Was the world economy in a recession in 2015? Labor theory says, “No.”
There is an interesting dispute brewing over the figures the IMF provided for global growth for the period 2013-2015. The IMF is showing the global economy grew during 2015, while others dispute the methodology the IMF is using to calculate its figures.
The details of this simpleton cat fight can be found here, “The World’s Economy Soared Last Year (or Plunged)“.
The IMF employs the so-called purchasing power parity (PPP) method that allegedly adjusts for changes in the exchange rate between currencies. (The explanation for how the IMF uses PPP to calculate GDP is described here.) Other researchers are crying foul on this method because they think it overstates the extent to which the world economy is presently growing.
If the methodology the IMF uses to calculate GDP is flawed, we would be left with the impression that the world economy is growing faster or more slowly than the underlying data would suggest. The methodology could potentially even be used to hide a real recession in the statistical data.
Some researchers who disagree with the IMF propose world economic growth should be measured by its most important currency, the dollar. This simpler, allegedly less opaque, measure would immediately confirm whether the world economy is growing or contracting in its most important currency.
As the chart below shows, by the method the IMF used, the world economy allegedly grew in 2015, while in dollar terms favored by other economists the world economy contracted:
The fatal flaw of all currency based measures of GDP
While the dispute here may appear to be simply over the methodology used to calculate GDP, both PPP and dollar measures of GDP have fatal flaws for anyone using labor theory in their analysis. Neither dollar denominated measures of GDP nor PPP denominated measures of GDP tell us how much value was actually created during 2015. This is because neither the dollar, nor any of the other currencies used to measure GDP can express the value of global output.
To express the labor values of commodities, and determine whether the world economy actually grew in labor value terms, you have to use a commodity money (gold or silver) as the standard for all currency denominated prices.
So, according to the measure of value preferred by labor theory, gold, did the world economy grow last year?
The answer is yes. While in dollar terms the world economy contracted in all of the regions indicated on the previous chart, in gold terms the GDP of world market as a whole still expanded.
Here is what GDP growth looked like in dollars (green), in the national currencies of the respective countries (blue) and in gold (yellow):
According to gold, global GDP expanded by 4%, while dollar denominated growth fell by 5%. Moreover, although gold indicates each of the countries suffered a recession, not expansion as their own national currencies appear to indicate, the contraction of each of the countries was less when denominated in gold than it was in dollar terms.
The reason the world market grew in gold denominated terms is that dollars represented a greater quantity of gold in 2015 than it did in 2014 — which is to say, the price standard of dollar denominated commodities fell.
Explaining the policies of the Federal Reserve
Now here is the thing: This has some real world implications for our analysis. Gold denominated GDP might make it easier to make sense of what the Fed is doing. It makes no sense for the Federal Reserve to be raising its policy rate now if the world economy is contracting. But despite the fact that dollar denominated global GDP says we are going into a recession, the Fed raised its policy rate and is expected to do it three or four more times this year.
So, which measure of GDP is the Fed looking at? The one that shows global GDP contracting (dollars)? Or the one that shows global growth expanding (gold). This is not to say one measure is right and the other is wrong — although I do think gold is accurately telling us what the world economy is doing. All I am asking is which do you think the Fed is looking at: the dollar measure that says world GDP is contracting by 5% or the gold measure that says it’s growing by 4%?
Finally, who do you think the IMF speaks for? Russia, the eurozone and Brazil? Or the United States?