Quantifying all the money being moved around the economy is difficult. It requires understanding the will of households, firms, governments, and foreign markets. To pull off such a trick, we’d need near perfect knowledge.

Such omniscience is impossible. So, our solution is to provide a macroeconomic model for all the money being earned or spent on all final domestic goods and services.

Measuring a Nation’s Income

Gross Domestic Product (GDP) serves as the measurement of the income or expenditures of a nation, the calculation of money transferring hands, and a comparison of national efficiency and wealth. As an economic indicator, it gives us an idea of a nation’s welfare by giving it an income, and comparing it’s earning and spending powers to previous fiscal calendar quarters. Investors and economists looking to interpret the data can find releases from the Bureau of Economic Analysis.

Stocks and Flows

Thinking about GDP means categorizing all things in the national economy as either stocks or flows. Stocks are a quantity we measure at a specific point in time. Flows are that same quantity measured over a specific period of time. These numbers give us two distinct ways of measuring GDP:

1. Looking at the prices of goods with inflation (nominal GDP); and,
2. Looking at the prices of goods without inflation (real GDP).

When nominal GDP is higher than real GDP (it usually is), there is a rate of inflation within the economy. We measure this with the Consumer-Price Index (which finds how prices have changed over a specific quantity or flow variable) and the GDP Deflator (which finds how quantities have changed over a specific price or stock variable). Then we take the best of both worlds and average the two together. This is known as the Fisher Index.

(Note: all numbers are presented with seasonally-adjusted averages.)

The Income Approach and the Expenditure Approach

A nation’s total income is added up in two different forms:

1. the income approach; and,
2. the expenditure approach.

The income approach measures a nation’s income by the amount of money made within the country. The expenditure approach measures by the amount of money spent within the country. Either approach should theoretically yield the same amount.

The Income Approach Breakdown: W+P+R+I+T

The income approach is found through all money earned by firms and households. This includes:

Wages – Monies earned by households through business payrolls.

Profit – Monies earned by firms through businesses. This also includes money earned by the self-employed.

Rent – Monies earned by landlords for use of land and properties by consumer households and firms.

Interest – Monies earned through banking interest.

Taxes – Monies collected by the government.

The income approach is a valid method for collecting GDP data, yet is less popular and not used officially on government economic releases.

The Expenditure Approach Breakdown – C+I+G+(X-M)

The expenditure approach is used more frequently than the income approach, and its components are accessible through Federal Reserve Economic Data.

Consumption – Consumption, which accounts for around two-thirds of GDP, is the expenditure of all households within a nation. It is divided into three subcategories: durable goods, nondurable goods, and services. Durable goods make up items that are held for long-term purposes such as TV’s or cars. Nondurable goods serve short-term purposes and include food and clothing. Services are work done for consumers by individuals and firms.

Investment – Investment is made up of goods bought for future use. Investment is also divided into three subcategories: business fixed investment, residential fixed investment, and inventory investment. Business fixed investment is the purchase of new plant and equipment for firms. Residential fixed investment is the purchase of housing by households and landlords. Inventory investment is the increase in a firm’s inventory. For example, an unsold 2010 Corolla would be added to Toyota’s (TM) investment spending.

Government Spending – Government spending makes up all goods and services bought by federal, state, and local governments. This includes military spending, highways and infrastructure, and funding for government services. However, it is important to note that government spending does not include transfer payments to individuals such as Social Security and welfare. Transfer payments reallocate existing income. Since they are not made in exchange for goods and services, they are not included in GDP.

Net Exports – The last category, net exports, is the total value of the exports a nation provides the rest of the world minus the value of the imports a nation receives from foreign countries. Starting in 1976 our country has experienced a trade deficit because the amount of goods imported were more than the number exported. In 1985 the US began its infamous trading deficit with China.

Is Gross Domestic Product Accurate?

The flaws with GDP data are that some use these numbers to determine the welfare and quality of life in a country. Unfortunately, GDP can only be used to calculate the amount of domestic production. GDP fails to tell us how large the gap is between the rich and the poor, the wealth of the average citizen, and is also underestimated because it does not include money being pumped through underground economies.

Another criticism is that GDP fails to categorize unpaid house work such as that performed by stay-at-home parents. The value of this labor not being included diminishes overall GDP. Similarly, this draws criticism because a sandwich eaten at a restaurant contributes to GDP, where a sandwich prepared at home does not. The sale of used goods is not included either. Anyone who has been to a yard sale or heard of eBay (EBAY) knows this is a major flaw with GDP data.

