Tuesday, December 4, 2012

Marc Faber : GDP is not a very Relevant Figure

Marc Faber : GDP is not a very Relevant Figure

Oh boy; Marc, this is exactly what we posted last week. We  certainly appreciate your subscription to our blog, and flattered by your  concurrence. Great minds think alike or, -  fools seldom differ?

For the record, here's a short list of the GDP concerns we have:

Firstly, it is held out as the annual measure of the wealth (production/consumption) created by a national  economy using a subjective abstract unit of measure - money. Meta-economics meanwhile demands an object unit of measure that ties economic activity to the actual usable-physical-elements produced and consumed by the economy. Further, a balance sheet picture is possible and more relevant, when usable-physical-elements are the unit of measure, providing a national net worth based on the difference between the aggregate of remaining usable elements and elements owing to others, including its citizens. Thus, calculating an objective national (or even global) net worth, whereby its net changes would better indicate whether national wealth improved or declined over a specified period.

Such an approach would seriously change the thinking of geo-economic-political policy makers. For example, these metrics certainly would have retrospectively influenced how the British Empire dealt with its colonies. Every effort one assumes would have been made to fully incorporate them into the base country, had policy-makers known the extent of usable-physical-elements that were being forgone. Possibly causing this island nation to still  be the most powerful economic dominion in the world. There is a lesson be learned.

Secondly, the current GDP number is flawed because it emphasizes nominal, as opposed to real values. The real value determination is, however, difficult for two reasons. One, the CPI factor used to adjust the nominal value is highly arbitrary - and filled with non-scientific rationale and assumptions. Two, many countries convert their GDP into US dollars in order to level the playing field, thereby acting to neutralize the currency exchange differences. The central flaw here, is that the US dollar is not a good proxy for global purchasing power or even the core-commodities value basket required for primary global industrial production.

Thirdly, whatever measure is applied, it should be divided by the population of the subject nation. Many stratification's of population could also apply: garnering useful insights. Regardless, the aggregate division is still a fair measure of overall industrial progress. A much measure better could however be calculated using the meta-economic object unit of measure for GDP. Even greater understandings should evolve by also using the balance sheet approach, thereby calculating the per capita object net worth.

This latter calculation is of utmost importance as nations would begin to understand the diluting effects that population growth, mortality and immigration have on the physical staying power of the nation. The real physical wealth of nations Again more insightful analysis should result, providing understandings that are more scientific and object in nature.

As indicated at the outset, there are many more concerns, but this short list should start a thoughtful process that would lead to conclusions profoundly affecting economic, social and geo-political views, both historically and prospectively. We therefore humbly look forward to hearing your thoughts and ideas!

Dr Peter G Kinesa
December 4, 2012

Finally, I get it!

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