THE UNFORTUNATE MATH BEHIND OUR ECONOMIC PLIGHT
by ilene - September 9th, 2010 5:04 pm
Pragcap argues that the U.S. is in a balance sheet recession, not a gov’t debt crisis, and not a banking crisis (Geithner, Bernanke and Paulson all misdiagnosing the problem). And it won’t end till 2012 at the earliest. – Ilene
THE UNFORTUNATE MATH BEHIND OUR ECONOMIC PLIGHT
Courtesy of The Pragmatic Capitalist
Few will argue against the fact that the U.S.
The following chart shows 30 years of US GDP along with potential output. The blue line represents actual GDP while the red line shows potential GDP. This represents what economists call the output gap.
(Figure 1)
At the current levels we are running an output gap of just over $1.2T. This merely means that the U.S. economy would be producing $1.2T more in total GDP if we did not have so much idle capacity.
The math behind the U.S. economic growth of the last 100 years is fairly straight forward. Economists describe GDP in mathematical format as follows:
Y=C+I+E+G
Y = GDP
C = Personal Consumption Expenditures
I = Fixed Private Investment
E = Net Exports/Imports
G = Government Consumption Expenditures
While all four components matter to the economy the C component (at roughly 71%) is the coaching staff, offense and defense of this football team. Let’s just call the other three components “special teams” – important, but far less so in the grand scheme of things. What’s happened to this crucial component of the U.S. economy in the last three years has been remarkable to say the least. There has been a dramatic stagnation in personal consumption expenditures (PCE). If we take a look at the historical data it’s truly incredible. PCE grew at an average rate of 7.5% for almost 50 straight years. Even more incredible is that this growth has been almost entirely uninterrupted.
(Figure 2)
(Figure 3)
When the Nasdaq bubble imploded, American balance sheets were cracked, but not shattered. Slowly, they began to come back. But as we all know now a far more nefarious bubble was brewing. One based on pure 
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site