Lastly, GDP data is backward looking, always revised later, and subject to government manipulation. For this reason, some famous investors such as Jim Rogers don’t even pay attention to GDP numbers.

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From Yahoo Finance:

It’s the beginning of the end for the U.S. dollar.

China made headlines last week, overtaking Japan as the second-largest economy in the world. However, Damien Hoffman, co-founder of Wallstcheatsheet.com, says it was other news out of China that may prove more vital for the dollar’s standing as the world’s reserve currency.

Not only is China diversifying away from U.S. Treasuries with euros and other currencies, they are buying more gold and opening their debt markets to international companies. Last week, McDonald’s (MCD) became the first nonfinancial foreign company to launch a yuan-backed bond offering. The deal was relatively small, with the fast-food giant raising nearly $30 million to expand in China, but was symbolically huge.

“The number itself isn’t important,” Hoffman tells Aaron in this clip. “What’s important is that now those yuan-backed bonds will change the dynamic of capital that is available in the world and where these companies are going to go to get that capital.”

If this trend continues – which Hoffman believes is inevitable – demand for U.S. dollars will wane, resulting in an even weaker dollar.

Compounding the problem is the seismic shift of industrial jobs to emerging markets in Latin America and Asia. Hoffman worries a disappearing middle class and a compromised currency “doesn’t bode well” for living standards in America. He warns that unless we fundamentally fix our economic imbalances it’ll be wise to teach our children Mandarin — one of the prime reasons famed investor Jimmy Rogers says he moved his family to Singapore more-than three years ago.

This morning, shares if The India Fund (NYSE: IFN) pushed ahead to 52-week highs as US equities sold off.  While IFN has subsequently given away some of the day’s gains, the achievement in the face of market weakness deserves our attention.  This comes on the heals the first Indian IPO in the US since 2007 with MakeMyTrip (NASDAQ: MMYT) and the news that India may consider easing constraints on foreign capital inflows to Indian equity markets.

Yesterday, noted investor Jim Rogers put out a note on his blog saying the following:

India is perhaps going to open its market to foreigners to make it easy for all foreigners to buy and sell shares in India. If India does that, that will make me to have to scratch my head and think a lot more about India. Indian shares are certainly not cheap and they have gone up a lot, but if they are finally going to make the Indian stock market open and accessible to everybody, that having to go through a bunch of hoops or a bunch of rigmaroles, that is certainly going to attract more and more investors to India. Now, they have to make the currency convertible, they have to follow through on a lot of things, but if India is going to do that, it would have to make me reconsider my views on India.

This development bodes particularly well for this BRIC country.  India already boasts a prominent technology sector and one of the world’s most impressive growth rates, however, the country has always been reluctant to fully tap into international capital markets.  Such a move would drastically alter the investment landscape in India for the better, particularly at a time when many in the developing world are looking for growth opportunities abroad.

Disclosure: Long IFN

Recent Gross Domestic Product data out of China and Singapore has ignited new arguments from both bulls and bears. But how much credence do successful macro investors give to GDP numbers? Depends on the investor.

One of the world’s most successful macro investors, Jim Rogers, doesn’t use GDP as a major variable in his investing framework. When I asked him why, he offered these four reasons:

Jim Rogers: I do not pay attention to that sort of thing for the following reasons:

1. The numbers are backward looking;
2. They are always revised;
3. Every government has different methodologies; and,
4. Most governments have no clue so they just make up the numbers.

So, next time someone on Wall Street tries to persuade you to make investments solely on the “big” GDP data, keep Jim’s wisdom in mind.

Jim Rogers is one of the world’s top investors and author of A Gift to My Children: A Father’s Lessons for Life and Investing.

Looking for great investing ideas? Wall St. Cheat Sheet Premium subscribers have been crushing the markets with winning stock picks and a professional navigator in the hot gold and silver sectors. Let our team of professionals give you their best investing and trading ideas: click here now for your free trial.

Since early 2009 we’ve written about the super-bullish long-term cup and handle pattern in Gold (GLD). It dates back to 1980 and has a logarithmic target of about $2,100. We noted that previous cup and handle patterns in Gold all reached their logarithmic target. We expect that this move to $2,100 will be the recognition move that awakens the masses to the Gold bull market and the reality of severe inflation in the near future.

