Jack Rasmus

Alternative Visions Radio Show, June 28, 2014

Dr. Jack Rasmus continues his analysis of the growing influence and instability in the global shadow banking system, including a look at the major role being played by shadow banks in China today.

Rasmus explains how shadow banks have been behind the historic $5 trillion in China municipal and provincial real estate (commercial, residential, industrial) debt boom since 2008 and China currency speculation.

Rasmus provides a deeper historical analysis of shadow banks in US depressions since the 1830s, and the parallels with China today. Continuing a key point from last week, its not just the shadow banks as institutions, but the ultra high net worth investors globally—the new financial global elite—that are behind the new financial instability building in the global financial system again. Shadow banks + Ultras + proliferating liquid financial asset markets and securities traded in these markets are at the heart of the next debt-deflation-default nexus.

Rasmus argues that money capital flows in a capitalist system cannot be effectively regulated long term, and that’s why financial crises keep returning. The bigger the liquidity explosion, the greater the debt and financial speculation, and the more frequent and greater magnitude the financial crises.

Dr. Rasmus concludes the show with an indepth look at the composition of the just announced -2.9% decline in first quarter US GDP, and debunks the mainstream view that the -2.9% was due to the ‘weather’ and that the US economy and GDP will soon ‘snap back’ with a 4%-5% GDP growth rate, as now touted in the mainstream business press. Jack shows how business inventories, net exports, and consumer spending will continue to fare poorly, or modestly at best, in coming quarters—and that the US economy will continue its ‘stop-go’ economic trajectory that is characteristic of an epic recession and its aftermath.

Access the archive of this radio show at:

http://www.alternativevisions.podbean.com

or at:

http://prn.fm/alternative-visions-us-grass-roots-anti-war-protests-syrian-war-062814/

NOTE: Disregard the incorrect title posted for the show (Not on Syrian War but on Shadow Banks and GDP). The announcement and content are correct–on shadow banks in China and US GDP

Final revisions to US GDP released June 25, 2014 show the US economy contracted this past January-March 2014 by -2.9%. Does the much larger than predicted decline reflect the beginning of new recession? A -2.9% contraction for the quarter is just about the average quarter decline during the 2007-09 last recession. Or is the -2.9% an indication of a continuing stagnation, with a moderate recovery in GDP to occur in the second quarter 2014? Or perhaps it was just an aberration, due to bad winter weather, as many mainstream economists and press pundits are now saying, with a robust recovery of 4%-5% GDP growth coming in the second half of 2014?

The larger than expected -2.9% contraction was a further significant reduction from the government’s GDP estimate of a -1.0% GDP decline for the quarter that was reported by the government in May; and an even bigger 3% ‘swing’ from the initial +0.1% GDP estimate reported in April.

The record-setting ‘swing’ of 3% represents the largest such adjustment in nearly four decades, raising a question of why the government’s initial GDP estimate of 0.1% was so far off the mark in the first place? It also raises a question of just how accurate are estimates of GDP in today’s post-2008 ‘great’ recession restructured US and global economy? Is estimation becoming more a game of ‘guestimation’?

The record 3.0% swing and final GDP revision should finally silence those forecasters who have been spinning the message for months now that the US economy’s first quarter poor performance was due mostly to ‘weather’ factors. As this writer has been saying in several prior published commentaries since March, based on a closer look at the composition and magnitude of the GDP decline in the first quarter it is impossible to attribute the huge -2.9% decline to weather factors. A -2.9% drop would have taken the onset of a virtual new mini ice-age—and not just ‘bad winter weather’. Something more fundamental is going on perhaps in the US economy that official government estimates of GDP aren’t initially recognizing, or even picking up.

The closer look at the composition of elements of GDP responsible for the -2.9% drop were unrelated to bad weather—as this writer previously pointed out in a prior article, ‘The Real ‘Real’ GDP’, on June 3, 2014, and in a prior piece, ‘False Positives: Analyzing Recent US GDP and Jobs Reports’, November 11, 2013, both available on the writer’s blog at jackrasmus.com. The major factors behind the first quarter major -2.9% GDP decline were:

• a big pull back of business inventory investment during the quarter, after a buildup of the same in the third quarter of 2013 in anticipation of a surge in end of year consumer spending that did not materialize;

• a similar major drop in US net exports in the first quarter that reflected a slowing global economy.

