I sell hot cakes.
Last year I sold them at a buck each and I sold a hundred, contributing $100 to the GDP. The cost was $0.50 each, and my profit margin was 100%. My income (pre tax) was $50 after cost.
This year, inflation has increased my cost to $0.65, to maintain the same profit margin in $, I will have to sell the cakes at $1.15, if I want to maintain the profit margin in percentage, to take inflation into account, I will have to sell them at $1.30.
I sold a hundred again this year, in the first instance my contribution to the GDP will be $115, and the second $130, and this will be reflected in the governments numbers.
Did I have to do more work to increase my GDP output by 15 to 30 percentage points? Did I make more money in terms of purchasing power? In the first instance at $1.15, I would have made less while on paper my output increased by 15%.
In trading, we always keep an eye on the numbers released by the BLS in the good old US of A, the Bureau of Labor Statistics, or as some of us call it, the Bureau of Lies n Statistics. Why? Because the US consumer is a bit above 20% of the Global Economy, and when they stop spending, a lot of us will be up the creek with no paddle.
Sadly, the libertine John Maynard Keynes still holds sway over most peoples understanding of economics, and even the saying that goes “You can fool anyone, but you can never fool the currency trader” does not hold true anymore because everyone and their uncle seems to be one nowadays.
The best indicator of how the economy is doing is what you are going through. If its getting more difficult to make ends meet, then it’s not as rosy as the numbers say.
http://www.mondaymorningeconomist.com/cooking.html if you want to read more about how the governments of the world cook their books, in this case the USA.
Jeevindra Kumar