Speaking of the near future, the relative strength of Gold in the face of a strong US dollar (or weak Euro) is one big hint that this recognition move is around the corner. We’ve noted this before and it is important to explain to new readers. Gold priced in foreign currencies has been leading Gold in US$ terms. It is true for the entire bull market and is quite evident in just the past few years.

In the chart below we use the foreign currency ETF (UDN) to show Gold against currencies ex the US Dollar. The lower half shows Gold in US Dollars. Note how Gold/UDN is breaking away to new highs. That chart is so strong that it barely had time for even a small correction. Since Gold/UDN has been leading Gold reliably, this is an indication of what is eventually coming in the US Dollar price of Gold.

Nowhere Close to a Bubble

As Gold pierces $1200 and makes a new high, surely we will hear a new round of calls that Gold is in a bubble or it is a crowded trade. Be sure to avoid this unsubstantiated nonsense, as it will only serve to waste your time and inevitably reduce your net worth. Let me provide you with just a few pieces of information, which refute this baseless claim.

First, did you know that as of a few months ago, Gold equities and ETF’s only accounted for 0.7% of all managed assets in the world! Can you imagine how high precious metals could rise, if everyone in the world just put 2% of their assets in this sector? What if it was 5% or 10%?

Second, Jim Rogers recently spoke at a conference with, in his words, 300 big-time money managers. Apparently 76% of them had never owned Gold!

Third, superstar fund manager John Paulson of subprime fame has had great difficulty raising money for his Gold fund. Even one of the top fund managers can’t even convince people to get aboard the Gold train.

Finally, consider public opinion on Gold, courtesy of sentimentrader.com. In the past, public opinion followed Gold higher. Yet, since the end of 2008, public opinion has stayed in a range, while Gold has climbed about $300/oz. The public hasn’t budged despite the historic breakout and holding of $1000/oz level.

Policy Makers are Shooting Blanks

Mainstream and amateur analysts will make the claims that the Fed will tighten or that the government will get serious about its troubling finances. There is almost nothing the authorities can do to stop the coming inflation and the roaring bull market in Gold and Silver.

First and most importantly, because of the overall debt level, which is massive compared to 1980, the US cannot afford to let interest rates rise. If interest rates rise, the market will only lose greater and greater confidence in the US as the interest burden will accelerate thereby hurting the economy’s ability to grow and hastening the threat of bankruptcy. However, if interest rates remain low, speculation in hard assets will become rampant as these markets continue to rise, inflation ticks up and purchasing power declines.

Second, the Fed would have difficulty trying to tighten the money supply. Remember that to do this, the Fed would need to sell assets into the market. Remember, the Fed’s balance sheet consists of garbage assets that the Fed overpaid for. Yes they could raise interest rates but then how would the banks survive? They wouldn’t be able to borrow at 0.25% and repair their balance sheets. If the Fed would raise rates above the level of inflation, it would certainly end up threatening the financial system.

Moreover, as we’ve noted again and again, severe inflation results from a loss of confidence in a government’s ability to meet its debts. This manifests in a falling bond market, rising interest rates and currency weakness. Debt crisis’ go hand in hand with currency crises. Hence, we see Gold breaking out against numerous currencies even though “the banks aren’t lending” and “velocity is falling.”

The last line of defense is the Treasury market. If and when interest rates breakout to the upside, the authorities will effectively lose both control and power. At that point, the inflation genie will be out of the bottle. The action in Gold is already hinting at that outcome.

Conclusion

Even though Gold has risen nine years in a row, it is nowhere near a bubble. Just take a look at this chart courtesy of Frank Holmes. It compares Gold’s current bull market with its bull market in the 1970s.

Note that Gold rose about six-fold the first eight years into the bull market (it began in 1970). Ultimately it rose 25-fold. The Nasdaq from 1982 to 1992 advanced about four fold. Ultimately it rose 29-fold. The Nikkei advanced less than three fold from 1970 to 1978. From 1970 to 1990 it gained 19-fold. Gold is nine years into its bull market and has advanced less than five fold. See a pattern here?

If you’d like professional assistance riding the coming acceleration and eventual mania in the Gold and Silver market, then visit our website and consider a free 14-day trial to our premium newsletter.