Final revisions to GDP just reported this week now show clearly that the inventory adjustment reduced 1st quarter GDP by a whopping -1.7 percentage points, and the decline in net exports by another -1.5%. A weakening of Net exports reflects a gradual and progressively slowing global economy. The business inventory slowdown represents business stocking up for a consumer spending surge that nonetheless repeatedly fails to materialize. Neither of these developments can be attributed significantly to ‘weather factors’

In addition, the final GDP revision reported on June 25, 2014 showed a third important element underlying the -2.9% GDP decline in general, and the big ‘swing’ from -1.0% to -2.9% in the final revision: Consumer spending the first quarter was initially grossly overestimated in both April and May GDP reports. A growth in consumer spending of 3.3% was actually only 1%. What was first thought as healthcare spending surge generated by sign ups to the Affordable Care Act, boosting consumer spending, turned out not to be the case. The ACA boost to consumer spending was minimal, not significant.

None of these major determinants of first quarter GDP can be attributed to ‘bad weather’. Weather does not impact inventory accumulation or exports. Both inventories and exports are sold and ‘booked’, and thus added to GDP, before transported to warehouses or shipped. Moreover, consumer spending on ACA sign ups occurs mostly via phone or online, and not by going to a government or insurance company office purportedly postponed due to bad weather.

Estimates of the ‘bad weather’ impact are at best responsible for only 0.5% of the GDP decline in the quarter. That leaves more than 2.4% of the decline to be determined by real causes, not weather. Weak inventory spending, slowing net exports, and stagnating consumer spending are more fundamental conditions that are due to the aftermath of a fragile ‘epic’ recession characterized by lack of disposable income generation by most of consumer households and minimal debt reduction for most since 2009 despite claims of economy recovery by politicians.

Consumer spending weakness in particular reflects the lack of real wage and income growth for the vast majority of households. Slowing inventory investment is a lagged consequence of the same. And net exports weakness is a reflection of a slowing global demand and/or currency exchange rate shifts. But none of the above is weather related. Nonetheless, many economists and politicians are still sticking to the ‘bad weather’ metaphor for the huge -2.9% drop. And now argue to corollary, that the end of bad weather will mean a robust 4%-5% recovery in GDP in the months ahead.

The key question now, therefore, is whether the above factors behind the big first quarter 2014 contraction (i.e. inventory investment slowdown, net exports slowing, consumer spending stagnation) will continue into the current April-June, second quarter 2014? Will those factors be offset perhaps by growth in other sectors of the US economy in the second quarter and the rest of the 2014 year—like residential housing, government spending, or business equipment investment? Will the long awaited sustained consumer spending recovery that has been predicted, but has not occurred since 2010, finally appear?

Or will the ‘recovery’ from winter ‘bad weather’ once again in the second quarter 2014—as in previous years—prove far weaker than official government, mainstream economists’, and politicians’ current predictions?

1st Quarter 2014 GDP: Even Worse Than Reported

The US economy has been on a ‘stop-go’ trajectory ever since the official end of the 2007-09 recession in June 2009, now a full five years ago during which the US economy has grown at best one half to two thirds the normal recovery rate at this stage following recession. During the best quarters of economic performance since 2009, the US economy has grown at a sub-par 3% or so, followed by what this writer calls economic ‘relapses’ back to zero or below zero GDP growth on several occasions—three to be exact.

After only 18 months of economic growth following June 2009, for example, the US economy experienced a negative GDP again in the first quarter of 2011. It thereafter’ relapsed’ again, falling into virtual zero growth in the fourth quarter of 2012. The latest, third ‘relapse’ has occurred now, resulting in an even more dramatic -2.9% growth in the first quarter of 2014.

But this past quarter 2014’s -2.9% is actually even worse in fact than reported. It comes after last summer 2013’s redefinition of US GDP that added $500 billion more annually to GDP by declaring certain business expenses involving research & development and other ‘intangibles’ were thereafter to be included in GDP numbers. (see my ‘The Real ‘Real’ GDP’ article explanation). That redefinition added at minimum another 0.3% to US GDP. Adjust for that ‘GDP growth by redefinition’ and the first quarter’s GDP decline was actually an even worse -3.2%. But that’s not all.

An even greater GDP overestimation effect derives from how the US ‘adjusts’ GDP for inflation. The US uses a conservative estimator called the ‘GDP Deflator’ that grossly underestimates the role of price changes on the economy. The smaller the estimated inflation, the larger the real GDP. If the government adjusted inflation using the Consumer Price Index (CPI), or even the Personal Consumption Expenditures (PCE) index, both of which better estimate inflation, then the real GDP for the first quarter 2014 (and previous quarters) would be less than reported—i.e. at least 0.5% lower than actually estimated. The US government’s ‘GDP Deflator’ estimates US inflation at well less than 1.5%. In contrast, both the CPI price index and the PCE price index register inflation today at around 2% or more, and rising.

