Real GDP Doesn’t Begin To Tell Inflation’s Story

Real GDP Doesn’t Begin To Tell Inflation’s Story

I mentioned to a friend last night that I expect 1% Real GDP growth once we normalize after this recovery that will last at least for the next several years. However, the traditional “Real GDP” calculation understates inflation due to its narrow definition of inflation – the CPI.

The Bureau of Economic Analysis does not factor in the asset inflation that has occurred in the capital markets, the housing market and elsewhere as a result of:

  1. Near-zero interest rate policy;
  2. Loose lending standards;
  3. The recent fiscal stimulus package and other fiscal programs;
  4. Monetary policy that is hell-bent on printing to subsidize fiscal programs and to maintain low interest rates.

These debt-funded programs created the asset inflation we mentioned above. This asset inflation is an implicit tax on everyone living in the United States.

The fastest and most politically expedient way to pull Real GDP growth out of the muck and the mire? Allow interest rates to float upward after the general election. Doing so will prick the equity market bubble, the corporate debt bubble, the government agency debt bubble, the personal debt and housing bubbles while simultaneously rewarding savers, attracting outside capital and strengthening the U.S. Dollar.

The corporate debt bubble concerns me most. It acts as a wet blanket to long-term innovation and instead provides an incentive for companies to pursue ultra short-term interests.

Real GDP (source: FRED). Click to expand or download.