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The Great American Economic Growth Myth
Submitted by Lance Roberts of STA Wealth Management,
Yesterday, I discussed the real use of economic data when it comes to investing. However, it was extremely interesting to see the vast amount of analysis being done to dismiss the dismal Q1 report and push the "hope" of a better tomorrow. It was in this context that Mohammed El-Erian made a very astute comment:
"As analysts scramble to explain away this morning's sharp and unfavorable revision to the first-quarter's gross domestic product, it's tempting to dismiss that 2.9 percent drop given that weaknesses in the health-care sector was a major driver of the contraction...
Overall, the first-quarter drop — the worst in five years — involved very broad sectorial weaknesses that spoke too much more than the negative impact of bad weather and industry-specific factors like health care. It also points to underlying economic conditions that remain weak and concerning despite several years of healing facilitated by exceptionally accommodative monetary policy."
Since the end of the financial crisis, economists, analysts and the Federal Reserve have continued to predict a return to higher levels of economic growth. As I showed in my discussion of the Fed's forecasts, these predictions have continued to fall short of reality.
However, the issue is much greater than just a "post-financial crisis" malaise.
"Since 1999, the annual real economic growth rate has run at 1.94%, which is the lowest growth rate in history including the 'Great Depression.' I have broken down economic growth into major cycles for clarity."
While economists, politicians and analysts point to current data points and primarily coincident indicators to create a "bullish spin" for the investing public, the underlying deterioration in economic prosperity is a much more important long-term concern. The question that we should be asking is "why is this happening?"
From 1950-1980 nominal GDP grew at an annualized rate of 7.55%. This was accomplished with a total credit market debt to GDP ratio of less 150%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There was a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily in production and manufacturing which has a high multiplier effect on the economy. This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.
However, beginning in 1980 the shift of the economic makeup from a manufacturing and production based economy to a service and finance economy, where there is a low economic multiplier, is partially responsible for this transformation. The decline in economic output was further exacerbated by increased productivity through technological advances and outsourcing of manufacturing which plagued the economy with steadily decreasing wages. Unlike the steadily growing economic environment prior to 1980; the post 1980 economy has experienced by a steady decline. Therefore, a statement that the economy has had an average growth of X% since 1980 is grossly misleading. The trend of the growth is far more important, and telling, than the average growth rate over time.
This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living. As their wages declined, they were forced to turn to credit to fill the gap in maintaining their current standard of living. This demand for credit became the new breeding ground for the financed based economy. Easier credit terms, lower interest rates, easier lending standards and less regulation fueled the continued consumption boom. By the end of 2007, the household debt outstanding had surged to 140% of GDP. It was only a function of time until the collapse in the "house built of credit cards" occurred.
This is why the economic prosperity of the last 30 years has been a fantasy. While America, at least on the surface, was the envy of the world for its apparent success and prosperity; the underlying cancer of debt expansion and declining wages was eating away at core. The only way to maintain the "standard of living" that American's were told they "deserved," was to utilize ever increasing levels of debt. The now deregulated financial institutions were only too happy to provide that "credit" as it was a financial windfall of mass proportions.
The massive indulgence in debt, what the Austrians refer to as a "credit induced boom," has likely reached its inevitable conclusion. The unsustainable credit-sourced boom, which led to artificially stimulated borrowing, has continued to seek out ever diminishing investment opportunities. Ultimately these diminished investment opportunities repeatedly lead to widespread mal-investments. Not surprisingly, we clearly saw it play out "real-time" in everything from subprime mortgages to derivative instruments which were only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk. We see it playing out again in the "chase for yield" in everything from junk bonds to equities. Not surprisingly, the end result will not be any different.
When credit creation can no longer be sustained, the process of clearing the excesses must be completed before the cycle can resume. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.
The clearing process is going to be very substantial. The economy currently requires $2.75 of debt to create $1 of real (inflation adjusted) economic growth. A reversion to a structurally manageable level of debt* would require in excess of $35 Trillion in debt reduction. The economic drag from such a reduction would be dramatic while the clearing process occurs.
*Structural Debt Level - Estimated trend of debt growth in a normalized economic environment which would be supportive of economic growth levels of 150% of debt-to-GDP.