Together just these two changes—the redefinition of GDP that artificially raises it and the failure to fully adjust GDP to real GDP—means first quarter GDP declined by -3.7% and not the -2.9%.

From ‘Bad Weather’ to ‘Second Half’ Hype: A Continuing Pattern

‘Bad weather’ metaphors have been repeatedly trotted out as explanations whenever the US economy weakens—as has been the case since 2011—in turn followed by claims that the second half of the year will finally bring sustained recovery.

For example, US GDP contracted in the first quarter 2011—i.e. the first ‘economic relapse’ following the formal ending of the 2007-09 recession. That ‘relapse’ was predicted by this writer in his book, ‘Epic Recession’ written late 2009. As is the case today in 2014, that 2011 GDP contraction was blamed on bad weather, and was followed up by economists and forecasters assuring a second half 2011 would result in sustained recovery. But it didn’t. The pattern was again repeated in the fourth quarter 2012 when the economy initially contracted again by 0.1% despite the year-end 2012 holiday spending season, and winter weather was blamed again. Once more a robust recovery was predicted that didn’t happen.

First quarter 2011, fourth quarter 2012, and now once again first quarter 2014—it’s the same old story: it’s the bad weather that’s responsible for periodic GDP contraction; and the ‘second half of the year’ will bring a sustained recovery. Whether that pattern changes in the second half of 2014 remains to be seen, although it appears economists and forecasters are now ‘doubling down’ and betting on an enormous 4%-5% second half US GDP explosion—a growth that hasn’t been seen in any quarter since the onset of the recession in 2007!

(For the rest of this article on 1st quarter GDP by Dr. Rasmus, further analysis of 2nd quarter US GDP, and full year 2014 GDP, go his website at:

http://www.kyklosproductions.com/articles.html

My latest 15 minute interview on the subject of the super rich (Ultra High Net Worth Individuals) and their shadow banks is available at:

http://voiceofrussia.com/us/news/2014_06_25/Super-Rich-and-Their-Shadow-Banks-a-Growing-Threat-to-Economic-Stability-6134/

The following is a short introduction to the interview posted on the Voice of Russia Radio US Edition station:

Super Rich and Their Shadow Banks: a Growing Threat to Economic Stability

By David Kerans

WASHINGTON (VR)— Unregulated financial institutions or “shadow banks” which cater to the world’s super rich are becoming so potent as to present serious threats to economic stability around the globe, as even the mainstream financial press is now acknowledging.

However, the agility of the shadow banking sector (think investment banks, private equity funds, money market funds, REITs, etc.) more or less precludes effective scrutiny from government regulators, let alone proper control. Moreover, the relative weight of the shadow banks is growing quickly, thanks to the spiraling concentration of wealth among the super-rich. In the US alone, for example, high net worth individuals (with tens of millions of investment capital each) shot from $24 trillion in 2009 to $46 trillion in 2013.

Huge and expanding liquidity pools in the shadow banking system create booms and busts around the globe or in certain investment categories, by flooding attractive investment targets and then evacuating them, leaving governments, central banks, and taxpayers to pick up the pieces.

The upshot, as economist and St. Mary’s College Professor Jack Rasmus insists, is a serious and growing threat to economic stability, a threat that central banks can do little to control. Of course central banks can still exercise some control over the money supply and economic stability by setting prime interest rates and enforcing capital controls over traditional banks. But central bank infusions of liquidity since the recession began in 2008 have fueled rapid growth in the shadow banking sector, and made the world financial system increasingly less stable (traditional banks deployed the easy credit with shadow banks, where their returns were best).

The danger from the flourishing shadow banking sector is all the more serious, points out Rasmus, because these institutions are so lopsided in deploying their capital towards short-term, speculative ends. Investment in real productive assets has therefore languished, making the economy all the more susceptible to a crash when the speculative money retreats.

The retreat is not far off, according to Rasmus: “We’re going to find, I predict, when the Fed starts raising interest rates, if the Bank of England doesn’t start doing it first, we’re going to see this phenomenon within the next year, I think, with so much debt and short-term investing out there, as rates rise, it may precipitate defaults quicker than people think. I think it won’t take much of an interest rate increase to destabilize the financial investment structure once again.”

Solutions to the hypertrophy of the shadow banking sector are within reach of policy makers. Rasmus advocates establishing a public banking system that can loan money to productive, real economy enterprises, at the cost of capital (as per the successful North Dakota model, for instance, which Green Party candidate for California State Treasurer Ellen Brown explained to Radio VR in a recent interview). Real economic growth would then pull some of the speculative capital into productive use.

