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The third and final estimate (until the annual GDP revisions) of first quarter 2014 real GDP growth released June 25 by the US Bureau of Economic Analysis was a 2.9% contraction in GDP growth, a 5.5 percentage point difference from the January forecast of 2.6% growth. Apparently, the first quarter contraction was dismissed by those speculating in equities as weather related, as stock averages rose with the bad news.

Stock market participants might be in for a second quarter surprise. The result of many years of changes made to the official inflation measures is a substantially understated inflation rate. John Williams ( provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.

A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.

Realistic economic analysis is a rarity. The financial press echoes Wall Street, and Wall Street economists are paid to help sell financial instruments. Gloomy analysis is frowned upon. Even negative quarters are given a positive spin.

Years of understatement of inflation has resulted in years of overstatement of GDP growth. Thinking about the many years of misstatement, we realized that the typical computation in nominal terms of the ratio of debt to GDP is seriously misleading.

Consider that debt is issued in nominal terms and repaid in nominal terms (except for a few Treasury bonds with inflation adjustments). However, nominal wealth or nominal GDP overstates real economic strength. The debt is growing, but both the nominal and real values of the output of goods and services are not keeping up with the rise in debt.

To understand how risky the rise of debt is, nominal debt must be compared to real GDP. Spin masters might dismiss this computation as comparing apples to oranges, but such a charge constitutes denial that the ratio of nominal debt to nominal GDP understates the wealth dilution caused by the government’s ability to issue and repay debt in nominal dollars. We know that inflation favors debtors, because debts can be repaid in inflated dollars.

The graph below shows three different debt to GDP ratios. The bottom line is nominal debt to nominal GDP, the financial press ratio. The middle line is the ratio of nominal debt to the official measure of real GDP. The top line is the ratio of nominal GDP to Shadowstats’ corrected measure of real GDP that puts back in some of the inflation that is no longer included in official measures. The basis for this corrected measure is also 2000, but as the GDP number for 2000 is lower due to correction, this graph begins with the ratio at a slightly higher point.


The nominal debt to GDP ratio shows that as of the end of the first quarter of 2014 total US Treasury debt outstanding is 103 percent of US GDP.

The ratio of Treasury debt to official real GDP shows debt at 136% of GDP.

The ratio of debt to real GDP deflated with more a more realistic measure of inflation, one more in keeping with the experience of consumers, puts US public debt at 185% of GDP. In other words, the burden of US debt on the real economy is almost twice the burden that is normally perceived.

The Shadowstats adjustment we made to real GDP does not fully correct for what we believe has been a growing understatement of inflation since the 1980s. The adjustment we made corrects the implicit price deflator for a two-percentage point understatement of annual inflation due to hedonic distortion. Real GDP with this correction since 2000 looks like this:


We have calculated the ratios of US public debt to nominal GDP and to two measures of real GDP. The ratios of debt to GDP would be much higher if we used total credit outstanding, or total public and private debt, and if we used the government’s unfunded liabilities. The fact seems clear that debt is a major and unappreciated issue for the US economy. The enormous debt, especially with the middle class economy largely offshored, implies substantially lower living standards for the 99 percent.

The first quarter contraction, especially our corrected number, implies a second quarter negative real GDP. In other words, the years of Quantitative Easing (money printing) by the Federal Reserve has not resulted in economic recovery from the 2008 downturn and has not prevented further contraction.

Massive money creation and huge fiscal deficits have protected the balance sheets of “banks too big to fail” but have harmed the American people. Retirees and pension funds have been deprived for years of interest income as the Federal Reserve engineered zero or negative interest rates for the sake of a handful of oversized banks.

The extraordinary creation of new dollars diluted the dollars held by peoples, companies, institutions, and central banks throughout the world, raising fears that the dollar would lose exchange value and its role as world reserve currency.

Washington’s use of financial sanctions to force other countries to bend to Washington’s will is causing countries to leave the dollar payments system. Russian President Vladimir Putin’s advisor has said that the dollar must be crashed as the only way to prevent US aggression. The Chinese have called for “de-americanizing the world.”


