Most people noticed when the bureau of economic analysis released GDP growth numbers for Q4’10 of 3.2%. What most people have not noticed is a rise in the level of national affluence. There appears to be a disconnect that is growing between the numbers that are released by the government and what people are seeing with their own eyes. The most obvious of these problems is the fact that unemployment remains persistently above 9% with underemployment over 16%. Strangely, none of the growth that is consistently communicated to the street seems to be making any kind of significant difference in driving employment.
One of the ways that the numbers reported by the government deceive people is by blending economic activity that is driven by the government with economic activity that is driven through the private sector. The way that we prefer to measure ‘real’ economic affluence is through private sector output per capita. The way that we prefer to measure private sector output is to subtract total government spending from reported GDP and then deflate the number by the CPI-U and divide by the total US population from the census bureau. This tells us how much “real” output is being produced per person in terms of purchasing power.
When this trend is charted out, it becomes quite clear that the private sector out per capita is still considerably below the peak in Q4’06. (12.4% below the peak to be exact) What this means is that the “recovery” is being driven by government spending and borrowed (or printed) money. The fundamental recovery is progressing extremely slowly and is not even remotely close to pre-recession levels.
The problem that created by this phenomenon is one where resources are being extracted from the private sector through taxation, borrowing in capital markets that displaces private sector investment capital, and monetary expansion that erodes the purchasing power of dollars already in circulation. The fundamental issue with this cycle of raiding the private sector to finance the government is that spending is that the political process allocates resources very poorly. The funds from government spending frequently go to the pet causes of powerful politicians, instead of the purposes that will generate the highest amount of total output. Thus, every successive shift of resources from the private to public sector results in less economic efficiency.
If the desired purpose of all these actions is a more powerful government and the ability of political figures to reward their supporters, then this cycle of stimulus is a perfect ruse. If the desired purpose is to drive a fundamental economic recovery, then the only thing we should expect is a continued downward vortex of eroding economic efficiency. In order to achieve success against this headwind of burdensome government, it requires that investors think outside of the box to ride trends that are being driven by public policy. The most prominent of these trends is likely to be inflation resulting from monetary expansion to meet nominal financial obligations. People who own real assets such as income property that is financed with fixed-rate debt will benefit from this coming inflation as the value and rent income of their property increases while the mortgage payments hold flat.
Action Item: Immediately take action to acquire prudent income property assets so that the trend of government expansion will not destroy your financial future. Hold to this strategy until a fundamental recovery resumes that is driven by increased private sector output. (Top image: Flickr | Michael Fleshman)
The Jason Hartman Team