The odds Washington or London will pursue such sensible policies are approximately zero, however.
Read more: http://voiceofrussia.com/us/news/2014_06_25/Super-Rich-and-Their-Shadow-Banks-a-Growing-Threat-to-Economic-Stability-6134/

Alternative Visions – Shadow Banking Concerns Growing – 06/21/14

(To Listen to the show click on either of the two urls indicated after the announcement)

RADIO SHOW ANNOUNCEMENT

“Dr. Jack Rasmus reviews the growing role and influence of shadow banks in the global financial system, amidst recent growing concern in official circles of the need for their regulation and control to avoid another even deeper financial crash in the future.

Rasmus addresses the recent editorial of Mark Carney, chair of the UK’s central bank, the Bank of England, last week on the need to quickly regulate the shadow banking system, and the daily feature stories in the global financial paper, The Financial Times, on shadow banks following Carney’s editorial. Dr. Rasmus argues that “money capital is like water flowing downhill” and cannot be regulated in the long run”. Jack documents the explosion in liquidity and investible financial assets in the global shadow banking system since the 1960s and since the crash of 2008 in particular, and explains the fundamental linkage between the new global financial elite—the global high net worth individual investors(HNWIs)—and the shadow banks as their now preferred investing institutions as they shift their wealth recently from traditional banks to the shadow sector. Referring to recent reports by the Boston Consulting Group and Capgemini, Jack shows how investible assets of HNWIs and the shadow banks have grown faster since 2008 than during the decade preceding the crash of 2008. While global total private wealth has risen by more than $40 trillion, from $111 trillion in 2008 to more than $152 trillion today, the top 200,000 HNWIs share has risen even faster and now exceeds $53 trillion. Jack explains how the growing concentration and acceleration of liquid, investible assets within the HNWIs and Shadow banks is building the preconditions for another, perhaps even greater, financial crash, as debt-leverage based investing and securitization grows again. Jack notes that Bank of England Carney’s recent editorial represents a growing awareness among central bankers that their influence over the shadow banking system may be eroding even further than pre-2008, laying the ground for even greater central banks’ difficulty in re-stabilizing the global capitalist system in the event of another crash.”

Listen to the show at either of the following:

http://prn.fm/alternative-visions-shadow-banking-concerns-growing-062114/

http://alternativevisions.podbean.com/

Alternative Visions – Billionaires vs Teachers: The Vergara Court Decision in California – 06/14/14

Dr. Jack Rasmus and guest, 40-year experienced teacher, Gretchen Lipow, discuss last week’s ‘Vergara’ legal decision in California—the latest example of a long series of efforts by politicians and corporate elites to blame teachers for the decline in the quality of K-12 public education in America. Dr. Rasmus explains how David Welch, Silicon Valley tech billionaire, has been behind funding the movement and the legal suit that led to last week’s Vergara decision identifying teacher tenure as the cause of inner city schools’ student underachievement. Lipow explains how Teacher Tenure is just a diversionary tactic by opponents of teachers and public education, and why eliminating it will not change urban schools students’ underperformance, which is the consequence of many cultural-socio-economic factors. Lipow also points out the many procedures that already exist to eliminate poor performing teachers and how ‘tenure’ does not mean a guaranteed lifetime job but just the right to due process. Rasmus explains the bigger context of the Vergara decision: How Vergara is just the latest element in an intensifying decade long attack on teachers and public schools. Vergara is the latest element in a long term Corporate strategy to remake the public education system into a major new profit center for tech companies: No Child Left Behind, Race to the Top, Core Curriculum, Charter Schools are all examples, Rasmus explains, of the long term plan to standardize K-12 ‘product’ into pre-packaged software and hardware, that will de-professionalize the teacher profession in the process, eventually turn teachers into ‘technology monitors’ in the classroom, and cut education costs by eliminating teachers and lowering wages. Rasmus notes that lower costs from teacher de-professionalization means more spending on K-12 technology and more profits for the David Welch’s, the Bill Gates’, and other tech billionaires who are driving this long term strategy for K-12 education. However, first teacher job security, unions, and bargaining rights must be gutted, Rasmus argues. The Vergara decision therefore represents the latest offensive in this longer term corporate initiative to recast public education into a new multi-billion dollar corporate profit center. (For more on Dr. Rasmus’s view on this theme, see posted on the PRN website his chapter, ‘The Privatization of Public Education’, from his forthcoming book, ‘America’s Ten Crises’).

Gretchen Lipow has been a public school teacher for 40 years in New York City and Alameda, California. She has been an officer in her teachers union in Alameda and a member of the California Teachers Association (CTA) State Council, which determines union policy for 300,000 California teachers, and is currently President of the Retired Teachers Association in Alameda and Contra Costa County, California. She is also active in various Alameda Community initiatives and political activities.”

