Inflation Deception Enables Cheerleaders to Claim Economy Is Growing

Well, if you believe the reporting coming out of the mainstream financial media, then the economy is going gangbusters.

Third quarter GDP came in on Thursday at a better than expected 4.9%. That represents an acceleration of economic growth, at least officially, despite the Federal Reserve's ongoing campaign to cool demand.

The Fed has succeeded at crushing the bond market, freezing the housing market, and plunging many sectors of the stock market into deep downtrends.

The Fed has also put the squeeze on consumers, who face higher interest rates on credit cards, car loans, and mortgages.

But somehow the consumer-driven economy is posting good growth numbers, even as stocks are in a recent downtrend.

But there's more to this story.

As Mark Twain once observed, there are lies, damn lies, and statistics. To say the least, official statistics put out by Washington bureaucrats don't paint a full picture of what's going on in the real world.

The GDP figure is supposed to reflect an inflation adjustment. But the inflation rate government economists use to arrive at their 4.9% figure is highly suspect. Based on alternative measures of general price level increases, real GDP growth is closer to 0%.

Surveys of Americans' views on the economy certainly don't line up with the official narrative. Most report feeling like they are losing ground due to high costs of living.

Americans have also been draining their savings at an alarming rate. This increased financial pressure has even led to a noticeable uptick in Money Metals customers selling a portion of their precious metals savings back to Money Metals, taking advantage of our extremely attractive bid prices as compared to other dealers.

One of the biggest contributors to GDP growth this year has been government spending. It doesn't matter whether it's spent on productive activities. Government spending includes entitlements and other transfer payments, missiles to blow things up, and sometimes even foreign aid to rebuild things that were blown up by the missiles.

All that matters is that hundreds of billions of new dollars borrowed into existence gets spent somewhere.

Of course, what is counted as stimulus today will actually become a drag on the economy in the future as interest costs on the borrowed cash pile up.

The feedstock of future economic growth is capital investment, not government borrowing or consumer spending. And if you look underneath the hood of the reported 4.9% GDP growth, you'll find that business investment actually fell for the first time in two years.

For now, though, the Fed continues to insist that the economy is strong enough to withstand its rate hikes. Investor fears that rates will remain higher for longer than previously expected are weighing on asset markets.

This week stocks and bonds continued to come under pressure while the gold market consolidated near the $2,000 level. As of this Friday recording, the monetary metal checks in at $1,991 an ounce – essentially unchanged on the week.

Turning to the white metals, silver prices are off 3.0% this week to trade at $22.86 an ounce. Platinum is little changed at $913. And finally, palladium is posting a weekly gain of 1.6% to come in at $1,155 per ounce.

With only modest levels of retailing buying in the last few months, premiums on gold and silver coins, bars, and rounds have fallen to the lowest levels since 2019 – caused by excess capacity at mints and softer demand. The good news is this has made investments into physical precious metals more efficient as of late.

Meanwhile, metals markets have been holding up fairly well in recent weeks despite ongoing strength in the U.S. Dollar Index. Higher interest rates and a superficially strong GDP number are boosting the U.S. currency versus foreign competitors – at least for the time being.

But dollar bulls risk getting whipsawed at the first sign of a Fed pivot toward monetary easing. They also risk being on the wrong side of ballooning federal budget deficits which could trigger a vicious circle of more borrowing to pay rising debt servicing costs.

Neither Congress nor the Biden administration appear able or willing to practice any semblance of fiscal restraint.

The appearance of dysfunction has marred the narrow Republican majority in the House of Representatives. The GOP finally settled on Mike Johnson as the new Speaker of the House. He was little-known outside his own district in Louisiana, and it isn't clear whether he will be able to deliver on any substantive budget reforms that his predecessor wasn't.

Given Democrat control of the Senate and the White House, plus a GOP Congress that is far from united on how to govern, neither voters nor investors should expect much to change in terms of the trajectory of spending, debt, and inflation.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a wonderful weekend everybody.

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