Wednesday, September 10, 2008

Real GDP

What is the real rate of inflation? The government's shadow statistics on inflation are ridiculous. CPI is a (poor) measure of price increases of consumer goods, excluding food and energy. Inflation on the other hand is an increase in the monetary supply. An increase in prices, therefore is a result of inflation in the money supply; i.e. more money chasing the same goods, thereby causing prices to trend up.

Currently, inflation expectations on the 30 year bond are relatively small 2.18% (Treasury yield - TIPS yield). However, based on the True Money Supply data, real inflation over the past 50 years has been approximately 6% annualized with nominal GDP at 6.65%. This means that real GDP (nominal growth - inflation) has grown at .65% annualized.

The following charts show the nature of the situation. The Federal Reserve has established the policy of pumping cash/credit into the system during economic downturns, thereby increasing inflation and decreasing real GDP. In fact the economy has not grown significantly in real terms since the late 1970s and early 1980s.

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