This 55min. interview and discussion is available for listening and download at:

http://www.alternativevisions.podbean.com

and at:

http://prn.fm/alternative-visions-billionaires-vs-teachers-vergara-court-decision-california-061414/

“ Dr. Jack Rasmus, is interviewed by Russia Radio host, David Kerans, on the European Central Bank’s latest move to inject still more money into the Eurozone banking system and economy last week. Rasmus explains why this latest injection, which includes the introduction of negative interest rates and ‘targeted lending’, will prove no more successful than prior LTRO I, II liquidity injections undertaken by the ECB since 2012. A Eurozone QE will ultimately follow, as these latest moves prove ineffective as well. Rasmus further explains why monetary policies of central banks worldwide mostly stimulate financial asset prices (stocks, bonds, derivatives, foreign exchange trading, etc.) and not the real economy. The monetary stimulus from near zero rates to banks, QE, and other money injection measures ends up either hoarded by banks, loaned to shadow bank speculators that invest in financial securities world wide, or are loaned offshore to emerging markets, Rasmus notes. Meanwhile, in Europe (as in the USA, Japan and elsewhere) real investment, jobs, and incomes for the majority fail to grow, prices for goods and services slow and trend toward deflation, and workers-households consumption relies increasingly on credit and more debt instead of jobs and income.’

Listen to the 16 min. audio interview at:

http://voiceofrussia.com/us/news/2014_06_11/Euro-Zone-Economy-Impervious-to-Monetary-Policy-Stimulation-Rasmus-223

Alternative Visions Radio Show
Jun 7th, 2014 on the Progressive Radio Network

SHOW ANNOUNCEMENT:
Dr. Jack Rasmus and guest, Steve Breyman, discuss this past week’s just released Obama/EPA proposals to reduce CO2 emissions from existing industrial plants in the US by 30% by 2030. Are conservative environmental groups justified in their praise of the EPA proposals? Are the proposals too little, too late, and cleverly left to the last two years of the Obama administration to ensure nothing will actually happen during the remaining years of Obama’s second term? Jack offers a criticism of the Obama/EPA strategy, noting if Obama were really serious he would have issued an Executive Order to immediately implement the EPA rules. In the present form, Rasmus notes, there will be no implementation of any rules until after the 2016 elections, if even then. Breyman and Rasmus discuss whether the EPA’s 30% ‘target’ for emissions reduction is really only 14%? Whether the EPA rules are proposed in order to provide political ‘cover’ for the administration’s now fast track promotion of natural gas fracking. And whether the EPA proposals ‘sometime later’ are a trade-off to enable Obama to ‘immediately’ approve and sign the XL pipeline after this November 2014 midterm congressional elections? Breyman discusses the likelihood the EPA proposals will reduce CO2 from industrial plants, but stimulate even more C02 and methane carbon emissions from natural gas fracking now destroying water tables and air quality in the Dakotas, Texas and Pennsylvania? Rasmus asks if the rules represent a ‘passing the buck’ by Obama to the states to encourage the latter to develop more state-level ‘cap and trade’ carbon credits trading programs that have elsewhere had little impact on reducing carbon emissions? Can EPA proposals be trusted that, according to multi-state coal-fired plant corporations, like American Electric Power, “allow us to keep coal units running for an extended period” (John McManus, VP of American Electric Power). Listeners are encouraged to check out analyses of the EPA proposals by ‘Rainforest Network’ and ‘Food&Water Watch’ environmental groups, not just the big Washington environmental lobbies, and not to get taken in by the ‘spin machine’ in Washington.

Steve Breyman is a former New York State environmental bureaucrat and current the ‘shadow’ EPA Administrator for the Green Shadow Cabinet. He formerly also worked for the US State Department. He currently teaches peace, environmental and media studies at Rensselaer Polytechnic Institute.

ACCESS & DOWNLOAD this show at either of the following sites:

http://alternativevisions.podbean.com/

http://prn.fm/alternative-visions-obamas-new-epa-industrial-plant-co2-rules-progress-election-year-maneuver-060714/

This past Friday, May 30, 2014, the US government released its revised estimates for the first quarter 2014 US Gross Domestic Product. The initial April estimate of GDP for the first quarter showed the US economy stagnating, at only a 0.1% growth rate. Last week’s revised data showed, however, a significant further downward revision of first quarter GDP to a negative -1.0% growth, i.e. a contraction.

