July 8, 2014

Press Lionizes Buffett, Ignores Near Reappearance of Recession Under His Definition

The press loves billionaire Warren Buffett, who can be relied to support President Barack Obama even in implausible circumstances — such as the current economy, where the “recovery” following the 2008-2009 traditionally defined recession has been worse than any since World War II, and barely better than what was seen during the awful post-Depression 1930s.

Thus far, the press has managed to ignore one of the implications of the first quarter’s serious contraction. One more quarter of economic contraction could mean that the end of the recession, as Buffett himself has defined it, failed to permanently arrive.

In September 2010, a year after the recession’s official end, Buffett told CNBC what his benchmark for the end of the recession would be:

I think we’re in a recession until real per capita GDP gets back up to where it was before. That is not the way the National Bureau of Economic Research measures it. But I will tell you that to any, on any common sense definition, the average American is below where he was before, or his family, in terms of real income, GDP. We’re still in a recession. And, and we’re not gonna be out of it for awhile, but we will get out of it.

Thanks to the historically weak recovery, the economy did not get out of recession under Buffett’s “common sense” definition until the second quarter of last year. Growth during last year’s third and fourth quarters created a bit of daylight, but the first quarter’s contraction caused almost two-thirds of what had been gained to be lost:

PerCapitaGDP4Q07to1Q14asOf070814

Per capita GDP in the first quarter was only 0.5 percent above the pre-recession peak seen in the fourth quarter of 2007.

My calculations incidate that an annualized contraction of 1.6 percent or greater in the second quarter would take the nation back into the Warren Buffett-defined recession. That doesn’t seem likely — but then again, the first quarter’s 2.9 percent annualized contraction didn’t seem likely in early January.

Perhaps Buffett’s fixation on per capita GDP partially explains his obsession with funding abortions. If there are fewer people, per capita GDP will be higher.

Of course, that doesn’t answer the question of who would produce all of the goods and services that make up GDP. But leftists, even those who are good at thinking things through in their own business and investments, aren’t particularly good at global thinking — at least morally-based global thinking.

Cross-posted at NewsBusters.org.

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7 Comments

  1. GDP figures are no longer a valid metric. First, the under reporting of inflation has allowed Obama and his cronies to count inflation as economic growth, which it isn’t.

    Second, the money printed by Quantitative Easing Infinity – roughly $1 Trillion per year goes right into GDP figures. Currently world bank estimates US GDP @ $16,800,000,000,000 for 2013. $1 Trillion is 5.95% of GDP. If you remove both of the amount of inflation counted as growth and the money printed that goes to GDP we have been losing 5 – 6% GDP per year under Obama and his Jackass cronies.

    Its not a recession, its been a 6 year long depression which is only hidden by printing and borrowing to mask the damage with transfer payments.

    O.V.

    Comment by Opinonated Vogon — July 9, 2014 @ 1:01 pm

  2. #1, thanks for your comment.

    QEI is definitely horribly dangerous and likely eventually fatal to the economic order, but all I think it has done so far is artificially ratchet up stock values and set the stage for potential hyperinflation.

    I don’t think there has been a 20%-25% contraction in GDP (the rough result of 5-6 percent per year for 4-5 years) as your statement would imply.

    I think the problem with GDP has ALWAYS BEEN that it’s backs into “output” by looking at spending and adjusting for inventory changes. Wasteful spending, especially by govt., gets equally treated with legitimate spending. It wouldn’t be easy, but it seems that there should be a way to get to the value added of what is actually produced.

    Comment by Tom — July 9, 2014 @ 1:37 pm

  3. Tom,

    I’m not alone in my view:

    http://www.zerohedge.com/news/2014-06-09/how-much-us-economic-growth-due-exclusively-federal-reserve

    while GDP as presented for public consumption has risen to a record nominal high of $17.1 trillion (humiliating Q1 GDP collapse notwithstanding), if one were to exclude Fed reserves on bank balance sheets, and adjusted the resulting GDP impact, it means the US economy has grown by a paltry $900 billion since the third quarter of 2008, and it also means that realistically, instead of $17.1 trillion, US growth output is somewhere in the ~$14.5 trillion neighborhood. Said otherwise, snow may have “crushed” the world’s biggest economy by 1% in Q1, but in the last 6 years, the Fed has goosed its 20% higher than it otherwise would be.

    and also:

    http://beforeitsnews.com/economy/2014/05/the-market-ticker-the-monetary-policy-dilemma-2619746.html

    Since GDP is stated in “M” to get an accurate account of GDP you must subtract back off any permanent change in “M” from GDP.

    QE, on a rolling 12 month basis, is about $1 trillion. The US Economy is about $17 trillion. Therefore you must subtract the amount of QE added back out, which is about 5.9% of the total economy!

    In other words with the current GDP “growth” of effectively zero (0.1%) the economy is in fact in deep recession as the actual “growth rate” is currently -5.8%.

    This is caused by QE.

    ============

    Denninger’s original post is no longer available, but please look it over at the URL I linked, as he covers the reasons why QE is added directly to GDP and buttresses my original comment.

    Cheers,

    O.V.

    Comment by Opinonated Vogon — July 9, 2014 @ 3:29 pm

  4. #2, So would the GNP calculation do a better job than GDP? We switched to GDP because the Europeans were using it, of course the BEA would disagree on that characterization.

    Here is a link that describes the difference: http://www.diffen.com/difference/GDP_vs_GNP

    Formula for Calculation GDP = consumption + investment + (government spending) + (exports − imports).

    GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) – NP (Net payment outflow to foreign assets).

    From this we see GNP includes the profits of multinationals in and out of the country, basically it incorporates the so called Trade Balance.

    IMO, the GDP’s central fallacy is counting government spending as a plus since this allows the inclusion of deficit spending as a net positive contribution when it is in fact NOT. The misallocation of borrowed money from the private sector for public debt and confiscated money via taxation to run government is basically a theft of investment capital/seed money for future economic growth in the private sector. All government funding comes from taking it from the private sector with the exception of the Federal Reserve emailing ones and zeros to the banks (inflationary and devalues the currency). At best it should be a footnote and not included at all.

    Comment by dscott — July 9, 2014 @ 4:25 pm

  5. #1, I believe you are double counting, QE dumps (worthless) money into the economy and the government uses that fictional money to buy things. Inflation is the result of adding the fictional money to the existing total because the pie hasn’t been increased but re-denominated fractionally with smaller units. i.e. a pie cut into eight slices is the same size as a piece cut into 10 slices. But we get your point, politicians and bureaucrats want you to believe there is more for everyone (GDP growth) when in fact they sliced the pie finer. They call that Redistribution of Wealth.

    Comment by dscott — July 9, 2014 @ 4:31 pm

  6. The whole problem is that we look at cash registers and other payments made instead of tru value added. That’s as much a problem with GNP as GDP.

    I don’t have an answer, esp b/c value added is probably subject to a lot of judgments which we can’t trust govt. to make.

    Comment by Tom — July 9, 2014 @ 5:58 pm

  7. I think the whole premise is flawed.

    A dollar of QE doesn’t get added to GDP. It “helps” us add to our debt without having to go to the trouble of getting someone else to lend it to us (at a likely higher interest rate).

    Now if you want to argue that GDP might have been only $14.5 trillion if the Fed hadn’t propped up the economy and the government (in combination with ruinous, useless Keynesianism), you probably have a valid point for discussion.

    Comment by Tom — July 9, 2014 @ 6:04 pm

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