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

All investment managers use the media to talk their book. With that caveat aside, Jim Chanos has been ubiquitous over the past several weeks. He’s going to need much more help if he plans to defeat the Chinese government’s media machine.

Apparently, Chanos is beating his drum that China’s real estate market is in a bubble. Fair enough. Even China bull Jim Rogers agrees. However, there is something comical about one man pushing this hard to pop a bubble which is being controlled by the powerhouse Chinese Government.

In case you have been living in a cave which does not have access to the financial media, here is a summary of Chanos’ mantra from his recent appearance on Fox Business:

“China is in the midst of a world class property boom. It is leading to the economic growth we are seeing. Almost half of their GDP is coming from that.”

There you have it. If you agree, start throwing darts at the China bubble.

Kirby Daley: Gold is an Armageddon Hedge…

CNBC Europe: Gold Set to Go Higher…

Marc Faber: Gold Standard Already in Place…

Jim Rogers talks about the Euro and the US$…..

Peter Schiff on the US$ and Paul Krugman….

David Tice on CNBC….

For unbiased analysis and complete coverage of Gold and Silver stocks, try a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

Jim Rogers is one of the best global investors of all-time. Last time we chatted a couple months ago he was sleeping soundly with his investments in commodities. Before Bloomberg interviewed Jim this morning, I caught up with him last week to get some high level perspective on the current issues unfolding in the European Union …

Damien Hoffman: Jim, Do you think the EU will survive economically and/or politically through this entire debacle?

Jim: Well I’m long the Euro because I expect them to come through this one okay. Either Greece is going to be papered over and they’ll give a blast to the Euro, or they’re going to let Greece go bankrupt. In my view, this is what they should do because then people would say, “Wow. They’re serious about sound economies in Europe.” That would make the Euro very strong. Then people would know they are not just going to print money or paper over failure.

Either way, I think there’s probably a rally coming. There’s a huge short position in the Euro and whenever there’s been a huge short position in anything, it’s sometimes profitable to go to the other side. So, I am long the Euro because I think there are too many pessimists.

Maybe Greece will go bankrupt and the Euro will collapse before people realize, “That’s good … that’s not bad.” Sometimes it takes a lot for perception to become reality or reality become perception.

Damien: What other countries are you monitoring to make sure the situation isn’t going to spread or get out of control?

Jim: I’m trying to watch the whole world. We cannot be very successful investors if we don’t know what’s going on everywhere. All of a sudden you’ll something like Iceland will show up and you’ll get killed because you didn’t know that Iceland even existed. Usually these things come out of the blue from some place we’re not thinking of.

Damien: Do you think Greece will be the first to tumble?

Jim: I would suspect that the U.K. is more likely to suffer before Greece, but who knows. Maybe it’s time for all of them to collapse and come down together.

Damien: Speaking of collapsing together, do you think the creditor-consumer model — as used by the Chinese with the US and the Germans with the Greeks — has been proven unstable and countries should be moving more passionately towards developing organic manufacturing and consumption economies at home?

Jim: The idea of economies built on consumerism has been discredited many times. The last ten or twenty years people have been shouting, “Oh gosh! Thank goodness for the American consumer.” However, no economy has ever been built on consumption for the long term.

The only way you build an economy is through savings and investments. Look at Dubai. The basic economic model in Dubai was to build an economy based on real estate speculation. That cannot work. You’ve got to have savings, investing, and productive capacity.

It’s all wonderful if we can go to the disco every Saturday night or go drinking by paying our bills with transfer payments. But that doesn’t do anything for long term productivity or competitiveness. Also, guys who build tanks have fun building the tank, but that tank then goes out in the sun or rain to rust. It doesn’t do anything for future productivity. The only way to build an economy long term is to save and invest while building infrastructure and productivity. Nothing else has ever worked.

Damien: Which countries are doing things correctly?

Jim: There are some doing better than others. The largest creditor nations in the world now are China, Korea, Japan, Taiwan, Hong Kong, and Singapore. That’s where the assets are. There are hundreds of billions of dollars in these countries because they’ve been doing something right.

You know who the largest debtor nations in the world are? I assure you they’re not in Asia. They’re in the West.

The future has always belonged to the people who’ve got the assets — the people who’ve built up savings and investing. Throughout history, we have never heard people say, “Gosh. Look over there at all those debtors. Why don’t we go over there and join those debtors?”