Politicians and analysts had initially forecast in April a slowing of GDP growth to around 1.2%. They then adjusted that in May to a slight -0.5% contraction of growth for the first quarter. But the -1.0% GDP revision last week was twice as bad as their consensus estimates. Despite their missed forecasts, which initially explained that ‘bad weather’ was the cause behind the GDP decline, forecasters continue to insist that the -1.0% GDP contraction was due to bad weather during January-March 2014.

From Bad Metaphors to Bad Forecasting

When economists, pundits, and politicians can’t explain real causes—or wish to avoid bringing them to public light—they blame the weather. But weather metaphors are an excuse, not an explanation. If the bad weather were the cause of last week’s revised -1.0% GDP decline, then forecasters’ estimate of only a -0.5% drop in GDP would still leave a remaining -0.5% decline to be explained. But no explanation has been put forward to explain the additional -0.5% contraction. How the economy can go from a 4% growth rate in the third quarter 2013 to a -1.0% barely three months later, a swing of 5% in a matter of a few months, has not been explained—except of course to blame it on ‘the weather’.

While weather might have been perhaps a minor factor in some east coast regions of the country, it was certainly not a factor nationwide. The bad weather metaphor approach to economic explanation also fails to explain why luxury retail sales, at Tiffany’s and other high end retailers, expanded at double digit rates throughout the bad weather months. Apparently the rich aren’t as deterred by weather from spending while middle Americas are. Buying milk at the grocery store is somehow postponed by bad weather, but buying diamonds and baubles at the jewelry store is not. Nor does ‘bad weather’ in January-February explain why a number of key economic indicators continued to decline in March and even April, when ‘bad weather’ was not a factor. Somehow bad weather deterred home sales more than usual this past winter, even though home sales were declining well before, and have continued to do so after March 2014. Or ‘bad weather’ advocates argue that industrial production slowed in the winter because of the weather, when one would suspect bad weather would boost energy utilities’ output and industrial production during such weather. So much for bad weather forecasting.

A Non-Weather Explanation of Recent GDP

As far back as last November 2013 this writer was forewarning that the 4% growth rate of third quarter 2013 did not represent any real future growth trend; it was not indicative of any kind of sustained economic recovery. (see my ‘Economic False Positives: US GDP & Jobs Reports’, Counterpunch, November 11, 2013).

The growth in the third quarter was comprised in large part of business inventory investment bouncing back from low first half 2013 levels, on the one hand, and driven further at the same time by businesses moving up into the quarter inventory spending that would have otherwise occurred in early 2014. This latter shift occurred because businesses were anticipating—in retrospect incorrectly—that consumer retail spending would surge in the holiday season in the fourth quarter.

For example, after contributing only .18 to GDP in the first half of 2013, inventories surged to .71 contribution to the third quarter 2013 total GDP gain. That’s almost three-fourths of the third quarter’s 4% GDP gain in July-September 2013. But the year end 2013 consumer sales surge businesses anticipated, and stocked up for, never happened. Overall retail sales grew only 0.2% in December. Given no consumer response to the prior inventory buildup during the holidays, the contribution of inventories to fourth quarter GDP dropped to virtually zero. Not surprising, business inventory spending thereafter contracted even more sharply in January-March 2014 once again.

But the January-March 2014 decline of -1.0% was due not only to slowing of business inventory investment. It was due even more to the slowing global economy and its related effect on US net exports. Both US exports and business equipment investment also contracted sharply from the last quarter of 2013. An economic explanation for the -1.0% GDP fall would thus have to account for why both business inventory and business equipment investment declined and why exports weakened. It would also have to take into account that consumer spending in the January-March period was itself due largely to a one time factor—i.e. a big increase in health care services spending as the Affordable Care Act took effect. Without this health care spending effect (which will not be a factor in the second quarter 2014), the -1.0% GDP decline would have been even worse.
The point is that none of these factors—the business inventory, business equipment, exports slowdown, or healthcare spending due to ACA—were particularly sensitive to ‘weather’, good or bad. What that in turn means is that forecasters’ ‘weather argument’, i.e. that good weather during April-June will mean a GDP ‘snap back’ growth of 3-4% once again (see the lead business page article, The New York Times, of May 30, 2014), is as absurd a prediction as the same forecasters’ original ‘bad weather’ argument was erroneous.

A non-weather metaphor explanation of the -1.0% GDP is: businesses overestimated households’ consumption recovery in the face of the latter’s continuing disposable income decline last year, a decline that has been occurring for five years now every year. Businesses overstocked inventory in late summer 2013 in anticipation of a holiday season retail sales surge that never occurred. They then responded by quickly reducing investment, both on inventory and business equipment. (This is a pattern, by the way, that has been evident at least three times in the US economy since 2009).

