economy.

Keynesian kleptocrats falsely believe that spending more fake money into an economy can put the “slack” workers to work doing something productive. This is clearly not the case because any spending of fake money into an economy will necessarily divert already existing resources. In the course of diverting those resources, they will cause the loss of already existing jobs. It is a zero sum game.

The creation and spending of new debt based fraud does not increase the amount of productive resources available. If a new steel building is constructed and paid for using fake money, the steel used in the production of that building must have been diverted away from the production of fire pokers. Thus, fire poker production will contract and people will get laid off.

Unless the kleptocrats can demonstrate how no preexisting resources are diverted by the spending of new money (which is obviously impossible), their claims of putting “slack” workers to work without causing a proportionate loss of other jobs is completely baseless. Even if they decide to put people to work digging ditches with their bare hands, they still run into the same problem of not increasing the productive capacity of the economy by their spending. – and yet GDP would still go up.

This concept is critical to understanding why the addition of government spending totally negates GDP as a valuable metric for determining the real value of goods and services produced within a country, and the use of GDP as an indicator of living standards.

Since GDP supposedly gives us the market value of all goods and services produced within a country, we have to ask what government causes to be produced with its spending. Given what we know to be true above:

-Virtually all military spending causes a direct reduction in living standards.

The military is the great waster of resources. It is a black void of doom into which real physical resources are consumed without benefit to humanity. The steel used in a tank did not go into the production of a car. The plastic used in a military computer did not go into the production of a cell phone. The labor used to man a carrier is not being utilized in the production of furniture.

If military spending is required to protect existing resources, then the market will obviously work to meet the protection needs of resources holders at an exact level to that which they feel they need protection. Any military spending above this point constitutes gross waste. Obviously it is impossible for our wise overlords to know exactly what that level should be, just as it is impossible for them to know exactly what interest rates should be.

Given that government spending is not based on consumer desires, we can extend the claim of gross waste to nearly ALL GOVERNMENT SPENDING. Since the government spends money based on political desires, it necessarily distorts our production pie chart by shifting resources into politically favorable areas of the economy. It will artificially expand production in a politically favorable area to the detriment of other areas that it deems will not provide as many votes.

If the government artificially expands the number of colleges and college graduates by flooding those areas of the economy with artificially cheap credit, what resources were diverted in this process and has the inflation of colleges provided a increase in living standards for everyone more than had the market been allowed to manage that sector on its own? The answer should be obvious.

In order for the government to spend money, it must first take it from those who produce. Since the government produces NOTHING and has NOTHING of its own to spend, any inclusion of government spending in the GDP of a nation is preposterous on its face. Why should the cost of an aircraft carrier, the cost IRS agent’s gun, or the cost of a politician’s salary be included in a metric that supposedly provides us with a standard of living measurement?

Is anyone’s life better off because an IRS agent now has a shotgun with which to blow your head off with? Sure, the shotgun maker might be happy, but the fire poker maker is going to be sad, since he now has to pay a higher price for steel, because the steel was not left on the market for him to purchase. So, are the consumers of fire pokers, or anything else that requires steel, better off than they were previously?

No.

The entire basis of GDP as a measure of a country’s productive capacity and standard of living is a joke.

A country that artificially diverts all of its resources into the production of housing and military hardware will devolve into a basket case. Such a country must necessarily import all of its other consumer goods. And since it is not producing anything of trade value, eventually the sellers of those imported goods are going to reject the funny money and demand real goods in return for real goods, resulting in a total implosion of the unsustainable system. All the while this is going on, the nation’s GDP will look spectacular.

At first blush, due to lack of replies, it might look like no one cared what you had to say, but I do. I will admit up front that I have to be labeled as at the "economics for dummies" level of understanding on this, but I do understand mathematics very well, I for the life of me can't understand how GDP measures anything of real value as far as "how well the economy is performing".

If government spending is included as a positive in the calculation there are a myriad of misrepresentation issues that come into play. While it must be admitted that SOME of the government spending would be for what would be labeled as true products and services, the vast majority of it is either for bureaucratic salaries and military salaries, none of which should be considered "services".

For instance, in the expenditure approach, since the government spending term includes salaries for civil servants and military personnel, that is a mixing of the income approach to calculate GDP with the expenditure approach to calculate GDP. And it double books the consumer spending of civil servants and military personnel. In other words, their consumer spending could not take place without the government handing them their salary.

It would be equivalent to the government spending term including (which it does not) entitlement pay-outs and then still counting the consumer spending of the entitlement recipients' consumer spending. So why is it double counted on one hand, but not on the other?

In addition why is excess inventory counted in the investment expenditures? That's basically including "speculative consumption" on goods that may never be sold due to exceeding shelf-life, or becoming obsolete. That's gross domestic PRODUCTION, but not product if we are to state "product sold". It appears the calculation should only include the outlay of raw materials and services to produce inventory. In other word the true outlay of cost to make the products MINUS the internal salaries paid to the company's employees. Because if you count the salaries, once again, you are mixing income with expenditures because you subsequently count the consumer spending of the employees of that company.

It appears that there is a tremendous amount of "double booking" in the calculation due to salary expenditures both in the government spending term as well as the investment expenditures term.

Am I not understanding?

Further to that I would also like to see the numbers when SERVICES are not counted. While I understand that a service purchased is a true product expenditure, with the product being the service, it again mixes income generation with expenditures which results in a double booking of the expenditures of the service-generated income spent.

Are we a service nation or a product nation? I speculate the former.

And sorry to keep posting, but one more factor that is hidden and kind of skews the GDP final tally is how much new money printed entered in the system in a given year. For instance, let's look at 2010:

moneyfactory.gov...

According to the footnote on that site an average of 95% of the notes printed (so this does not include any coinage) is to replace existing money. So let's take 5% of the notes printed in 2010. That's basically 12 billion dollars that entered our economy but the deflation of the value of the money available and whatever portion subsequently spent and counted is not taken into account. Shouldn't that effect be included in some way?