The imperialistic US Foreign Account Tax Compliance Act (FATCA), which comes into full force July 1, 2015, imposes such heavy reporting costs on foreign financial institutions that these institutions might opt out of dollar transactions. All together, the result could be a serious tumble in the value of the US dollar, more wealth contraction, higher inflation via import prices, and less US wealth available to support US debt.

In view of this reality, why is Washington pushing its puppet in Kiev toward war with Russia? Why is Washington pushing NATO to spend more money and build more bases on which to deploy more troops in the Baltics and Eastern Europe, especially when Washington’s contribution will be the largest part of the cost? Why is Washington re-entering the Middle East conflict that Washington began by inciting Sunni and Shia against one another? Why is Washington constructing new naval and air bases from the Philippines to Vietnam in order to encircle China?

If Washington is this unaware of its budget constraints and its financial predicament, it cannot be long before Americans experience economic catastrophe.

John Williams, an expert on government economic statistics, has been a private consulting economist for more than thirty years ( Dave Kranzler ( ) has years of experience in financial markets. Paul Craig Roberts is an economist and former Assistant Secretary of the US Treasury for Economic Policy.

(Republished from by permission of author or representative)
• Category: Economics • Tags: Federal Reserve, Unemployment, Wall Street 
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  1. While many of the idiots in Washington are probably unaware of what is coming, I suspect that there is a hard core that is well aware and making preparations for the next phase.

    The US has been economically and socially neutered, mostly with “the consent of the governed”. Only now with the ugly result looming nearer are significant numbers of people starting to get nervous and realize that both political parties have sold them down the river.

    Our Constitutional Republic will not survive the coming economic catastrophe, nor would it have survived a crash in 2008. An Emergency will be declared and the powers of the Defense Production Act of 1950 (as amended and with its knock-ons) will be used to keep the wheels turning as our leaders proclaim that they are “restoring America”. The congress will continue to meet and enjoy the percs, but it will not function in any real sense.

    Lots of people will sing “Happy Days Are Here Again” until the wars start.

    So it goes…

  2. What will the US do if the dollar crashed? Are they overwhelming the American economic system out of greed, design, or both. Is there anyone in the US that would gain from the complete destruction of the US dollar? What political system would follow such a crash and what would be the lie that the media and politicians give for the crash?

  3. olde reb says:

    The article asks the rhetorical question “Why?” The answer is easy. The government is following the New World Order plan established and instrumented by Wall Street.

    When the dollar crashes, Wall Street interests that manage the U.S. Debt (Primary Dealers), will be collecting the $17 trillion national debt. It is the same scheme the same Wall Street financiers have been using in Europe and have previously used in the third world (using the IMF and WB).

    Are you ready for the austerity and asset seizures of Greece and Cyprus ?


  4. @ Johnny F. Ive

    “What political system would follow such a crash…”

    The laws are already on the books. The Defense Production Act of 1950 was passed to provide for continuity of government in case of a nuclear attack, but it has been expanded and provides for vast powers to the bureaucracy (the Secretaries mostly) if a sufficient emergency requires it. Many other laws passed since that time have emergency provisions.

    Most people do not realize it, but we still have an emergency that was declared because of 9/11 in effect (how else do you think they grounded all the planes), but there are few emergency powers being used as the declared emergency is limited in scope. Given sufficient need, the emergency powers of the Federal Government are pretty much total beyond a few fig leaves and genuflection in the direction of the Constitution.

    The idiots who think a crash will be the spark that ignites a revolution will actually be providing the rationale for Leviathan.

    Consider that in 1929 the USA was a rural, agrarian nation. Something like 90% of the people lived in rural areas and something like 60% were either farmers or directly dependent on farming. The phrase “root, hog, or die” was operative – that’s what people did and that is how the Republic survived. Today we are an urban nation. If the 18 wheelers do not show up at the back of the grocery most people do not eat. Furthermore, few people have cash to last more than a day or two, so if the “banking” system does not operate they cannot access the food that presumably reaches the shelves.

    All it will take is a few days of unrest and the people will be screaming for the government to “do something”, and you can bet your sweet ass they will. Again, the Laws are already on the books, all that is needed is for the emergency to be declared and the people will DEMAND that.

