Measuring Recession

Sep 18, 2019·Alasdair Macleod

Using nominal GDP, or GDP deflated by the CPI, as the principal guide to the state of the economy is a common mistake which will eventually prove very costly. Having convinced themselves that GDP measures economic progress, government statisticians have suppressed evidence of price inflation, giving the illusion of economic growth. Policy makers appear unaware that they are leeching ordinary people and their businesses of their wealth to the point where an economic and monetary collapse becomes inevitable. This article exposes how the authorities use GDP and the CPI to conceal the true deterioration of an economy.


When an economy turns from expansion to contraction there is an order of events. The first signs are an unexpected increase in inventories of unsold goods, both accompanied with and followed by business surveys indicating a general softening in demand. For monetarists, this is often confirmed by an inverting yield curve, which tells them that at the margin the short-term rates set by the central bank are becoming too high for business conditions.

That was the position for the US 10-year bond less the 2-year bond very briefly at the end of August, since when this measure, which is often taken to predict recessions, has turned mildly positive again. A generally negative sentiment, fuelled mainly by the escalating tariff war between America and China, had earlier alerted investors to an international trade slowdown, expected to undermine the American economy in due course along with all the others. It stands to reason that backward-looking statistics have yet to reflect the global slowdown on the US economy, which is still buoyed up by consumer credit. The German economy, which is driven by production rather than consumption is perhaps a better guide and is already in recession.

After an initial hit, a small recovery in investor sentiment is understandable, with the negative outlook perhaps having got ahead of itself. But we must look beyond that. History shows the combination of a peak in the credit cycle and tariffs can be economically lethal. A brief return to a positive yield curve achieves little more than a sucker rally. It may be enough to put further monetary expansion on pause. But when that is over, and jobs begin to be threatened, there can be no doubt that central banks will ramp up the printing presses.

So reliant have markets become on monetary expansion that the default assumption is that an economy will always be rescued from recession by an easing of monetary policy, and furthermore that monetary inflation will prevent it from being any more than mild and short. We see this in the performance of stockmarket indices, which reflect perpetual optimism.

There is a further problem. Other than a rise in bankruptcies, unemployment and negative indications from business surveys, there may be no statistical evidence of a slump. The reason this is almost certainly the case is we are dealing with a combination of funny money and statistics which are simply not fit for measuring anything. The money and credit are backed by nothing, and when expanded by the banking system simply dilutes the quantity of existing money, which if continued is bound to end up impoverishing everyone with cash balances and whose wages and profits do not increase at least as fast as the surge in the quantity of money.

Indeed, the official purpose of the expansion of money and credit is to somehow persuade economic actors that things are better than they really are, and to stimulate those animal spirits. You’d think that with this policy now being continually in operation that people would have become aware of the dilution fraud. But as Keynes, the architect of it all said, not one man in a million understands money, and in this he has been proved right.

For five years, the ECB has applied negative interest rates on commercial bank reserves, and commercial banks have paid €21.4bn to it in deposit interest. Since it introduced negative interest rates, it has injected some €2.7 trillion of base money into the Eurozone economy, increasing M1, the narrower measure of the money quantity, by 61%. Almost all of it has supported the finances of Eurozone governments.

The effect on broader money, which includes bank credit, has been to increase M3 by 30%. Far from stimulation, this is daylight robbery perpetrated on everyone’s liquidity and cash deposits. It is a tax on the purchasing power of their wages.

The ECB is not alone. Since Lehman went under, the major central banks have collectively increased their balance sheets from $7 trillion to $19.4 trillion, an increase of 177%. Most of this monetary expansion has been to buy government bonds, providing a money-fountain for profligate governments. The purpose of money-printing is always to finance government spending, not to stimulate or ease conditions for the private sector: while some trusting souls in the system believe it is for the latter, that amounts to just a myth.