Instead, throughout history people have said, “Look over there where all the assets are.” People have always said they want to go where the assets are, not where the debts are. That’s what happened in America etc., and that’s what’s going to happen in the future as well.

Damien: Jim, thank you very much for updating us on your view.

Jim: You’re welcome.

This is the start of a fun new series here at Wall St. Cheat Sheet. Over the next few months we have some of the most popular minds in finance answering the open-ended intro “If I were Federal Reserve Chairman I would …”

We kick things off with legendary investor Jim Rogers …

Jim Rogers: If I were Federal Reserve Chairman I would abolish the Federal Reserve and then resign. It would be best for the world.
The market would then decide the monetary policy rather than bureaucrats. The bureaucrats have been printing huge amounts of money and incurring gigantic amounts of debt. Neither would or could happen after I abolish the central bank and resign.

Jim Rogers

Jim Rogers is one of the most respected investors in the world. I had a chance to chat with him the other morning to get more details about some of his recent comments in the media …

Damien Hoffman: Jim, you were in the media a few times last week and I want to follow up on a few points you made. You said on Bloomberg that Nouriel Roubini did not do his homework regarding the asset bubbles about which he is now warning. Can you explain what homework he did not do?

Jim: All of it. How can you talk about a bubble when assets such as silver are 70% below their all-time high? Same for coffee, sugar, cotton, natural gas, and many more. I have a problem talking about a bubble when assets are this depressed from their all-time highs.

A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.

I am flabbergasted at Mr. Roubini’s comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. That’s hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.

If an asset rises 100% in one year, that’s a great year, but not necessarily a bubble. Look at oil. It’s up huge off the bottom but nowhere near it’s old highs. Look at Citigroup. The stock is up 3 or so times off the bottom …

Damien: … and I doubt long term shareholders feel like they are in a bubble.

Jim: Exactly. And since Mr. Roubini thought oil would stay below $40 a barrel for all of 2009, I would love for him to tell me and the rest of the world exactly where are all the oil supplies because the International Energy Agency (IEA) — which has the best global data set on energy supplies — has no idea where is the oil. Mr. Roubini should tell us where this price suppressing oil supply is hidden. All the oil possessing countries in the world have declining reserves. All the oil companies have declining reserves. So Mr. Roubini must know something the rest of us don’t.

Damien: On another note, Gold has been reaching new all-time highs, although not inflation adjusted. You said Gold may reach $2,000 an ounce over the next decade. Can you explain what variables will push Gold to $2,000?

Jim: First, I hope you will keep Mr. Roubini’s statement where he said Gold going to $2,000 an ounce by 2019 is “utter nonsense.” I think you’re going to get a chance to call him before 2019 to ask him what he thinks of Gold at $2,000 and why he thought it was “utter nonsense.”

Regarding variables, it’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it.

Additionally, no new large gold mines have been opened in decades. Some of those mines are over 100-years old. They are all depleting. On the other hand, central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.

If you adjust Gold for inflation and go back to it’s former all-time high in 1980, Gold should be over $2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs. That does not mean Gold has to get back to a true all-time high. Nothing has to. However, I suspect that given all the money printing in the world, we will see much higher prices for hard assets.

Despite Gold’s potential, I think I will make more money in other commodities such as silver, cotton, or coffee — all of which are terribly depressed.

Damien: Speaking of other assets, as an outsider living abroad, what is your opinion on US Equities?

Jim: This is one of the few times in my life I have not had shorts anywhere in the world. I have also not had a lot of longs in the stock market because I’ve chosen longs in commodities and currencies. I have kept away from shorts because there is a gigantic amount of money being printed and it has to go somewhere. I thought some of it would end up in the stock market, and it has.

How much higher can the equity markets go? I don’t know. There are a lot of problems in the economy, but I don’t know when those problems will cause a downdraft in the stock market. All we’ve done is paper over the problem, so I expect we’ll have to deal with those issues in the future. Printing and spending money we don’t have simply prolongs the problems and makes them worse in the long run.

If the world economy improves, commodities will lead the way due to demand and shortages. If the world economy does not get better, commodities are still a great place to be because governments are printing so much money. And, if the world economy doesn’t get better, they will print even more money!

Damien: Jim, thank you for taking the time to share your outlook and opinions. I greatly appreciate it.

Jim: You are very welcome. Your site is very impressive. I look forward to staying in touch.