John Williams continues:

“Indeed, the ‘recovery’ is an illusion that has been created as a direct result of methodological changes in government inflation reporting of recent decades.  Those methodological changes have resulted in an artificial lowering of official rates of inflation.  The faux growth problem is in the use of understated inflation estimates in deflating a number of economic series.

Major economic series that have no underlying pricing base—such as housing starts, payroll employment and consumer confidence—correspondingly do not require inflation adjustment to put them on a consistent theoretical basis with the concept of real (inflation-adjusted) GDP. 

Those series confirm a history of business activity in recent years that shows a plunge in the economy from 2006/2007 into late-2008/mid-2009, followed by a period of protracted, low-level stagnation, or bottom-bouncing, instead of a “recovery.”

Following are two graphs reflecting the latest GDP information.  The first graph shows the real GDP level, as deflated by the official IPD.  Note the recent recovery of activity versus pre-recession levels.  The second graph is inflation-corrected.

The weaker-than-expected initial growth estimate for first-quarter GDP rounds out a month of indicators showing increasingly soft economic activity.  The economy has not recovered from its multi-year plunge in activity from 2006/2007 into late-2008/mid-2009.  The recent reporting of some economic gains largely has been an illusion, tied to the effects of underestimated inflation.

As previously noted, the U.S. consumer does not have the ability to sustain growth in personal consumption expenditures (71% of GDP), due to structural problems with household income and debt.  Accordingly, there is no recovery underway or likely in the near future.

Underlying economic reality does not have positive implications for the system.  Ongoing economic stagnation and renewed contraction will mean much-worse-than-anticipated federal budget deficits, U.S. Treasury funding needs and banking-system solvency issues. 

Despite current protestations to the contrary, the Fed likely will be forced into a new round of easing in an effort to support the still-faltering banking system.  As has been the case in recent years, though, any action here again should be under the cover of attempting to stimulate the economy.  Any such action also likely will provide a trigger for heavy selling of the U.S. dollar and upside pressure on domestic inflation.

SGS-Alternate GDP.  The SGS-Alternate GDP estimate for first-quarter 2012 is an approximate annual contraction of 2.2% versus the official estimate of a 2.1% gain.  Adjusted for gimmicked inflation and other methodological changes, the business downturn that began in 2006/2007 is ongoing; there has been no meaningful economic rebound.” 

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The Eric Sprott and Egon von Greyerz audio interviews are available now.  And be sure to listen to this week’s incredible line-up of other KWN interviews, which include Rich Yamarone, John Embry, Jim Sinclair and John Hathaway.  You can listen to these interviews by CLICKING HERE.

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

Eric King

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