Gross Domestic Product: Is It the Measuring Stick of Success?

You are here

Gross Domestic Product

Is It the Measuring Stick of Success?

Login or Create an Account

With a account you will be able to save items to read and study later!

Sign In | Sign Up


When we look at the economic health of the United States, the main thing many people look at is Gross Domestic Product (GDP). This is the total of all transactions of the goods and services of the United States. It is the broadest available picture of the country's economic growth.

As of Oct. 1, 2005, GDP has been positive for 16 consecutive quarters. That is four years in a row. While the GDP of other nations has struggled at times to remain positive, America's GDP keeps going forward.

The most recent figures show the GDP for July through September 2005 rose 3.8 percent—a good healthy rise. GDP has now expanded at a rate between 3 percent and 4.5 percent for eight consecutives quarters, the longest streak of such consistent growth since World War II.

But before Americans get out the noisemakers and confetti in celebration, we should look at how the United States attained this feat.

GDP growth in spite of economic sluggishness?

Over the last several years of steady GDP growth, the manufacturing sector has been declining. The service sector has grown, but only sluggishly. And unemployment was up during some of these same quarters the GDP surged ahead.

So, how does the United States get the GDP to keep moving forward so well in spite of all this? As a friend of mine, a local bank president, says, "We are a great nation because we spend a lot of money." That's pretty much it in a nutshell.

Referring to growth after Hurricanes Katrina and Rita, The Wall Street Journal said of the GDP expansion of July-September 2005, "Increased consumer and federal government spending contributed heavily to the increase" ("Economy Marks Solid Growth Despite Storms," Oct. 29, 2005).

First we need to realize that a product, let's say a microwave oven, could be made in China, shipped from California to Maine by a Mexican trucking company and sold in a Dutch-owned store, with each step in this process adding to America's GDP.

What has added most to GDP growth is the volume of foreign goods sold in America. As late as 1975 the country had a trade surplus of $9 billion. By 1980 that turned into a trade deficit of $24 billion. In 1995, the deficit soared to $150 billion; in 2000, to $436 billion; in 2003, to $532 billion; and in 2004, to $600 billion. This year, the deficit will be around $750 to 800 billion. Many economists believe that these trade deficit increases cannot continue without an eventual economic collapse.

The unique part is how America could make GDP grow so much without a corresponding increase in national productivity. In other words, how can the United States spend so much more money without Americans making more money? Good question.

In 2004 when the trade deficit was $600 billion, the U.S. government also overspent its budget by $400 billion. You could say the nation "lost" $1 trillion last year. And yet it seems to be going forward.

Spending other nations' money

What the United States is doing now is unique—financing its deficit by borrowing huge sums of other nations' money and spending it.

Remember when the United States used to have gold bullion sitting in Fort Knox backing its currency? Those days are long gone. In fact, no major country has precious metals backing its currency today. Instead most countries today have either American treasury bills or European Union treasury bills backing their currency.

It's like you going down to the bank and buying a certificate of deposit. You buy a certificate of deposit with a maturity date and a specific amount of interest you will receive at the time of maturity. The issuer of the certificate of deposit meanwhile uses your money as it wishes until the due date. The U.S. government does the same thing, only on a much bigger scale.

The money invested in U.S. treasury bills, in large part, comes from the trade surpluses that other countries have with America. For instance, as of September 2005, China had $770 billion; Hong Kong, $120 billion; Taiwan, $250 billion, South Korea, $250 billion and on it goes. In the back pages of The Economist magazine you can find the breakdown per country of GDP growth, trade deficit or surplus, as well as foreign reserves.

It should be noted here that during the Reagan administration, America's Social Security money was moved from a "locked box" to U.S. treasury bonds so the money could draw interest. This money is in the same pool as the treasury bills purchased by other nations as well as U.S. investors.

You may have noticed that after Hurricane Katrina, President Bush pledged up to $200 billion for disaster relief and rebuilding. Seven billion dollars has been pledged to fight the bird flu and the list goes on. The United States keeps spending more and borrowing more. Actually, as the government spends more money, regardless of where it gets it, that spending in turn makes GDP rise because it puts more money into the economy.

Conservative-minded Americans shake their heads, saying, "But it isn't our money!" This protest is generally ignored. It's the 21st century, with its "live for today" mentality!

Relentless savers vs. reckless spenders

The second big gusher of money comes from the private sector. The world's pension funds, mutual funds and insurance money have $46 trillion at their disposal globally. In order to tap into this huge pool of money, the Federal Reserve dropped its lending rates from 6 percent to 1 percent in a single year. This caused an avalanche of new home buyers and builders, as well as corporate building.

"That there should be such a glut [of money] when U.S. consumers save none of their current income and their federal government borrows heavily, might seem paradoxical. But plenty of others do save and accumulate cash to invest, including U.S. corporations. Abroad [outside the United States] many families' saving habits are the mirror image of American's free-spending ways. European and Japanese workers save far bigger shares of their incomes and Chinese households save a stunning 25% of their income. In all, China is expected to have about $116 billion to invest abroad this year, much of which goes into U.S. bonds" ("Huge Flood of Capital to Invest Spurs World-Wide Risk Taking," The Wall Street Journal, Nov. 3, 2005).

U.S. household savings rates have been declining steadily for many years, but not until the April-June 2005 quarter have the savings rates gone negative. Savings for the third quarter dropped to a negative 1 percent of personal income. Many Americans have become dependent on "home equity loans," borrowing money on their biggest asset, their homes.

"The money is out there looking for people to use it. People talk about a wall of money everywhere," says Peter Fisher, a former Federal Reserve and Treasury Department official. "Bankers talk about too much money chasing deals. Private-equity funds talk of money chasing them. And buyers of corporate and asset-backed debt seem to come at the bond market from all directions" (ibid.).

In general, America has become the "Great Consumer" while many other nations have become the "Great Lenders." It is an illusion that spending borrowed money is good for the economy, because, of course, it has to be paid back at some point. America is recklessly spending money it is borrowing from foreigners.

Unsustainable trend

The question is not whether this is a sustainable trend. Economists, government leaders and bankers know this has to be turned around. The question is how do you do it without a domino effect?

In a global economy, even seemingly small adjustments can lead to the "housing bubble" bursting or some other economic downturn that could make foreign investors fear the loss of their investments. Or if other nations find their money could make a better return somewhere else, that could be fatal to the U.S. economy.

American consumer greed for more material possessions continues. Accepting less is not a part of the American psyche. How do you change that?

What God says

In the end, it is God who blesses or curses us. If U.S. citizens, as a nation, put God first in their lives, He promises to bless them. But if people greedily try to get all they can, never acknowledging God or thanking Him for His blessings, disobeying His laws, then they will receive curses from Him. Deuteronomy 28 lists blessings and curses. God says if the United States turns its back on Him, this is what will happen:

"The alien who is among you shall rise higher and higher above you, and you shall come down lower and lower. He shall lend to you, but you shall not lend to him; he shall be the head, and you shall be the tail. Moreover all these curses shall come upon you and pursue and overtake you, until you are destroyed, because you did not obey the voice of the L ord your God, to keep His commandments and His statutes which he commanded you" (Deuteronomy 28:43-35 Deuteronomy 28:43-35
American King James Version×

Does this sound like America? It's time to turn back to God before it's too late. WNP

You might also be interested in...