Friday, October 29, 2004

As noted below, the somewhat robust 3.7% GDP growth in the third quarter was heavily dependent on motor vehicle and parts consumption. This gives me a chance to blow my deflation horn as well as highlight one of my favorite deflationary data points.

In the third quarter, new vehicle prices (NSA) changed another -1.6% in nominal terms and -1.9% in real terms. As of September 2004, nominal new vehicle prices are -6.5% since 1997; in real terms, they are -21%.

In the 21st century, GDP growth depends on goods deflation. Real prices fall, we consume more than we would if prices were stable or rising, consumption figures increase, GDP goes up. We draw down the equity in our homes and borrow from abroad to keep the wheel turning. At a savings rate of 0.4% and threats of a falling dollar thanks to a current account deficit in the range of $600bn this year, we'll have to start selling our property off outright soon just to stay above water.

UPDATE: After reading comments on this post, I realized I was being a bit coy with the phrase "selling our property off outright". Commentor big al cuts through the niceities:
"What do you suppose China will buy with your dollars? Land and or mineral resources I suppose. They are already getting into the Tar Sands, perhaps the coalfields in the US, or forests. How soon before you can't have them, because the owners ship the products to China?"
Recall all the fuss about Japan buying up everything in sight in the US during the late 1980s? Now replay that for the 2000s but with communists in the lead role. Sound fun?


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