Accounting Magic: Double Economic Growth Overnight, Nigeria Edition

All it takes for Nigeria to magically double the size of her economy is to apply some accounting-statistical trickery.

From Simon Black at the Sovereign Man (bold mine)

Over the weekend, Nigeria’s government made an accounting adjustment in how it calculates its GDP statistics.

By changing the base-year in GDP calculations from 1990 to 2010, Nigeria increased the reported size of its economy by 89% over the weekend.

So with a stroke of a pen, the West African nation leapfrogged South Africa to become the continent’s largest economy.

And in doing so the country’s debt-to-GDP ratio fell below 20%. The ratio of bad loans in the banking system when compared to the overall size of the economy also dramatically declined in proportion.

The same thing happened in Poland last year when the government there made a grab for private pensions, then counted those new assets against government debt.

It was just another accounting scam. But it dramatically lowered Poland’s debt-to-GDP ratio on paper, even though the government had not actually gotten any ‘richer’.

And how the same accounting-statistical manipulation can be seen applied to the balance sheets of the ECB and the US Federal Reserve. Again Mr. Black

Just hours ago, the European Central Bank released its 2013 annual report, showing a massive 44% surge in profits.

Diving into the numbers, though, it turns out that most of the ECB’s profits come from funny accounting tricks—revaluing a permanent swap line they have with the Federal Reserve, and moving funds from the “risk provision” column into the profit column.

I’m also reminded of the Federal Reserve’s own admission that they had $50+ billion in ‘unrealized losses’ due to the erosion of their portfolio of US Treasuries.

This is almost as much as their entire capital reserve… meaning that the Fed is practically insolvent by its own admission.

Not to worry, though. The Fed gets to employ its own accounting tricks to make these losses disappear, marking the assets on the balance sheet at their much higher ‘book value’, rather than the much lower ‘market value’.

Of course, the US government does exactly the same thing… often conveniently leaving out huge portions of its total debt such as the non-marketable securities it owes to the Social Security trust funds.

All of this really just goes to show how absurd it is to rely on these numbers conjured by politicians and central bankers.

And I’ve been repeatedly saying that since government issues all the accounting based statistics they will show what they want to show rather than what really has been.

To give you more example of fallacies of mainstream statistics,  the great dean of the Austrian school of economics Murray N. Rothbard exposed on the flagrant errors of the Keynesian multiplier. Mr. Rothbard’s case more lucidly explained by Professor Steven Landsburg: (bold orginal)

If you studied economics from one of the classic textbooks (like Samuelson) you might remember how this goes. We start with an accounting identity, which nobody can deny:

Y = C + I + G

Here Y represents the value of everything produced in (say) a given month, which in turn is equal to the total income generated in that month (because producing a $20 radio allows you — or perhaps you and your boss jointly — to earn $20 worth of income). C (which stands for consumption) is the value of the output that ends up in households; I (which stands for investment) is the value of the output that ends up at firms, and G (which stands for government spending) is the value of the output that ends up in the hands of the government. Since all output ends up somewhere, and since households, firms and government exhaust the possibilities, this equation must be true.

Next, we notice that people tend to spend, oh, say about 80 percent of their incomes. What they spend is equal to the value of what ends up in their households, which we’ve already called C. So we have

C = .8Y

Now we use a little algebra to combine our two equations and quickly derive a new equation:

Y = 5(I+G)

That 5 is the famous Keynesian multiplier. In this case, it tells you that if you increase government spending by one dollar, then economy-wide output (and hence economy-wide income) will increase by a whopping five dollars. What a deal!

Now, though I cannot seem to find a reference, I have a vague memory that it was Murray Rothbard who observed that the really neat thing about this argument is that you can do exactly the same thing with any accounting identity. Let’s start with this one:

Y = L + E

Here Y is economy-wide income, L is Landsburg’s income, and E is everyone else’s income. No disputing that one.

Next we observe that everyone else’s share of the income tends to be about 99.999999% of the total. In symbols, we have:

E = .99999999 Y

Combine these two equations, do your algebra, and voila:

Y = 100,000,000 L

That 100,000,000 there is the soon-to-be-famous “Landsburg multiplier”. Our equation proves that if you send Landsburg a dollar, you’ll generate $100,000,000 worth of income for everyone else.

The policy implications are unmistakable. It’s just Eco 101!!

See how accounting identities can create a paradise for everyone?