It was announced today that 4th quarter GDP grew by 5.7% exceeding economists’ expectations of 4.8%.  Of course GDP for 2009 actually fell by 2.4% representing the largest annual decline since 1946 but that was a vestige of the nasty, old, antiquated, private-sector economy.

This spectacular expansion is wonderful news right?  We are experiencing the fastest growing economy in more than 6 years.  Surely the Great Recession is over now?  We can expect unemployment to improve rapidly, the deficit to shrink, housing prices to rise, credit to increase and a return to prosperity?

This is the problem with Government mandated, deficit-financed GDP growth driven by stimulus that is inappropriate relative to the fundamental forces which are undermining the economy.

The US Government has the ability to artificially manufacture arbitrary GDP growth anytime it wants.  The nation has a unique ability to borrow money based on our historical credit-worthiness and productivity.  This capacity for debt accumulation allows the Government the option to spend more money than it collects in revenues.

Despite extraordinary stimulus we have high and rising unemployment, housing prices are falling and credit availability is contracting.  If 5.7% GDP growth manufactured by Government edict is a good thing, why not create GDP growth of 20% in 2010?  

"Let Them Wear Snuggies!"

2009 GDP was $14.5 trillion.  The Government could borrow $2.0 trillion and spend it on Snuggies, Perfect Brownie Bake Pans, Ab Circle Pros and commemorative Barack Obama bobblehead dolls for all Americans.  These expenditures would trickle through the economy as infomercial product manufacturers nationwide reap and spend windfall profits from the Government purchases.   It would be relatively easy to grow 2010 GDP by $2.9 trillion.

The obvious problem being that this GDP growth is not real, sustainable or productive and creates liabilities which are economically debilitating.  

$2.0 trillion in new debt would need to be serviced annually and eventually repaid.  Future economic growth and job creation would be directly restrained by the new debt.  The increased debt load would translate into higher interest rates on new borrowing and refinancings further choking the economy.  And in exchange for this monstrous new liability the nation would be in possession of nothing that produces future economic benefit.  Certainly some number of Americans would be employed temporarily in manufacturing jobs, but when the artificial demand evaporated so would the jobs. 

This is the economic crime being perpetuated against the American people by a political administration that does not understand how wealth is created, where jobs come from or why the economy continues to suffer despite make-believe GDP gains.

The legacy of steroid-induced GDP gains may be to accelerate the onslaught of debilitating inflation even as the real economic damage has yet to be halted or reversed.

House prices remain over-valued relative to the economic fundamentals which determine them.  The economic damage of falling prices is magnified as leveraged equity evaporates.  Much of the excessive debt burdening the housing industry results from Government policies which continue to encourage massive borrowing at subsidized interest rates .  If there was any doubt as to whether house prices would gravitate towards a sustainable equilibrium, the ever-present and growing influence of unavoidable foreclosures makes falling prices inevitable.  The economy will continue to weaken as leveraged equity is destroyed, consumption is eroded, bank capital is written-off and the will to borrow/lend for the purpose of purchasing a house fades with the return of the risk premium. 

The last 18 months have been a case study in economic fraud.  Were such a stunt to have been attempted within a banana republic such as Zimbabwe or Venezuela the scheme would have quickly collapsed, resulting in hyper-inflation, a hobbled currency and an eviscerated borrowing capability.  It is only a function of America’s exceptional credit history and resilience that lenders have been willing to finance the unsustainable.  It remains to be seen how much longer this arrangement will endure.