Despite all the talk about a “strong economy,” nobody was expecting a blistering hot GDP for the first quarter. The consensus was for around a 1% gain. As it turned out, it was even worse than expected. GDP shrank in Q1, contracting by 1.4%.
Despite the awful number, the mainstream spun it as a positive. Peter Schiff called it an outrageous positive spin on negative GDP and a great example of Orwellian doublespeak.
A New York Times headline proclaimed, “GDP Report Shows US Economy Shrank Maskin a Broader Recovery”
Basically, the NYT and others in the mainstream media are claiming the economy is really strong. You just can’t see that strength because it’s hidden behind this weak economy. Peter wondered out loud what in the hell they are talking about.
The first point to consider is that of negative GDP in one quarter means we’re halfway to a recession. A recession is defined as two consecutive quarters of contracting GDP.
Jerome Powell and the other central bankers at the Federal Reserve have hung their hats on the fact that the US has a super-strong economy. They claim the economy is strong enough to handle rate hikes and quantitative tightening without spinning into a deep recession. Peter asks the operative question.
If the economy is so strong, why is it contracting? How is a -1.4% GDP a strong economy?”
Peter said he can’t remember a time when the Fed hiked rates after a negative GDP quarter. Normally, a quarter like Q1 would have the Fed considering rate cuts in order to preemptively prevent a recession.
If we already have one negative quarter, and that’s with interest rates at 25 basis points, if the Fed really ratchets up interest rates in Q2, well, doesn’t it stand to reason that GDP in the second quarter will be even lower than GDP in the first quarter when the economy is going to have to contend with much higher interest rates? Of course! So, you would have to say the odds favor a recession.”
Normally when the Fed starts hiking rates, the economy is strong. You’re getting big GDP prints. When the economy is hot, the central bank typically tries to cool it off in order to head off inflation before it gets started.
Well, we don’t have a blazing hot economy. We really have an ice-cold economy. Just look at the GDP. Yet the Fed is just starting to raise rates anyway because we have inflation — not in a strong economy. We have inflation in a weak economy. We have stagflation.”
Peter said the Fed’s credibility is in a very precarious position. It’s pretty much ignoring this negative GDP print, claiming the economy is still strong.
What happens when we end up in a recession? What happens to the Fed’s credibility? Because, after all, they’ve got everything wrong. First, they said there’s no inflation. Then they said inflation is transitory. Then they admit they got that wrong. And now they see this negative GDP number, and basically, they say that’s transitory too.”
If Powell and Company were honest, they would say, “We’re going to hike rates to fight inflation and that’s going to cause a recession.” But they don’t want to admit that. They want to have it both ways. They want everybody to think they can put out the inflation fire without starting a fire in the economy.
One of the factors pulling GDP down was the massive trade deficit. The March trade deficit in goods came in way above expectations and shattered the old record. And yet the dollar remains strong. Normally, a massive trade deficit would result in the dollar getting punished. But the US enjoys the privilege of issuing the world reserve currency. America imports goods and exports dollars.
Dollars are America’s greatest export. Except they’re worthless. We just print them. We create them out of thin air. They have no value. The stuff that we’re getting has real value. You need factories, machines, workers, land — all sorts of materials go into the production of finished goods that Americans are importing. And what are we giving our trading partners? Digits that we create out of thin air. Why do they do that? Beats the hell out of me. What is the world doing with all these dollars? What are they going to do with $125.3 billion they just earned?”
The more dollars the world has, the less they are worth. At some point, it has to collapse. At this point, the dollar is benefitting from being the cleanest dirty shirt in the laundry. There are problems in Japan and Europe. At some point, this bubble will pop.
But the mainstream spins big trade deficits as a sign of a strong economy. They reason that the voracious appetite for imports shows Americans have plenty of money to spend. Peter called this nonsense.
Strong economies produce stuff. They don’t simply consume stuff. If we really had a strong economy, we wouldn’t just be buying stuff. We would be making the stuff we’re buying. In fact, we would be making so much stuff that we’d have extra, and we’d be able to sell it to other people whose economies aren’t strong enough to make what we could make, and we would have a trade surplus.”
Peter called this “George Orwell doublespeak.”
This is everybody trying to convince the public that something bad is actually good.”
And that brings us back to the GDP report.
The mainstream spin is the economy is strong except for the pesky trade deficit. Trade deficits subtract from GDP. A record trade deficit means a record subtraction from GDP. But in the mainstream view, Americans are spending, spending, spending, and this signals economic strength. But Peter said you can’t just pretend that the trade deficit doesn’t exist. GDP measures the output of the domestic economy. That’s what the D stands for.
If you’re buying stuff that was made abroad, well, you’re not measuring the domestic economy. You’re measuring the foreign economy. We’re not supposed to be picking up the Japanese economy, or the Chinese economy, or the Korean economy, or any of these other economies. We’re focusing on the US economy. So, if we have a trade deficit, we have to minus that out.”
Ignoring the trade deficit destroys the whole concept of GDP.
You can’t take out the trade deficit and say, ‘This is a great economy. We have a broad-based recovery.’ We have a bubble. That’s what the trade deficit is showing. This isn’t real economic strength. This is a massive bubble. And when Powell is saying we have this great economy so we can raise rates, we have a lousy economy. The trade deficit proves it.”
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