The world was on fire and no one could save me but you. It’s strange what desire will make foolish people do. I never dreamed that I’d meet somebody like you, and I never dreamed that I’d lose somebody like you. No, I don’t want to fall in love (this girl is only gonna break your heart). No, I don’t want to fall in love (this girl is only gonna break your heart) with you, with you (this girl is only gonna break your heart). What a wicked game you play to make me feel this way. There is a wicked game other than the one that American rock musician Chris Isaak, sang about in his 1991 hit. That wicked game is being played by the Federal Reserve on the American economy, and can be seen in the economic statistics over the past 8 years.
As the attached graphic shows, the American economy has grown from $14.4 trillion in 2009, following the last recession, to about $17.3 trillion in 2014, the last year for which all data are available. In other words, over this 5 year period the economy created about $8.5 trillion in additional consumption, or spending. This is an important distinction. While GDP is supposedly a measure of production in the economy, the way that the Bureau of Economic Analysis actually measures it is through spending, so all we can honestly tell from the numbers is that business, consumers and the government spent a combined $8.5 trillion more over the 5 year period than would be the case had the economy held constant.
Note that these are nominal dollars, not adjusted for inflation. So if the price of a hamburger went from $1.00 in 2009 to $1.29 in 2014, the nominal GDP measure would say that the economy grew by 29-cents, even though the same hamburger was being sold each year. All told, using the Bureau of Labor Statistics’ Consumer Price Index (CPI) as a measure of inflation suggests that in real terms, 17.4 percent of the nominal growth (about $1.5 trillion) is accounted for simply by inflation. The BEA does show this distinction in their statistics in that they report both nominal and inflation adjusted numbers. But that is not the wicked game.
GDP also includes spending by the government as part of the calculation. Over this period, the total federal debt grew by just over $7 trillion which is roughly the same as the total net change in overall spending in the economy. Using a different source, and netting out state government savings, the overall growth in government debt was just $6 trillion over this period. Now some government spending goes toward actual economic activity – running courts, operating the military construction roads – but a huge amount of government “spending” is simply transfer payments. If the government is borrowing from me to give money to you, there is no net economic activity, and over this period nearly 64 percent of government spending was for transfer payments of some type. This suggests that about $3.2 trillion, or 38 percent, of the reported growth in economic activity simply reflected non-productive borrowing for transfer payments.
Taking this and the inflation adjustment together, about 55 percent of the reported growth in the economy between 2009 and 2014 was simply due to inflation or borrowing and no actual economic activity was generated. This is the reason why most people still believe that we are in a recession. Put another way, assuming a population of 307 million people, the US economy generated per capita growth of about $27,870 during the 5 year period. Of this, inflation accounted for $4,860, and borrowing for $10,480. Actual productive economic activity was just $12,520 over the period or about $2,500 per year. This is extremely slow per capita growth, just below 1 percent per year in real terms.
It is a wicked game to report that the economy is growing when in reality it is virtually stagnant. The country cannot borrow and spend its way to prosperity and reporting this as economic growth is only going to break our heart. The economy is not on fire, and has not been on fire since the last recession.