Is the economy good or bad? Is it growing or shrinking? Mr Bernanke and the mainstream economists all direct us to watch the GDP, or Gross Domestic Product to answer these questions. Of course, this is completely misleading as one might expect from a group of people who get pretty much everything wrong.

If you want to answer those questions, there is a pre-question to ask. What constitutes a good economy (or a bad one)? What does an economy need to do to earn a merit badge?

We must look to the purpose of the economy to answer the pre-questions. We need to go back to Adam Smith and his famous discussion of the pin-makers that illustrated the division of labor. Even the most primitive of peoples divide the labor of sustaining daily life – for example, the men might be the hunters while the women raise children and tend the home fires. This is a recognition that specialization improves overall productivity. Once people specialize in production, then we need to build the infrastructure that supports the exchange of goods and services between specialists so that, to the extent possible, everyone gets a share although not necessarily an equal share. For example, a blacksmith needs food but the community is better off if he spends his days at his forge while the farmers supply him with food – in exchange for plows, scythes, horse-shoeing services and so forth.

Modern society is no different. The purpose of the economy is to improve everyone’s standard of living by increasing the quantity of goods and services delivered to people for their personal consumption. So if we want to know how the economy is doing, that is what we need to measure.

That is not what GDP measures. Just think of the old gulag practice of assigning a crew to build a wall, and then another crew to tear it down. Then another crew rebuilds it and the cycle repeats. The economists would count both the construction and the destruction of the wall as production, so the faster the wall is built and destroyed again, the higher GDP becomes. But it is pointless activity and no wall results. Measuring this way allows Mr Bernanke and the other economists to claim the economy is growing when in fact it is not, because many of the goods and services produced do not benefit anyone.

A more relevant example will be the rebuilding after last week’s tragic earthquake and tsunami. That will boost Japan’s GDP. But it is merely offsetting a vast loss relative to a week ago, which is not subtracted from GDP. People are far worse off than they were a week ago, and an immense reconstruction effort will be needed to get them back to some approximation of where they were before. This is Bastiat’s “that which is not seen.” It is not seen because the accounting is bogus. If you are going to use GDP, you need to subtract GDDD&O – Gross Domestic Destruction, Discarding, Depreciation and Obsolescence.

Where do we look, then? Well, we can start here:

This chart shows how much income people have that they can spend, on a per capita basis. It is closer, but it fails to acknowledge that fact that more than 20% of personal income is borrowed money – borrowed by the Federal government. Leaving that aside, it is clear that GDP and personal income lead one to two very different conclusions.

From the Wall Street shill channel’s Larry Kudlow:

“The human toll here looks to be much worse than the economic toll and we can be grateful for that.”

Just shows the complete indifference to human suffering characteristic of Wall Street sociopaths.

Overnight there was a tragic earthquake and subsequent tsunami which appears to have been far more damaging than the quake itself. Of course, the pundits are out in full force this morning asserting that the damage  will ultimately be beneficial because the re-building will spur economic growth. Sigh. More economic idiocy, a fallacy that was originally exposed by Frédéric Bastiat in 1850. I just cannot believe the sheer idiocy that passes for economic wisdom these days. I mean, there are economic issues which are subtle and about which legitimate differences of opinion exist in the absence of any falsifiable theories. This isn’t one of them. A staggering amount of capital stock has been destroyed and must be replaced. This is a hit to the Japanese economy. Insurance companies facing claims will have to liquidate much of their securities portfolios – which themselves may also be impaired by losses from damage. This means funds will have to be diverted from consumption to investment, not just in Japan but around the world. There may be significant consequences for other countries where Japanese insurers and other companies have invested, and must now liquidate those investments.

If this is really an economic benefit, shouldn’t we blow up a city every month and really get some growth going?

As some day it may happen that a victim must be found,
I’ve got a little list — I’ve got a little list
Of society offenders who might well be underground,
And who never would be missed — who never would be missed!

– W.S. Gilbert, The Mikado

Now that I have vented, I note that this is the 2000th. post to this blog.

Edit: It’s Sunday morning, and Bloomberg is leading the shills. As usual. I’m sure the WSJ and Barron’s won’t be left behind.

Edit: Credit to Caroline Baum, also of Bloomberg, for exposing the fallacy.

From zero hedge, a real shocker:

And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco’s flagship Total Return Fund, the world’s largest bond fund, in the month of January, has taken its bond holdings to zero (and -14% on a Duration Weighted Exposure basis). The offset, not surprisingly, is cash. After sporting $28.6 billion in “government related” securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total TRF holdings of $236.9 billion as of February 28). This is the most cash the flagship fund has ever held, and the lowest amount in Treasury holdings since January 2009 before it was made clear that the Fed was going to adjust QE1 to include Treasurys in addition to Mortgage Backed Securities.

Edit: More on this, again from zero hedge, sourced from an ex-employee of Pimco who underlines the earth-shaking implications of this move and the amount of analysis and discussion that would have gone into it. What this really means is that Pimco believes that Bernanke’s game is up and his bluff is about to be called.

Having worked at PIMCO for 4.5 years, I can tell you that this kind of a major allocation decision was not reached overnight nor was it reached without considerable debate by every senior member of the firm. In other words, the decision to lower total US Treasuries to 0% was discussed by senior portfolio managers, senior account managers and many prominent outside consultants for days and perhaps even weeks before it was finally implemented. They never do anything over there without vigorous debate and discussion. For example, Alan Greenspan is a paid consultant to the firm and often participates in their quarterly Secular Outlook meetings. I don’t know if Mr. Greenspan participated in the debate about this decision but I wouldn’t be surprised if he or others of his stature did.

A very basic problem afflicting most modern societies is the myth of altruistic government. The notion is that government and its employees and officials operate without regard for personal or organizational gain. Therefore, goes the myth, government can be trusted to make decisions, laws and regulations solely for the benefit or the nation or community, without conflict of interest, and deliver services cost-effectively because there is no profit motive.

The truth is that government consists of people, who are the same as the rest of us, no better and no worse, motivated by the same self-interest. Given the ability to compel, they use it to further their personal needs and desires, which can be multiple and even conflicting, for example, religious as well as financial. They also try to use their powers to continuously expand the scope of government and its degree of control, transferring decision making power from the private sector to the government sector.

Admittedly there are countries where the truth is closer to the myth than elsewhere. Some of the Scandinavian countries, for example.  But in general, it isn’t even close and as the rewards for the abuse of government power become bigger, the myth becomes more of a joke than anything else. Eventually they kill the golden goose and some kind of restart occurs.

The realization that government workers have used their monopoly position to extract monopoly rents is finally seeping through to the citizenry. Even CNBC, the populist weathervane, is now on the case.

Barbara Davis, a retiree from Cherry Hill, N.J., has been watching public workers in rallies in Madison, Wis., as well as Trenton. She says the protesters are wrong about tightening benefits hurting the middle class.

“I’m sorry, but what they’re doing is telling off the middle class,” said Davis, 76, and a co-chairwoman of the Cherry Hill Area Tea Party. “The middle-class people don’t get all the goodies that they do.”

At its heart, the issue is this: Some public workers get a sweet deal compared to other workers. And it’s taxpayers who pay for it.