I am still learning the language of economics and finance, and I find ArabianMoney most helpful in this regard because of its varied and interesting articles.

One thing that I am still getting my head around is recession/depression on the one hand and inflation/hyperinflation on the other. The title of this article seems to be saying that you cannot have both recession and inflation at the same time, but that the world must choose one or the other.

The assumption here is that the global economy is not yet in recession particularly the EU, which may yet go into a shallow recession, and the US and China, which are both continuing to recover ie grow.

I then come across other experts who say that the world is bankrupt and that we have been in what is being called now “the Greater Depression” (to distinguish it from that of the 1930s) since 2007/2008.

Some say that we are not in recession, let alone depression, and others say we are not in recession because we are and have been for some years now in depression.

What one chooses seems to depend on how much currency debasement and printing is influencing, not only inflation, but also recession/depression. If one thinks of currency printing as only affecting inflation, then one can look at recession/depression purely on its own terms, such as published GDP figures.

However, I think that the cause of inflation, ie currency printing, is influencing the GDP figures, which are presumed to tell us whether or not we are in recession or whether the recession is shallow or whether we are and have been in depression.

If currency printing, such as QE, can give the appearance that a country is growing and producing above zero, then we have a link between inflation and recession/depression.

If there is a link between inflation and recession, then we cannot choose between inflation and recession. We cannot prevent recession by going for inflation.

If a country was on the gold standard, the GDP of that country would not be above the value of the gold in the country’s vaults, since no currency printing would be allowed to take the value of the currency above the value of the gold. In other words, the GDP would equal the value of the gold.

If that country’s politicians decided to relax their gold standard for a year by printing currency in excess of the value of the gold in the central bank, then the GDP would be greater than the value of the gold at the end of the year and would show a positive percentage, say, 2%.

But to interpret this 2% as growth would be irrational since the “growth” has only come about because there is 102% currency in that country compared to 100% gold value.

My current thinking is that inflation through currency printing does, indeed, determine the GDP figure each quarter. Therefore, the quarterly GDP figure is, in fact, a measure of inflation and not of growth.

Therefore, I am of the view that, whilst Europe, the US and China and the rest of the world are apparently growing, they are actually in Depression and are inflating instead of growing.

Ed Note: GDP is the sum of all activity in an economy and whether it is rising, static or falling is the question. But it is always quite a generalization as some parts are going up as others go down. You can certainly isolate a big dip in 2008-9 and a recovery though not necessarily to the prior level of activity or spread of activities. But you are right to see inflation as kind of illusionary growth that we do see in some countries now. Investment is particularly difficult in this kind of environment as you could fall behind the inflation rate and still be growing in nominal terms.

For many years prior to 2008 recorded growth was ficticious as it was based only on borrowed money. When ability to borrow dried up in 2008 QE (printing) was commenced to continue support for growth. In other words, the world is still pulling forward tomorrows demand to feed todays GDP. The longer this continues the greater the inevitable correction will be in the end.
The end is here now, but western governments and central banks are reluctant to accept that the medicine must be swallowed. All the wealth has gone, and they’ve mortgaged every possible asset several times over, but where has it gone? It has gone to China, Germany & the OPEC countries and they are using it to bail us out, buy us up, and take ownership lock stock & barrel. What does this mean for our future? In the future we’ll do as they dictate, we’ll have to live within our means and produce a profit for our owners, life will be tough.
Already the Eurozone countries seem quite willing to accept German ownership, but it won’t be long before they realise that this means permanent ‘real austerity’, subservience, restrictions on freedom and an iron fist.

Ed., thank you for your helpful Note. May I consider your statement that “GDP is the sum of all activity in an economy…” and fit it in with your later comment that “you are right to see inflation as a kind of illusionary growth…”

When I was about 17 years old, I visited some relatives in Longford, Eire, and I remember distinctly that its population was small as judged by the number of houses. I also remember that there was an enormous grass verge – more like a field – from the edge of the mainroad to the nearest houses.

I returned more recently after more than 40 years, and I was astonished at the density of the housing. The houses now came right up to the edge of the road. Houses everywhere as far as the eye could see.

At the time, I thought to myself that there must have been massive growth in the Tiger economy, that Eire must have been producing manufactures and exporting them to all parts of the globe. What a GDP it must have had during those years!

Now, I know that it was the Tiger-Shark economy and that the currency that built those houses and showed such positive GDPs each year was the result of EU currency borrowed by Eire.

The positive GDPs were not as a result of growth in manufactures but of “growth” in borrowing and, therefore, of “growth” in debt. The Tiger-Shark economy was eating up the savings of the good people of Eire even though the loss on those savings was postponed until now.

In contrast, the Norwegian government has saved its oil revenues in a sovereign wealth fund. It has become richer because it saved whereas Eire has become poorer because it borrowed. Maybe the Norwegians are spending the interest on their savings for the public good, such as houses, but the capital they keep for year after year.

They presumably add to their sovereign wealth fund from further oil revenues as well as investing in companies which are productive, using the dividends to build houses for their people.

What a difference between Eire and Norway! Yet Eire’s GDP would have been considerably greater during those boom borrowing years of the Tiger-Shark economy than that of Norway.

So, your point about GDP being the sum of all activity in an economy includes the sum of all activity funded by borrowed money. If a GDP is 2% on average for a year, yet 90% of that sum of all activity occurred solely and simply as a result of indebtedness from borrowing billions of euros from the EU, where is the growth?

You have acknowledged this point when you said that “inflation is a kind of illusionary growth”. The problem is, however, that we do not know what proportion of the announced GDP figure is due to activity based on debt-inflation-borrowing and what on solid manufactures and productivity.

With companies refusing to invest in capital equipment and to employ more staff at the present time because consumer expenditure is increasingly poor and less reliable, what proportion of the GDP figure is due to real output-growth? Very little indeed!

If high unemployment is increasing or not falling, and if companies are becoming cash richer and richer, then any positive GDP is due to government pumping currency into businesses, such as the building industry, and is, as you say, “illusionary growth based on inflation”.

In other words, the GDP figure is phoney! It measures the sum of all activity in an economy – true, but it does not measure the sum of all unindebted growth-productivity activity in that economy. At least, very little of it!

I still believe that the developed nations are in Depression as measured by a significant fall in living standards of the people.

The positive GDP phoney-statistic makes no difference to the continuing fall in the living standards of the people, as shown by the Occupy Wall Street sufferers around the world.

Yes John, still in depression, still in denial and still borrowing to fund the ‘look good’ culture.
Even those ‘cash rich’ companies you refer to have much greater debts than before. It is ironical that company ballance sheets record borrowings as ‘cash’, it looks impressive but look underneath.

Youth unemployment is over 1 million for the first time EVER! Overall unemployment is higher still in the UK.

And they say there is growth in the economy! GDP is a statistic used to lie to us!

For those 1 million young people, the UK is in Depression. For all those of any age who cannot find a job, the UK is in Depression.

Every time they announce a positive GDP statistic, ask yourself “and what percentage of that is economic activity based on borrowing and debt?”.

So, the recent announcement of 0.5% and 0.4% GDP “growth” somewhere in the Eurozone is “debt-growth” and is, therefore, anti-growth because it makes the nation poorer.

The lie is that GDP growth is, in fact, GDP anti-growth!

End of shout!