America’s long-term “balance sheet numbers” just continue to get progressively worse. Unfortunately, since the stock market has been soaring and the GDP numbers look okay, most Americans assume that the U.S. economy is doing just fine.
But the stock market was soaring and the GDP numbers looked okay just prior to the great financial crisis of 2008 as well, and we saw how that turned out. The truth is that GDP is not the best measure for the health of the economy. Judging the U.S. economy by GDP is basically like measuring the financial health of an individual by how much money he or she spends, and I will attempt to illustrate that in this article.
If I went out right now and got a whole bunch of new credit cards and started spending money like there was no tomorrow, would that mean that my financial condition had improved?
No, in fact it would mean that my long-term financial condition just got a whole lot worse.
GDP is a measurement of how much economic activity is happening in our society, and it is basically an indication of how much money is changing hands.
But just because more money is changing hands does not mean that things are going well. What really matters is what is happening to assets and liabilities. In other words, is wealth being built or is more debt just being accumulated?