The retail sales report released yesterday is a live example of this. Gasoline station sales are up 26.5 percent nominally. Gasoline prices are up 40.5 percent. The identity says retail sales grew. Price theory asks what actually happened — households bought fewer gallons and spent more dollars doing it. Real volume fell while the nominal number rose.
The debt side makes it worse. When the accounting identity gets misread as consumer strength, the follow-on question never gets asked: how is the spending being funded? U.S. household debt hit $18.8 trillion in Q1 — a record — with a personal savings rate of 2.6%. Spending went up. Income didn't follow at the same rate. The gap got filled with borrowed money. The identity still holds. It just doesn't tell you what you think it tells you.
This is the problem I've had with undergraduate economics. Only a percentage of economics students pursue econometrics, the rest are encouraged to turn a blind eye to the underlying cause. The curve has shifted right, so let's make it shift left and all's will be well.
The retail sales report released yesterday is a live example of this. Gasoline station sales are up 26.5 percent nominally. Gasoline prices are up 40.5 percent. The identity says retail sales grew. Price theory asks what actually happened — households bought fewer gallons and spent more dollars doing it. Real volume fell while the nominal number rose.
The debt side makes it worse. When the accounting identity gets misread as consumer strength, the follow-on question never gets asked: how is the spending being funded? U.S. household debt hit $18.8 trillion in Q1 — a record — with a personal savings rate of 2.6%. Spending went up. Income didn't follow at the same rate. The gap got filled with borrowed money. The identity still holds. It just doesn't tell you what you think it tells you.
This is the problem I've had with undergraduate economics. Only a percentage of economics students pursue econometrics, the rest are encouraged to turn a blind eye to the underlying cause. The curve has shifted right, so let's make it shift left and all's will be well.
Brian,
Unfortunately, everyone watching Fox News (except your readers!) will believe Peter Navarro.