Simultaneous with the business inventory and equipment pull back, the global economy continued to slow over the winter, with particular problems emerging in China, Europe and Emerging Market economies. These negative factors were temporarily dampened by consumer spending on healthcare in the first quarter 2014, on the ACA sign ups in particular. However, other areas of consumer spending slowed, as did residential construction and state-local government spending.

Going into the second quarter 2014, the consumer factor is weakened; the US dollar is rising in value and thereby threatening exports further, and business inventory and equipment spending will continue to slow until it becomes more clear that consumers are really spending again. The latter is not likely, however, given continued real disposable income decline for average consumer households, now in its fifth consecutive year.
Meanwhile, and state-local government spending may be expected to continue to slow as well, continuing their trend of the first quarter, and no housing recovery is in sight after its slowing.

Without the ACA healthcare spending in the first quarter it is certain the -1.0% GDP decline would have been much greater. But that -1.0% was an overestimation for other reasons as well.

1st Quarter GDP Even Worse Than -1.0%

First, included in it is the overestimation of GDP growth due to the redefinition of GDP that occurred last summer 2013.

A number of progressive economists have been pointing out that real investment in equipment has been in a long run declining trend in the US for at least since 2000. That means a declining contribution of investment to GDP over the longer term. This decline was recently ‘upward adjusted’ in part by US government in 2013 by redefining what constitutes investment.

As described in a previous article (‘Economic Recovery by Statistical Manipulation’, Counterpunch, July 31, 2013), effective beginning last year (and retroactively to prior years) the US now counts as business investment certain categories of what were once considered business ‘expenses’ and not investment. In addition to counting expenses as investment, businesses can also now put an arbitrary price on the value of certain ‘intangibles’, like copyrights, trademarks, patents and other such items, and now consider them business investment as well. In this manner, business investment appears larger than it actually is, and the long term trend decline is offset to some extent. Every GDP estimate therefore now has, all things equal, a higher business investment contribution to GDP than before.

It was recently estimated by the business periodical, The Financial Times, March 12, 2014, that this redefinition adds about 3.6% to US GDP. On a $17 trillion US economy that amounts to about $600 billion a year. That’s not any actual new activity added to US growth, just an increase in growth by redefining it. Without this redefinition, the first quarter 2014 GDP decline of -1.0% would no doubt have experienced an even greater decline, to roughly around -1.3%.

Global Rush to Redefine GDP

The US changes in GDP represent just one of many such redefinitions designed to boost lagging GDP numbers in a number of countries in the past year. At one extreme is Nigeria’s recent redefinition, which effectively doubled its GDP to $510 billion annually overnight, making it the largest economy in Africa. China’s methods for estimating its GDP have for years been viewed with some doubt. Most economists consider that around 1 to 1.5% of China’s GDP represents an overestimation for various reasons of definition and data gathering difficulties. A number of other developing markets have similar problems with their GDP definitions.

Other redefinitions and changes have been occurring in the European Union, including east Europe, the Baltics, and even Austria. Most recently, however, are the economies of Italy and the United Kingdom, where economic recovery has been lagging for more than five years and where official double dip recessions and GDP growth rates of less than 1% have been the norm for most of the years.

As reported in the global Financial Times just last week, for example, both the UK and Italy are adding income from prostitution and from drug dealing to their GDP estimates. Britain estimates that prostitution services will add $17 billion to its GDP. That and other changes concerning drug dealing and other previously unaccounted for services will boost the UK GDP by 5%, according to the Financial Times of May 30, 2014.

Prostitution, Drug Dealing, and Future GDP Growth

Exactly how one would estimate the price of prostitution and gather the data on price and volume of activity for such critical services will no doubt prove interesting. Will UK statisticians go out and survey their 60,000 estimated prostitutes and drug dealers, as to how much they charge their ‘Johns’ and how much the dealers are ‘marking up’ their smuggled shipments of cocaine and heroin into the UK from offshore? Not likely. What they’ll probably do is simply ‘throw a statistical dart’ at the wall and cherry pick a price and volume of activity that suits them.

But that’s not all that different from a good many methods now for estimating GDP. For example, a good part of the Rent component in US GDP involves the assumption that homeowners pay themselves rent, which is then rolled up into GDP estimates. Another assumes that quality improvements in smartphones are going up so fast that prices are actually going down. You didn’t actually pay $800 for that iphone 5, in other words. Despite the charge on your credit card, it was really much less. And change your business logo, says it’s worth whatever you think, add it to your investment costs, and get a government investment tax credit for it while you’re at it.

