Wikinvest Wire

Real economic growth and inflation

Thursday, May 29, 2008

Curious about what "inflation adjusted" economic growth might look like with different levels of inflation, whipping up one more animated .gif seemed an appropriate thing to do.The second frame - Inflation as Stated - is what the official Commerce Department data indicated this morning.

The range indicated above - from an overstatement of 1 percent to an understatement of up to 3 percent - is based on the views of Ben Bernanke (at the Federal Reserve) and John Williams (at

Though the actual calculation is much, much more complex, for the purposes of this exercise, real GDP is simply adjusted up or down based on the overstatement or understatement of inflation, respectively.

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Anonymous said...

Federal Reserve governor Frederic Mishkin announced plans on Wednesday to step down from his post after only two years in office. Of course, nobody knows exactly why. After all, these guys never talk — at least not until later. (See Scott McClellan.)

A couple of things on this: First, Mishkin was known as a strong advocate of inflation targeting. That’s noteworthy since the other former strong advocate of inflation targeting, namely Ben Bernanke, seems to have given up on that all-important concept. In fact, a recent JPMorgan analysis predicts 5 percent inflation this summer. Read it and weep. Whether Mishkin’s departure has anything to do with this is a matter of pure speculation. Is he bailing out? I don’t know.

Another sidebar to this story is the unwillingness of Senate Banking head Chris Dodd (D., Conn.) to move on White House nominations for two of the unfilled Fed seats. Mishkin’s resignation now leaves three unfilled seats on the Federal Reserve Board. That means just four governors remain, barely a quorum. Of course, Dodd is playing politics here, probably hoping for an Obama victory so he can get a bunch of Democrats on the all-important Fed board.

little larry sellers said...

Intersting info, anon 4:51. Barring personal reasons, I see only two likely reasons for Mishkin's departure:

1) He's serious about fighting inflation but feels his hands are tied in Bernanke's Fed.

2) He thinks the US economy is headed for dark times and does not want his name attached to the debacle.

Neither of those reasons are particularly encouraging to say the least. As for Dodd and other members of the Tweedle Dum and Tweedle Dee parties, they'll be playing politics until the moment the plane crashes into the mountain (and possibly beyond).

Anonymous said...

Why do we care what the GDP is anyway? If prices deflate, cost of living and GDP go down, why would that be bad? It's all nonsense unless you can say the amount of money is effectively constant.

little larry sellers said...

Hmmm, forget what I said earlier about Mishkin. I researched him a bit more and now I see no reason to be saddened by his departure. Seems like another run of the mill ivory tower economist to me.

At this point, anyone who claims that dollar devaluation is not a problem and that asset bubbles should not be "pricked" because it is "likely to do more harm than good" is not the kind of person the Fed needs. They're already stocked up on crazy over there.

Tom Printy said...

So based on the last frame we are in a defined recesion. Where a recesion is defined as " generally associated with a decline in a country's real gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year"

vipness said...

Welcome to the age of mis-information. The internet has provided a faster media for spreading the coverup.

BrunoT said...

Anonymous 5:30. I think you need to go read up on what GDP is. GDP is not 100% accurate, but it generally measures the growth in wealth of a nation.

And prices are not going down. They're going up quite fast!

REAL GDP is what is spoken of, and that takes into account inflation. The problem we're having is that they're distorting what inflation is to make the real GDP numbers look better. Real GDP has actually been flat or negative for years now if you accurately reflect inflation, which they have purposely not been doing. (looks bad in the papers and upsets the citizens at their breakfast)

And the amount of money is not constant. It's rising, literally being created out of thin air by govn't fiat, and very fast. That is what is called monetary inflation. And that is what makes things cost more....more dollars chasing the same amount of goods.

If you were starving on a remote island with 5 others and had $5, you'd pay $5 for the one available cheeseburger. But if you all had $1,000, you'd pay $1,000 for that cheeseburger. Get it?

Anonymous said...


My point was just that even if one could measure real GDP accurately, it is a very gross metric and not worthy of the attention devoted to it. I think Tim's point here was a more conservative measure of real GDP would show that we have been in recession for years already. So, why should a recession be considered so abhorrent? It just says we have been doing much of the wrong kind of work, need to make adjustments and move onto to something else.

John S said...

That's interesting, but if we measure inflation by pre-1983 criteria, the government is understating inflation by nearly 8 percent. Where does that leave GDP?

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