Due to the flood of new money the yields on government debt have been depressed, giving holders of this debt, principally the banks, a nice fat capital profit. But that is not the purpose of all this monetary largess: it is to make it ultra-cheap for governments to borrow yet more and to encourage banks to expand credit in their governments’ favour. Just listen to the central bankers now encouraging governments to take the opportunity to ease fiscal policy, extend their debts and borrow even more.

Central banks pretend all these benefits come at no cost to anyone. Unfortunately, there is no such thing as a perpetual motion of money creation, and someone ultimately pays the price. But who pays for it all? Why, it is the wage-earner and saver and anyone else with deposits at the bank. They are also robbed of the compounding interest their pension funds would otherwise receive. These are the very people who, in a bizarre twist of macroeconomic logic, we are told benefit from having the prices of their everyday purchases continually increased.

Attempts to measure the supposed benefits of inflation on the general public are in turn dishonest, with the true rise in prices concealed in official calculations of price inflation. Suppressed evidence of rising prices is then applied to estimates of GDP to make them “real”. For the purpose of measuring the true condition of an economy these official statistics are taken as gospel by both the commentariat and investors.

We cannot know the accumulating economic cost of cycles of progressively greater monetary inflation, because all government statistics are based on the lie that money is a constant, when in fact it has become the greatest variable in everyone’s life. The transfer of wealth from all consumers through monetary debasement is an act of impoverishment, and to the extent it is not offset in other ways the economy as a whole suffers.

Gross domestic product is a deception

The inventor of national statistics, Simon Kuznets, was rightly cautious about taking gross national product (and therefore its successor, GDP) out of context. Their proper function is as a tool of government accounting, not to indicate economic progress. Progress cannot be measured and only emanates from the future demands of individuals, continually seeking new and improved products.

As a tool of government accounting, GDP attempts to measure the total value of final transactions in an economy. Say’s law, which simply states the principles of the division of labour, tells us that we earn money in order to buy the things we don’t make for ourselves. In order to facilitate the turning of our production into consumption, we use the medium of money. Money is the temporary storage of our labour between production and spending. Therefore, assuming for the moment there is no extra money being injected into the economy and no change in our savings habits, GDP is no more than the total of everyone’s earnings and profits.

This is obviously a simplified assertion, but trimmed of all other factors, it should be clear that with a constant quantity of money and credit GDP itself will be constant. It will neither increase nor decrease.

Correcting GDP by monetary inflation

Now let us assume there is an expansion of the quantity of money and credit. This can only become an addition to everyone’s earnings and profits, some of which will be reflected in rising prices and some in a deficit on the balance of trade. Nominal GDP cannot tell us anything about the loss of purchasing power of the currency, but we should correct GDP by the increase in money and credit to get a valid adjustment. But GDP includes exports, but not imports, so we need to capture the excess of imports over exports as well. This is because monetary expansion “escapes” to result in a deficit on the balance of trade, assuming there is no matching increase in the general level of consumer savings. America’s GDP adjusted for the increase of money and credit and the effect on the trade balance is shown in Chart 1, taken since the Lehman crisis when the current cycle of monetary expansion began.


While nominal GDP increased from $14,353bn in the first quarter of 2009 to $21,339 in the first quarter of 2019, adjusted for the expansion of broad money and the growing deficit on the balance of trade, it increased by only $642bn, a relatively small increase that can be easily explained by other variables, such as changes in flows between financial assets and non-financials, as well as between other categories included in the GDP compilation and those that are not. It was also close to the level of adjusted GDP in 2010, so has gone nowhere.

The lesson we learn from this is that all the money-printing and expansion of bank credit does virtually nothing to improve the economy. It is like flogging a dead horse that just won’t get up. Furthermore, if the Fed reintroduced massive QE for the next ten years, it would not engender any economic recovery whatsoever.

