GDP data shakes confidence

Wednesday afternoon’s Q4 GDP number was a shock for markets, though less surprising to those of you familiar with our views. Falling business inventories, reduced exports and a 22.5% quarterly drop in defence spending pushing the GDP change into negative territory (-0.1%) for the first time since the country emerged (technically) from recession in 2009. Yesterday’s larger-than-expected rise in unemployment benefit claims also hurt sentiment, though owing to seasonal factors, January can see unusually large fluctuations in this particular data set. Today’s nonfarm payroll numbers – released at 1.30pm GMT (8.30EDT) – will be watched with interest for further signs of economic deterioration.

Despite the dollar being hit by this news – the Dollar Index falling below 79.00 and grinding towards the bottom of its recent trading range – there was no big bullish reaction in precious metals. Gold rose to $1,680 immediately following news of the Q4 GDP decline, but again encountered stubborn resistance that resulted in it falling straight back to $1,650. Silver remains trapped below $32.50, while the weak data has temporarily at least thrown a wrench in the rally we were seeing in platinum, palladium, and other industrial commodities.

The GDP “surprise” should not have been a shock to anyone familiar with the structural problems afflicting the US economy – problems common to many other developed countries. Simply put, for a long-time now GDP has been made to look good by increasing government spending. But of course, as James Turk points out in this Free Gold Money Report article, governments do not create wealth; they consume it. Steady increases in government’s share of the national economy represent an increasing squeeze on the private sector, which translates overtime into a weaker and weaker economy – as the private sector is what creates wealth.

This isn’t to say that some government spending isn’t needed or worthwhile. But the simple trade-off described above needs to be understood if you want to gain a clear understanding of why the West is in the economic mess it’s in, and one of the main reasons why – as far as central banks are concerned – continued money printing is a political necessity.