Italy's New And Improved GDP

What Italy's "Mafia"-style GDP Says about the Eurozone Economy.

I cannot stress how major this event is, as it does not only speak of the Italian government's view on obtaining easy credit regardless of the means; it also speaks volumes about the EU itself.

The fact that the EU is fine with this shoddy GDP calculation and even supports including all activities (black market and beyond) in meeting its criteria for borrowing and spending suggests that the EU cares more about how its member-states' respective GDP figures LOOK as opposed to how well they are actually performing. It is beginning to become clear that austerity has not worked in Italy (and Greece etc. given the record unemployment rate), and now make-believe austerity coupled with inflated GDP figures shall convince creditors that the EU is recovering; if they were truly on the way up, there would be no need for such liberal accounting that includes an item that has been there all along. If anything, I believe that this is as sure a sign as anything to stay far away from EU debt.

Worse, it is well-known that black market activities often come at the expense of real economic activities. To include it is akin to encouraging it, which would more than likely eat away at real GDP numbers down the line thanks to increased crime and drug-addicted youths. All this is compounded by the impossible task of actually measuring such activity; by definition, illegal activity cannot be accurately measured since regulation of any kind would be its anti-thesis. This basically allows any EU country to inflate its GDP with any number at all, the definition of a Ponzi scheme.

The US is in bad shape too

Things are not much brighter in the US; the US has had to report a -1% GDP growth despite recent measures to include intangibles in the GDP calculation. Removing these would surely push its GDP into even poorer territory, and the use of cold weather as an excuse is...rather unimaginative.

In a note on the release, PNC Chief Economist Stuart Hoffman wrote, "I believe this real GDP decline, mostly due to the polar vortex, coiled the 'economic spring' even tighter for a sharp snap- back (boing!) this quarter where I have an above-consensus forecast for a 4.0% annualized rise in real GDP."

In another note, I noted that none of what was said in that last note had made any sense other than that polar bear that was sprung into a coiled python and snapped its back (zing!). In all honesty, I see no reason why a particularly cruel quarter would have a positive impact on the next. If anything, it could have the reverse effect.

At this stage the above problems are but the first heralds of potential policy failure, and I may be jumping the gun in calling it so. However, in summary, I believe that

1) including a sector of the economy that was always there, which can be estimated and manipulated to be any number and which has a detrimental impact on the real economy is a terrifying precedent which will justify infinite GDP growth and opaque markets that are no longer honest. Imagine if Greece had included black market activities when calculating its initial GDP, the world may have never found out that it had wasted much of its funds and was paying back old loans with new loans. With a 10% GDP growth, the world may have decided that in spite of the financial crises, Greece was a safe bet.

2) a spade should be called a spade, to blame the weather and continuously predict future recovery as opposed to admitting that there is a problem at all further contributes to the lack of transparency in markets and an inability to address the root problems.

3) when markets are no longer honest, and in the face of real policy failure, people are being forced to consider alternatives and safe haven currencies. Prime among these are gold and silver.

(click to enlarge)

And WHERE does gold go?

We observe that, as usual, gold is down sharply on what could only be interpreted as terrible news on the EU and US fronts. Why is that, I wonder? Instead of heading up, or even trading sideways, gold is down because apparently people were awaiting US data... Yet when the data proves negative, gold does not return to where it had been, suggesting that this was NOT the reason for a fall in gold. It is widely acknowledged now that gold is being manipulated, where previously any allegation that the markets had been rigged was met with ridicule. Manipulation permeates many markets, including LIBOR and aluminum, and it was presumptuous to assume gold was immune to this. I believe that it is time to buy physical gold and gold miners (GDX) (GDXJ) while the market is still irrationally short.