We have now established that issuing extra money and credit does nothing more than inflate the GDP statistic. The consensus today among both bulls and bears is that the pace of monetary expansion is about to accelerate again, confirmed by policy makers themselves. Therefore, nominal GDP will continue to increase, even in the teeth of an economic downturn. It will allow policy makers to claim they have rescued their economy from recession, or even from a prospective slump. The problem is then how to suppress the evidence of rising prices, the natural consequence of an increase in the quantity of money and credit that does not escape into net imports. It is necessary to give the appearance of economic growth.

Government statisticians have made significant progress in this direction. Independent analysis in the US by both and the Chapwood index suggests that prices are rising by approximately ten per cent per annum, not the 2% claimed by the government. It should be noted that in common with many other governments, the US Government faces some of its costs being indexed, so already has good reason to suppress evidence of rising prices, which they have been doing progressively since the 1980s.[i]

The fact of the matter is that changes in the general level of prices cannot be measured, and no one religiously buys the components of the consumer price index in the proportions allocated. Nor does anyone pay a hedonically adjusted price. This gives government statisticians with all their tools of statistical manipulation the ability to calculate whatever goal-sought result they want. The cumulative effect of this deception should not be underestimated, as Chart 2 illustrates.


Chart 2 shows end-year GDP between 2010 and 2018 deflated by the consumer price index for all items (US, city average, all urban consumers - the blue line). The end value of GDP adjusts from $20,898bn down to $18,231 in 2010 dollars, giving an average annual real growth rate of 1.71%. The red line is the end-year GDP adjusted by the Chapwood Index.[ii] The values taken are average annual inflation rates for all fifty cities included in the index, which are in turn comprised of the top 500 items on which Americans spend their after tax dollars. The average inflation rate of all these cities between 2010 and 2018 is exactly 10% and gives a final value for adjusted GDP in end-2010 dollars of $8,996bn. This is a drop in GDP values of 41%.

Besides showing that you can prove anything with statistics, the serious point is that by undermining the purchasing power of the dollar, monetary inflation has surreptitiously impoverished the American nation, something we also know from the wealth transfer effect of currency debasement. Clearly, the monetary authorities have pulled off an extraordinary trick: they have managed to transfer wealth from ordinary people and still be able to claim everyone is better off. Doubtless, they will not only continue with this monetary policy, but are about to accelerate it. Consequently, financial markets, being divorced from economic reality, will continue to believe everything is hunky-dory while the productive capacity of the economy continues to crumble – until they don’t.

It is a situation that one day will surely be corrected by a big adjustment; a sudden realisation of what’s actually happening. It can only lead to a crunch involving financial assets and fiat currencies, the apportionment between the two yet to be revealed. It is the stuff of the next credit crisis, which is bound to be crippling for the banks, a recurrence meant to be prevented following Lehman.

The authorities set up the G20 to coordinate plans to stop another banking crisis, but all they came up with was bail-ins to replace bailouts, and stress testing to identify banks in need of more capital. Both will not prevent another crisis, because they fail to address the cause. The forces behind a new financial calamity, driven by markets adjusting from extreme wishful thinking to reality, will only be appeased by a tsunami of new money.

The surprise is likely to be all the greater because adherents to the false science of macroeconomics, which includes the central bank establishment almost to a man, will find they have been misled by their maths, their statistics, and their charts. Instead of basing their approach on a proper understanding of the theory of money and credit, central banks and the economists in government treasury departments continue to worship their false gods. Because a banking crisis was averted in 2008/09 by nationalising or rescuing banks and other financial providers, it is believed the expansion of money and credit involved will work next time. The quantity required is whatever it takes to return order to the financial system.

All this extra money will ensure GDP will appear to grow, so long as evidence of price inflation remains suppressed. For believers in macroeconomics it will be proof the state theory of money works. It is pure deception.

Unfortunately, what is unseen is an acceleration in the rate of impoverishment faced by the wider population, that can only end in a collapse of the system. If you don’t believe it, talk to an Argentinian, a Venezuelan, or brush up your Shona and talk to a Zimbabwean.


[i] See for a fuller explanation:

[ii] See

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