No one likes to be manipulated. But for years we have experienced a manipulated calculation of economic yard sticks like Gross Domestic Product (GDP). You may remember about three years ago when we changed the way we calculated GDP—adding things to GDP that were not originally included and, from my viewpoint, should not be included.
Rather than addressing the lack of growth, we have changed the way we calculate growth. Instead of trying to solve the problem, we have manipulated numbers to paint a better picture of the economy. Changes made over the past 10 years have been designed to make things look better than they really are. We must look at the underlying fundamentals and stop worrying about a different way to calculate.
Is there a magical fix? A Brussels think tank for the Center for European Political Studies is now questioning the way Central Bankers of major economies are calculating GDP inflation, or the lack thereof. They say the calculations lead to misleading results. (Similar calculations are used for other economy indicators.)
This think tank believes Central Bankers don’t need to ramp up their accommodating policies any further. The report renders the opinion that negative interest rates are in place for the foreseeable future. It recommends calculating GDP on a GDP deflator that measures the difference between nominal and real GDP. (Nominal GDP considers Growth in Dollars year to year, before inflation. So if nominal GDP has grown 5 percent and the inflation rate is 2 percent, the real GDP growth is 3 percent. This would be the GDP deflator). Not a bad idea but let’s not forget that the health of GDP will depend on understanding what a good GDP growth is when considering population growth.
The Consumer Price Index (CPI) captures many changes related to production and, more importantly, income differences. The think tank study argues that because of the high debt environment, the GDP deflator would be a better guideline for making Central Bank policy and would not depend totally on growth of revenues. This is a good thing because I, for one, am sick and tired of seeing revenues go up while store sales and consumer spending continue to go down—again, no correlation between CPI, factory orders, productivity and wages to nominal GDP.
According to the think tank, the GDP deflator method in Euro nations signifies a 1.2 percent inflation rate, which indicates their accommodative negative interest rates are not warranted at this time. Another good thing. The accommodative environment under which Central Banks are operating is not warranted because it continues to postpone letting the chips falling where they may. It creates an ongoing environment of postponing problems while assuming that, anytime now, consumer spending will pick up dramatically—even when wages are going nowhere and the fear in these economies continues to grow out of control.
This method may take away some wiggle room to manipulate numbers. This is not good for Central Banks and governments that need to do some creative calculating.
We must return to an environment where strong countries, strong currencies, strong economies and strong companies survive and thrive as long as they are making good, solid economic decisions that are the best for the economic environment of their country or their company. Instead, governments continue to intervene with their misguided attempts to fix any little hiccup in the market—allowing companies to survive while mismanaging and miscalculating the economic environment in which they live. Things are likely to continue worsening as long as we continue creating moral hazards and a false sense of safety.
Lowering and raising the bar should be done only by the underlying fundamentals of an economy. For an export nation, this should be good strong exports based on good strong demand. For consumer-driven nations like America, it is based on tightening labor markets, rising wages and consumer spending.
It’s time to stop camouflaging the real problems and start addressing them.