Going forward, in the case of the UK and its newly accounted for prostitution drug dealing services, there will be the additional question of estimating how much the ‘prices’ for these services have actually risen every year in order to adjust to real GDP. Perhaps the bureaucrats will do a survey phone call instead of a direct interview? For certain the drug dealers will be glad to speak to a government official. Then there’s also the problem of quality changes affecting price for a prostitute’s ‘trick’ or a drug dealer’s ‘bag’ of goods. What constitutes a quality change, and therefore a reduction in inflation and subsequently a rise in real GDP? No doubt some bureaucrat in charge will simply ‘guestimate’ price, quality, and amount of activity to get to a real number to plug into UK GDP growth.

One can only speculate how much recently lost economic growth might be restored to the US economy, should the US in turn copy the UK by including prostitution and drug dealing. No doubt hundreds of billions, perhaps a trillion, might be added to US GDP growth estimates. That’s even greater than including research & development expenses as ‘investment’. The possibilities for further growth are limitless. The US could restructure college education curricula to reflect these new occupational opportunities of the future. After all, ‘contingent’ labor is the new dominant labor market trend in the US. Adding curricula for these new GDP services couldn’t be any more obscene than training students for finance and how to create new forms of financial securities that end up in bankrupting cities and school districts, and destroying grandma’s 401k.

The US economy has been rapidly replacing real jobs in goods producing industries with service jobs for decades now. Only 12% of the economy now comprises goods production and less than 8% construction. Service jobs have been replacing higher paid goods producing jobs for decades, followed in recent y ears by even lower paying service jobs replacing service jobs, as part time & temp service jobs with no benefits are becoming the new norm. At least prostitution and drug dealing pay well, one can set one’s own hours of work, and there’s enough income left maybe even to buy an Obama’s health insurance plan.

Jack Rasmus is the author of the book, ‘Obama’s Economy: Recovery for the Few’, Pluto Press, 2012, and ‘Epic Recession: Prelude to Global Depression, Pluto, 2010. He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network. His blog is jackrasmus.com, his website http://www.kyklosproductions.com, and twitter handle @drjackrasmus.

PLEASE NOTE: THE CORRECTED LINK TO THIS INTERVIEW BELOW:

As USA data will soon show a third economic ‘relapse’ since 2011, in the form of negative GDP growth for the 1st quarter of 2014, Europe’s economy continues even more fragile, according to Dr. Rasmus in the interview. Listen to his assessment of why Europe is even weaker than the USA economy today and will continue to remain so. Access the Russia Radio interview of May 27, 2014 at:

The Corrected Link for this interview is:

http://voiceofrussia.com/us/2014_05_28/Big-Bailout-Absence-Left-Europe-in-Chronic-Recession-Analyst-0992/

Alternative Visions Radio Show
May 24th, 2014

By Dr. Jack Rasmus

Jack Rasmus explains how Europe’s ‘stop-go’ recovery and its version of an ‘Epic recession’ (i.e. short, shallow recoveries followed by economic relapses and double dip recessions) is proving worse than the USA’s experience with ‘stop-go’ recovery since 2009. While the USA’s economy has slowed to zero or less on three different occasions since 2009 (in 2011, 2012, and now 2014), Europe’s economy experienced an even worse bona fide double dip recession, even weaker recoveries between, and now appears headed to another slowdown after only a year of a paltry 0.2% GDP growth.

As Depression conditions continue in Southern Europe and the Euro periphery economies, Northern Europe economies (France, Netherlands, Finland, etc.) are also beginning to experience declining real investment, falling exports, and slowing household consumption as well. Meanwhile, governments continue ‘austerity’ policies, struggle with a continuing fragile banking system and government debt, and continue to ‘talk down’ the crisis. Jack explains the role of European Central Bank monetary policies in Europe behind Europe’s current drift toward deflation and economic stagnation, which are the ultimate source of its continuing fiscal austerity policies.

The role of emerging markets’ capital flows to Europe, western global investors and shadow banks chasing risky corporate junk bond ‘yield’ and Eurozone periphery government bonds as key elements to today’s emerging ‘3rd phase’ of the crisis. Jack also explains the effects of changing China and Japan policies on Europe, the Ukraine crisis effect on Europe, and why the drift toward deflation Eurozone-wide will continue.

Dr. Rasmus concludes with an explanation of why the United Kingdom is experiencing an artificial recovery based on an induced property bubble in London and south England, with Cameron policies echoing George Bush-Alan Greenspan USA policies of 2002-03, in both cases (US and UK) representing a desperate attempt to engineer a short term unstable recovery before an upcoming national election that will inevitably collapse afterward with serious economic consequences.’

Listen to the 56 min. radio show at either of the following urls:

http://www.alternativevisions.podbean.com

http://prn.fm/alternative-visions-europes-continuing-epic-recession-052414/