Luskin and What the GDP Assumptions Imply
Jude Wanniski
February 4, 2005


From: Jude Wanniski  <        
To:      Ben.S.Bernanke@ * * * * *.GOV                                                                                                                        
Subject: Fwd: Luskin and What the GDP Assumptions Imply
Bcc: Glenn Hubbard

4:04 pm, 2/4/2005

You may know we have been responding to Krugman re social security, and so has Don Luskin of MegaTrends (Luskin another supply-sider.) Here is Hoffmeister's quibble with Luskin. Again we get back to gold.  Gold's continued decline along with bonds and the rise in the stock market reflects optimism on the President's reform agenda, I think. The futures market now expects you guys to pause now and then and maybe even stop.  JW


Date: Fri, 4 Feb 2005 12:43:53 -0800 (PST)
From: Paul Hoffmeister
Subject: Luskin and What the GDP Assumptions Imply
To: Jude Wanniski <>


It seems as though Luskin bases his argument on the assumption that real GDP will continue to grow 3.4% annually as it did over the last 75 years (note, this is nominal GDP adjusted for CPI). He then uses Krugman's logic that "profits grow at the same rate as the economy", to conclude that the stock market will return 3.4% in the future. Next, he adds the dividend and repurchase yield on stocks of 3%, which when added to 3.4% capital gains, nearly equals the required 6.5% market return.

Luskin's expectation that CPI-adjusted GDP will grow over 3% is what I'm diving into.  The actuarial assumption that "real" GDP will grow around 3% going forward implies that the American standard of living will be maintained over the next 75 years with our fiat monetary regime.  The flawed CPI measure overstates real GDP growth in gold terms.  Based on historical data since 1971, CPI-adjusted GDP over time needs to grow over 3% in order to increase personal income in gold terms (ie, increase living standards).  The statistical data supports what you've been saying all along.  The easiest way to fix social security amongst other things is by fixing the dollar to gold because increases in wealth go straight to the bottom line.  But if we can't fix the dollar anytime soon, then we have to increase returns to capital.