Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Friday, October 14, 2011

How government spending impoverished us all

A few weeks ago we discussed the growth of the "virtual" economy. The argument was that metal consumption (in particular copper and zinc) grew in accordance with global GDP until the mid '70's, after which metal consumption grew markedly more slowly than did global GDP. Our thesis was that global GDP (the "official" economy) has at least partially increased by management of perceptions and addition of a lot of economic "activity" which does not increase wealth.

It has troubled me in the past that I could file lawsuits against present and past associates, who in turn might file suits against me. In the very best scenario all that would happen is a redistribution of existing wealth, yet all the legal fees would be additive to GDP. Yet no wealth would be created (except from the lawyers' perspective) and a great deal would be lost. It has always seemed to me that economic activity of this type forms a component of GDP the magnitude of which is unknown.

A reader questioned whether the reduction in growth of consumption of these metals could be due to their replacement by less expensive alternatives. Although I believe that there may be a slight effect, as seen in relative increases in aluminum and stainless steel--I discount most of this because copper, for many of its applications, is very difficult to replace. It is why the price of Dr. Copper is thought to be such a good leading indicator for the economy.

Today we add nickel and steel to our graph, but instead of plotting them against GDP, we plot the ratio of their consumption to global GDP (all scaled to 1 at far left, in 1949).

What we are actually looking at is the relative growth in the amount of metal consumed in comparison to the growth of GDP. If the curve is level, then metal consumption is growing (or shrinking) at the same rate as global GDP. If the curve rises towards the right, then metal consumption is growing faster than global GDP. If the curve descends towards the right, then metal consumption is growing more slowly (or shrinking faster) than GDP.

We see clearly that the consumption of metals has not kept pace with GDP, with most of the relative decline happening after 1975.

At the World Complex, I view metal consumption as being a better indicator of economic activity than the officially reported GDP. Perhaps I should say I trust the metal consumption numbers more, as I suspect they are harder to fake. In any case, metal consumption usually involves making something, which is frequently accretive to wealth (except in the case of bombs, et al.).

The decline in metal consumption is a direct measure of the decline of real wealth. Yes, real wealth is not dollars, it is oil; it is copper; it steel. As long as the per capita availability of these resources is increasing, our wealth is increasing. I have argued in the past that the suppression management of commodity prices is largely responsible for comparatively recent declines in their per capita availability.

Has the definition of GDP changed over the last fifty years? According to wiki, it is defined as follows:

GDP = C + I + G + (X - M)

where C is private consumption, I is gross investment, G is government spending, X is exports, and M is imports. There hasn't been any change in the definition over the past sixty years. But here is something that has changed.

US Federal spending compared to GDP. The magnitude of spending really takes off after about 1970.

Now this is true for the US, but probably mirrored to some extent in other countries as well.

The problem is not a change in the way the GDP is defined--the problem is in the definition of GDP itself. If we want GDP to be a measure of wealth then we need to remove that G term--or part of it.

A tonne of copper can't be consumed until it is produced. But the government can spend money that it doesn't have. So government spending can't be part of what was produced by a country unless it has been covered by taxation--then at least the wealth was produced prior to consumption. If the spending is empowered by debt creation, then no production was involved.

It's like measuring the wealth of a family by counting the money they spend, with no regard as to whether they are piling up credit card debt.

The miscalculation of GDP is useful to TPTB because it creates an illusion that we are wealthier than we really are. Ph.D. economists can't perceive this truth if they want to keep their funding.

Perhaps in addition to occupying Wall Street, protesters should give some thought to occupying the White House, Congress, and the Senate.


  1. So true... There's so much to say about "economic numbers". Those have been around for so long, nobody even dare to question what they mean. Though, when you scratch the surface, most of them are simply utter nonsense...
    Thanks for scratching the surface!

  2. Excellent description of how Govt spending is skewing or perverting the GDP metric. But I am not clear as to how that actually "impoverished us all" as implied by the headline.

  3. Interesting read. Do you think it is possible that any form of intangible "production" of wealth (i.e. the information economy) is responsible for some of the lack of keeping pace of metal consumption vs. reported GDP? Or do you think that all wealth must necessarily be tangible? I don't have a considered opinion on that one way or another, but here are some more thoughts on the inaccuracy and unsustainability of GDP as calculated and conceptualized: Financialization = Doom

  4. To Anonymous: You are right--I changed my thesis as I got near the end of the story, and should have changed the title accordingly. I had first thought that it was government spending entirely that was the problem.

    To PJ Vandal--the question of intangible wealth is too complex for a poor geologist to solve. Admittedly, because of my profession, I may be biased towards tangible production. I have always felt that wealth creation always involved producing or improving some material thing.

    The creation of intangible wealth through financial wizardry is trickier because there isn't really any market-clearing mechanism. We don't get any meaningful auctions in fees when converting dollars to Ghanaian cedis, for instance. Banking has gotten away from its initial role of aiding capital formation (helping business) to one of taxing any economic activity in the system. These "taxes" are GDP-positive, as they are considered services.

    For this reason I have thought that GDP is likely greatly overstated.

    Wealth as a stored entity, I think, has to be tangible. But it might not be metals--years ago, when I lived in Newfoundland, my landlady's basement was filled with ten-gallon pails of salted moose meat, with a little caribou, seal flipper, and salt cod for variety. And she had shelves full of jars of various fruit and vegetable preserves.