Kudlow Needs a Refresher Course
in Econ 101
Peter Schiff
April 29, 2005
I hate to be so critical of
CNBC, especially since they were gracious enough to have me on
as a guest on Monday, but when they present such an easy target,
I just can't resist. Such was the case yesterday, when Larry
Kudlow, host of "Kudlow & Co.," and one of that
network's more colorful "economic" commentators, demonstrated
his needs to return to Princeton for a refresher course in basic
economics. I write this because, yesterday, when commenting on
the release of disappointing first quarter GDP numbers, his ridiculous
argument in favor of changing the way GDP is calculated, revealed
a lack of understanding of what this basic economic statistic
is attempting to measure.
Besides further supporting my stagflation warning (the deflator
rose at an annual rate of 3.2%,) yesterday's report revealed
that first quarter GDP grew at a less than stellar 3.1% rate;
its slowest pace in two years, and well below Kudlow's typically
far more optimistic forecast. But rather than admitting to being
wrong, Kudlow, much like a golfer blaming a poor shot on a defective
club, instead attributed the weaker performance to what he perceived
to be a flaw in the methodology used to calculate the index.
Since imports subtracted 2.19% from GDP, Kudlow proposed adding
that value back in. In his words, "imports are not a bad
thing" so why subtract them from GDP. As a result of his
recalculation, Kudlow argued, with a straight face I might add,
that the real growth rate of the U.S. GDP during the first quarter
was in fact a far more robust 5.29%.
While it may be true that imports per se are not bad,
it is also true that they have absolutely nothing to do with
GDP which is precisely why their value is subtracted from the
calculation in the first place. The concept of GDP is to measure
the value of goods and services produced by a nation. Since all
goods and services produced are ultimately consumed, the index
is calculated by totaling the expenditures made by individuals,
corporations, and governments, (I + C + G). However, since goods
produced for export are not consumed domestically, the value
of exports is, therefore, added to GDP. If this adjustment were
not made, the value of such production would go unmeasured. However,
since expenditures on imports do not reflect domestic production,
the value of imports is therefore subtracted from the calculation.
The net result is GDP, or Gross Domestic Product.
So, contrary to Mr. Kudlow's claims, U.S. GDP was not reduced
because Americans imported too much, it was reduced because we
produced too little. By adding the value of imports back into
GDP, what Kudlow, in fact, proposed measuring was something entirely
different, perhaps a new indicator which more accurately might
be called GDC, or Gross Domestic Consumption. While such
a ridiculous concept may in fact seem appropriate given the current
state of the highly imbalanced U.S. economy, it should not be
confused with GDP, which at least attempts to measure the value
of what a nation produces, not what it consumes.
I do agree with Mr. Kudlow on one point. This GDP report does
in fact present a distorted measure of the real output of the
U.S. economy. By failing to capture the true rate of inflation,
the deflator results in GDP being considerably higher than would
otherwise be the case were a more honest measure of inflation
used. Also, as GDP includes goods and services which do not necessarily
reflect higher standards of living, such as excessive legal or
medical expenditures, increased outlays necessary to deter rising
criminal or terrorist threats, or mere restoration of property
damaged by natural disaster, it often exaggerates true economic
growth.
In a world where government officials routinely change the way
economic statistics are calculated, for the specific purpose
of engineering a false sense of prosperity, Kudlow's suggestion
seems par for the course. However, such a biased manipulation
would be far more "appropriate" were Kudlow still working
on the federal payroll, where such propaganda would at least
be expected, rather than as a supposedly objective commentator,
where unsuspecting viewers might confuse his economic cheerleading
with legitimate insight, to the detriment of their financial
well being.
April 29, 2005
Do
not wait for pull backs that may never come. Buy gold at current
prices and do not look back. I still believe the best way for
average investors to participate is though the Perth Mint in Australia.
For more information on their unique, safe, private, low-cost
program visit www.goldyoucanfold.com.
In addition, as the dollar's
value is likely to sink far faster than those of other fiat currencies,
investors can learn strategies to protect wealth and preserve
purchasing power by downloading my free research report on the
coming collapse of the U.S. dollar at www.researchreportone.com
and subscribing to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
Recent Gold/Silver/$$$ essays at 321gold:
Jan 14 A Golden Pocket Rocket Is Launched Stewart Thomson 321gold
Jan 10 Gold Stocks: A 1970s Repeat Morris Hubbartt 321gold
Jan 10 Jobs Moving Gold Shifting Adam Hamilton 321gold
Jan 07 Gold Stocks: A Surge To All-Time Highs? Stewart Thomson 321gold
Jan 05 Gold & Oil: Upside Wave Counts In Play captainewave 321gold
Jan 03 Gold Stocks: A Stunning Year Ahead Morris Hubbartt 321gold
|
321gold Inc
|
