I have no doubt that you were correct in stating that a hedge fund manager claimed that TARP was goosing GDP. However, his claim was incorrect, and when you tried to verify it, you made a mistake: capital transfers are simply that, transfers, and are not counted as production or income. Put slightly differently, they are counted as money moved, not money made.

The technical breakdown is as follows.

The government component of GDP is “Government consumption expenditures and gross investment”, line 20 in table 1.1.5: http://bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&Freq=Qtr&FirstYear=2006&LastYear=2008

This is composed of two lines from Table 3.1, “Government Current Receipts and Expenditures”, which you cited in your post: http://bea.gov/national/nipaweb/TableView.asp?SelectedTable=84&Freq=Qtr&FirstYear=2006&LastYear=2008

These are line 16, “Consumption expenditures”, and line 35, “Gross government investment”. Capital transfers are recorded on line 36, which is not a component of either line 16 or 35. This is why the press release states explicitly that “[t]he recording of a capital transfer in the GDP accounts does not affect GDP or net government saving, but does reduce net government lending or borrowing.”

With regard to the CPI data, I do regard it as far more accurate than you’ve suggested in the past, if I am correct in believing that your blog posts about Kevin Phillips and John Williams are to be regarded as endorsements. Let me put it this way: by John Williams’s numbers (which you cited via Phillips, via Harper’s here: http://bigpicture.typepad.com/comments/2008/06/misery-index-ap.html) we are not presently facing deflationary pressures. According to Williams, we currently have inflation of about 3%: http://www.shadowstats.com/.

So I’ll toss it back to you– how is it possible to believe both that we’re understating inflation, and that we’re in or facing the threat of deflation?

Also, I apologize for misspelling your name. I’ll correct that.

Best regards,
Matthew McCormick

I verified his claim via the GDP technical note — it certainly implies as much is true (“when Treasury purchases a financial asset at more favorable terms than are available in private markets, BEA records a portion of the purchase as a capital transfer”) —

Given that several people pointed out the ambiguity of this, I corrected the post to reflect this.

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On a related point to your post, you aren’t really claiming that the BLS data accurately reflects the true conditions of Inflation in the real world, are you?

How much do you want to stand behind the actual BLS CPI data for the past 5 years?