    The people have voluntarily crawled out on this limb, lured by the carrot of “prosperity”, and it is a slender limb. When it breaks there is a net waiting.

    BTW: if one clicks “comment history” one gets the comments of another “Fred” than me, henceforth I will choose another handle.

  5. John W. says:

    I don’t think John Williams gives hedonics their due. We often hear that average real wages in America haven’t increased since the mid ’70s. And yet life has improved since then in innumerable ways: houses are bigger, cars run better, coffee tastes better, lawns are greener, fresh produce is more varied, TV reception is sharper. And anyone reading this could easily give other examples. These technological improvements are, I think, much more significant than those of the previous 40 years (the ’30s to the ’70s) at least as they affect daily life. This increasing pace of innovation represents a source of increased “wealth”, and one that we all share in.

    I certainly agree that the increasing national debt, and the deteriorating balance sheet of the average American household, are matters of serious concern, and which could possibly lead to widespread poverty, depending on events. But for now people, although straining, are enjoying an improved lifestyle. This is probably why there isn’t more protest or outrage.

    Anyway, I think Mr. Williams would be more persuasive if, instead of just rolling forward the 1970s methodology for calculating inflation, he gave due credit to the increasing benefits of technology.

    • Replies: @Ron Unz
  6. Ron Unz says:
    @John W.

    I noticed your reasonable-sounding comment and decided to take a brief break from my programming work to provide my own contrary perspective.

    What you say is absolutely true, but barely scratches the surface of your argument.

    Consider the poorest people in the world today, perhaps hungry African peasants. They may be extremely poor, but they have ready access to *amazing* technologies, like cellphones and Google. Such technologies would have been almost beyond imagination of the wealthiest people anywhere in the world in 1960, so does that mean that starving African peasants are actually exceptionally wealthy people?

    Or take even a stronger example. They also have reasonable access to modern medical technology, like antibiotics and vaccines. Queen Victoria’s beloved consort and lots of her children and other close relatives could have had their lives saved by such technologies, and I suspect that she—and any powerful monarch of the last several thousand years—would have traded half their empires for a few vials and syringes. Alexander the Great ruled half the known world but died at 33 from some sort of trivial disease.

    So if starving African peasants are actually among the wealthiest people in all of human history, why should anyone complain about their poverty or the bad behavior of their leaders that is partly responsible for it.

    And if tens of millions of Americans were reduced to living in hovels and surviving on beans and water, they would still be unimaginably wealthy by the standards of history and certainly relative to their grandparents of the 1950s. But that’s still not a very positive result.

    The problem is that the exponential growth of technology over the last couple of hundred years automatically distorts all economic calculations.

    • Replies: @Kiza
  7. Kiza says:
    @Ron Unz

    Measuring economic progress is a bit like measuring human intelligence. Everyone knows what it is but nobody understands it and nobody can measure it. Quality of life is an illusive category when analysed both time-wise and laterally (keeping up with the neighbors). Yet, John W comments about something that Mr John Williams does not write and talk about. Mr Williams is a statistician making a point relevant to Political Economy: the US regime lies, the worse the state of the US economy and society the more the regime lies through numbers.

    To those who have not experienced communism this may be foreign or new. But it was the gap the communist regimes created between its media images and the reality that the West successfully exploited to bring down Communism (US arming of Afghan mujahedin was only the final push for a sick regime). Now, the yesterday’s exploiters of the Reality Gap find themselves creating exactly the same kind of gap by playing with numbers (inflation, GDP, unemployment). The funny thing is that the former communist, such as Russia, now exploit this gap through its media such as RT. The same as we in the Eastern Block used to follow the Voice of America, Time magazine etc to know what was really going on, now many US citizens turn to RT to understand what is really going on behind the Western media curtin.

    No toys like iPhone or iPad will arrest the sinking of the US and EU, they are only useful distractions.

    Ron, congratulations on a fabulous website with some unique features such as comments history, expiring edit your comments option and so on. Also, great choice of relevant articles.

  8. “Ron, congratulations on a fabulous website with some unique features such as comments history, expiring edit your comments option and so on. Also, great choice of relevant articles.”

    I agree. The Unz Review has far surpassed TAC in quality of content.

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