Macro Economics 101: Real Growth versus Phony Growth

Many people don’t seem to understand that there is a difference between real wealth and real growth on the one hand, and phony wealth and phony growth on the other. And the failure to recognize what’s real and what’s phony, has resulted in bad economic policies that focus on creating financial bubbles rather than on rebuilding America’s manufacturing base. People at the highest levels of academia and policymaking seem to believe that we can get out of the economic mess we’re in by creating phony wealth and turning our backs on the creation of real wealth.

So what is real and what is phony? And why is phony wealth and phony growth bad for a country? And how does this all tie in with the economic stagnation American has been facing for the past 20 years or so?

To understand the difference between real wealth and phony wealth you need to understand that what might be considered wealth for an individual might not necessarily be actual wealth for a country at the macro level. Let’s say you bought a house a year ago for $200,000, and now, a year later, it’s worth $300,000. Sure, your wealth has risen in monetary terms – if you sell the house you’ll be $100,000 richer, again in monetary terms. But in real terms it is still the same house. If you want to buy another house in the same neighborhood, you’ll likely not be able to afford a bigger house for the same $300,000, because all the other houses also went up in price. If you want a bigger house and you want to stay in the neighborhood you’ll still have to pay more. So you’re not really better off, because you still need somewhere to live, unless of course you buy a smaller house in the same neighborhood for less than the $300,000, or you move to another neighborhood, or to another state or to another country where house prices are cheaper. So your real wealth hasn’t really increased, nor has the real wealth of the country as a whole increased. So rising home prices is not real growth. I’ll repeat that: rising home prices is not real growth. And everyone needs to realize that. The country as a whole is not better off, because real wealth at the macro level remains the same.  So don’t pay attention to the talking heads on television when they get all excited because home prices are going up. It doesn’t mean anything as far as the real economy is concerned.

Rising home prices is actually bad for a country, because the more home prices rise, the more people it prices out of the market, meaning that it puts buying a home out of people’s reach. Think of your children, if you have young children. How are they gonna be able to afford to buy a house when they’re ready to move out 10 or 20 or 25 years from now if prices go up each year 10 or 20 percent? They’ll probably not be able to afford a house. In Manhattan, for example, middle income people are having to move out because housing is too expensive. So a country as a whole doesn’t gain anything from rising home prices. It’s one of the biggest myths out there that rising home prices make people wealthier. It might make some people wealthier, but for many others who haven’t yet entered the housing market, it makes them poorer. So on balance it is bad and government should not pursue policies that cause home prices to rise. One of the reasons why we’re in the mess we’re in right now is because of the housing bubble that took place prior to 2008. Phony wealth doesn’t last; there will come a time when it will all come crashing down, like it did in 2008 and 2009.

The other big creator of phony wealth is the stock market. The Wall Street talking heads have convinced America that rising stock prices is good for the American economy. But I beg to disagree. The stock market is basically a casino, that’s all it is. People bet on certain stocks, and depending on the actions and opinions of stockbrokers and politicians and Wall Street king pins, stocks go up or down and people make profits or incur losses. It has very little to do with the real economy. Exhibit #1 is what’s happening right now. Stock prices are currently going thru the roof, but the economy is stuck; we’re not growing. The stock market does not reflect reality. It’s not related to the real economy. The reason why the stock market is booming is because the Obama Administration is pumping tons of money into the economy, and the money has to go somewhere, and so it ends up in the stock market inflating the price of stocks. This is not real, folks, it is all phony, and it’s all manufactured, and I will bet my life that it will come crashing down very soon, because a bubble cannot last forever, it has to burst.

Finally, there is the damage that is being done by the billions and billions of dollars that the Federal Reserve is pumping into the economy, as I mentioned a moment ago. Again, we need to distinguish between individual wealth and the wealth of a country. If an individual gets some extra cash, sure, he or she has more purchasing power and one can say that his or her wealth has increased. But if a country is issuing currency to itself, that’s not wealth to the country. So at a macro level, more money doesn’t mean more wealth for the country. So again, the wealth is phony, it’s not real. Over the years the United States has massively expanded the money supply to finance spending and grow the economy, instead of dealing with the underlying problems of the US economy. The U.S. government has chosen to create more phony wealth and inflate the bubble. And the only reason why the U.S. dollar hasn’t collapsed in value is because China has been stockpiling dollars. China is currently holding about $3 to $4 trillion U.S. dollars in reserve, mainly because it doesn’t want its own currency, the Yuan, to appreciate, and that takes the pressure off the U.S. Dollar in the international currency market. If China were spending back those dollars, the Yuan would go up and the U.S. dollar would fall. So for now, the dollar has stabilized. But China cannot hold those reserves forever, and when they start spending it that’s when we will see the decline of the dollar.  Actually, we’ve already seen the decline of the dollar internally within the USA. Inflation is much much higher than what the government is telling us. You and I know that the prices of nearly everything in the supermarket have gone up. So the decline of the dollar has already begun.

You see, it looks like we haven’t learned anything from the previous recessions. We keep inflating the economy instead of dealing with the underlying issues. We have a production problem in America; manufacturing and industrial production has declined over the years because of free trade, and instead of address that, we’re creating phony wealth by artificially inflating the economy with cheap money and easy credit. It will never work. It has never worked. The only way America will start to grow again and create jobs is if it engages in the creation of real wealth. And there is only one way to create real wealth: it is called manufacturing.

The biggest mistake we made was to buy into the free trade scam; it devastated our manufacturing base. America has been scammed and no one seems to realize it. We were told that free trade would increase our exports, and everybody said “good, that’s what we want, let’s go for it”. But what we weren’t told was that, on the flip side, free trade would massively increase our imports and kill major industries in the USA. And that is exactly what happened. Because of free trade, our manufacturing base has shrunk dramatically, and we’ve become a net importer, running massive trade deficits year after year. The bottom line is, we’re importing way too much, and we’re producing way too little. Both of these must be turned around. And this should be the focus of economic policy, not inflating the economy with cheap money and easy credit. We need to renegotiate our international trade treaties. If the other countries don’t want to renegotiate, we should take unilateral action and walk away from these trade agreements. The situation is dire and America need to act. The trade imbalance is causing a massive transfer of wealth away from the United States. We’re bleeding and someone has to stop the bleeding.

(If you would like to see my specific proposals to address the trade imbalance and create growth again in the American economy, please take a look at my video #1. In video #1 I go in depth into the US trade deficit and what specific policy changes the US government should make in order grow the economy again and create real wealth. In that video I also rebut some of the arguments that have been made against imposing restrictions on imports. So you might want to take a look at that.)

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