We got the revised GDP numbers for the 1st quarter this past week which showed the economy contracted at a 1% pace. This was revised down from .01% originally reported.
For those who don’t know how “GDP” is calculated I would like to explain it in the most basic of terms. The final GDP “growth” number is calculated by taking total “production” for the quarter and comparing it to either the quarter before or the same quarter the year before and adjusting it for “inflation.” For example, if the total economy was an arbitrary number of “100” last quarter and produced “101” this quarter then the nominal growth was 4% (1%X 4 quarters= 4%). But before coming up with a real and inflation adjusted number, the inflation rate must be taken into account. If inflation is running at 3% then the “real” growth rate is cut to just 1%. Yes I know this is oversimplified and does not take into account things like foreign trade etc. but follow along.
The last quarter showed an actual decrease in real production for the first time since 2011. As you know, I have questioned this GDP number many times before, particularly because of the inflation factor used (amongst other things). The lower the inflation number that discounts growth that is used…the higher the growth number…and here is the rub. If the number used is false then so is the growth rate number. The way I see it, our economy is at best treading water, then, after subtracting a true inflation rate we are in actual decline and have been for a majority of the time since the initial bounce in 2009-2010. The bottom line to the real GDP number is defined by what number you use and plug in for the inflation “assumption.”
With the above in mind, you obviously know that my thoughts are that the economy is far weaker than we are being told. We were also told that “QE” (quantitative easing) was necessary 4 or 5 years ago to get the economy moving again and to “save the system.” QE has been (allegedly) cut back $40 billion per month (to the current $45 billion) since last summer. The Fed needed to regain a morsel of credibility so they talked the economy up and “showed” their monetary “integrity” by beginning to taper.
You must ask a couple of questions here. First, this has totaled several trillions of $ (with a capital T) injected into the system, where would the economy have been without it? Would the system have imploded into a black hole of default without it? If the Fed began the “taper” because the economy became “self-sustaining” in their words, how will they respond to another “official recession?” They still pump $45 billion per month, is this amount not enough? Actually, does anyone even remember the days when “QE” was not necessary to sustain the economy or the financial system? What happened to that? What happened to an economy that could generate enough business to sustain itself without artificial life support?
You see, these two topics go hand in hand together. The Fed began to taper QE because the economy was “doing better” but now it isn’t anymore? I am going to tell you that we are very close to “reality” showing its ugly head because of a confluence of events. Inflation is now at the point that even the most ardent “ostrich” can no longer keep their head in the sand and believe the numbers. The number of unemployed and those receiving “benefits” can no longer be ignored. The Fed is going to have to soon reverse course and admit that more “adrenaline” (QE) is needed just to keep the patient alive.
This leads me to another topic that is also related, Belgium. “Belgium” is now an owner of some $450 billion worth of treasuries. They emerged as a big buyer since late last year and “coincidentally” (do you notice the sarcastic quotation marks?) they have accumulated almost exactly the amount of treasuries that the Fed supposedly “tapered.” Is this a coincidence? Belgium’s annual GDP is only $480 billion per year, are we to believe that they had an extra $400+ billion of capital laying around and they just decided out of the blue to buy U.S. Treasuries with it? Really? Do you wonder who the real buyer(s) is/are? The ECB? Bank of England? The Fed themselves? Who knows?
What we do know is that the Fed has been buying 70% of Treasury issuance … but why? Because no one else wanted them but the Treasury still had funding needs so the Fed acted in their true role of “lender of last resort.” This lender of last resort role was however supposed to be for a bank or the banks… not the Treasury itself. Good thing though because if it were not for the Fed we collectively would have already witnessed “reality.”
Let me tie these dots all up together for you if I may. The economy is admittedly weak, we know for a fact that it is in reality even weaker because inflation is running far higher than 2%. We also know that the Fed has “tapered” their monetization plan called QE and that “Belgium” has mysteriously (miraculously?) taken up the slacked amount of taper. We can now theorize that the Fed will be forced again to expand QE and that the total $85 billion per month is not enough adrenaline. …But wait, QE was supposed to be “short term” and an “unconventional tool” and yet it hasn’t seemed to work as planned. What happens if we get another quarter and another quarter of declining growth even with falsified inflation numbers to make it look better? Then what? A different plan? Different bullets? A different …bigger gun? Please remember that QE was (+Belgium now) over $1 trillion of extra “juice” per year, what is next? $2 trillion?
Folks, this will come to head in a very ugly manner. No country has ever “monetized” (printed) its way to prosperity. In fact, every country throughout all of history that tried this ended up losing their currency. This particular instance we are talking about the country that issues the reserve currency of the world and… in amounts and size that have NEVER, EVER been seen before. This has already been proven not to work many times before but the thought process is that they have not monetized “enough” I guess. And imagine this is the thought process coming out of Ivy League business schools! You must be prepared for yourself for what is coming because the brain trust has apparently short circuited!