This is one of the primary reasons why economic growth will continue to run at lower levels going into the future. We will continue to observe an economy plagued by more frequent recessionary spats, more volatile equity market returns and a stagflationary environment as wages remain suppressed while costs of living rise. Ultimately, it is the process of clearing the excess debt levels that will allow personal savings rates to return to levels that can promote productive investment, production and consumption.
The end game of three decades of excess is upon us, and we can't deny the weight of the debt imbalances that are currently in play. The medicine that the current administration is prescribing is a treatment for the common cold; in this case a normal business cycle recession. The problem is that the patient is suffering from a "debt cancer," and until the proper treatment is prescribed and implemented; the patient will most likely continue to suffer.
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come again?
Said the virgin mary very quietly.
Wow, Deja Vu. I feel like I read this story before somewhere. Like in 2009.
come again?
In the key of G...
Come to Me.
Your Breath smells like Come to me....
"The economy currently requires $2.75 of debt to create $1 of real (inflation adjusted) economic growth. "
I'll take issue with this statement. The economy does not require it. In fact, I can argue that the companies that are borrowing the debt and staying in business despite their poor growth prospects are dragging down the averages overall.
For instance, the auto sector would show much better performance numbers today had GM and Chrysler faded into history.
Get rid of the laggards that are being kept in business by our tax dollars, and the real ratio of debt to GDP growth will change drastically.
The patient in the bed next to us is Japan. Eurozone in an adjoining room.
On the next slab.
The mortician is working his magic.
Invade the Caymans.Problem solved.
Actually not a bad idea, but invade the Falkland Islands instead. Three bankrupt countries going at it, lots of broken windows.
Tylers, look into this story!
http://www.bloomberg.com/news/2014-06-26/bullard-sees-fed-raising-rates-...
great article, very well explained.
Look the reason for this wasn't starting in '80 as much the end of the Cold War starting in '89 and really ending in '91 and the subsequent rounds of 'free trade' with NAFTA in '94 and admittance of China in '01.
I love magic tricks.
I can make EPS of any company increase instantly.
Reduce the denominator with a share repurchase.
PRESTO - EARNINGS!
Thank you.
Show the drunken truth!
Intro
http://www.showrealhist.com/yTRIAL.html
The Public Be Suckered
http://patrick.net/forum/?p=1230886
Show the drunken truth!
Intro
http://www.showrealhist.com/yTRIAL.html
The Public Be Suckered
http://patrick.net/forum/?p=1230886
Put food and enery prices back into the inflation rate calc.
What President told the Cmmerce Dept. to take it out of the calc?
Yes, it was another incompetent named Bill Clinton.
"Do not try to grow the economy. That's impossible. Instead... only try to realize the truth. There is no economy. Then you'll see, that it is not the economy that grows, it is only the oligarchs wallet. "
High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.
Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.
Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.
This all started in 2002 when oil went from $12 a barrel to nearly $40 (and of course has never looked back)
Of course they will fail - because the disease is expensive oil. And there is no substitute
The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.
This moment will be known as the end of the industrial revolution by the few who survive.
This is not a Hollywood movie where the hero saves the day. This is the reality we are facing.
HIGH PRICED OIL DESTROYS GROWTH
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf
These graphics are basically confirming Thomas Piketty's findings.
Yep and that the Reagan era was the beginning of the end...
Historians, assuming there are any left around in 50 years, are not going to be kind to the supply siders and St. Ronnie might lose his status of beatification....
Supply siders as opposed to what?
Reagan era was the beginning of the end? Did you forget James Earl Carter, Richard M. Nixon, LBJ, and Jack Kennedy? This should be interesting. The US Gov't defaulted on its debt in 1967 under LBJ. Social Security receipts were no longer separated from general revenue. Oh, I could go on and on and on.
The table was set for Reagan....
High interest rates with no place to go but down...
The last great fields of the West in Prudhoe Bay and the North Sea coming on line...
-----
His "great tax reform" was a fucking sellout to the rentier class in essence creating the "bankster class". Before Reagan a bond trader made $50,000 a year, good money but nothing special...
Sure, we were fucked but he didn't have to have a fire sale while the country was looted by a small few....
Milton Freidman was the prophet to be followed: "Greed is good" was the mantra....
Face it, the trends changed in every possible way for the worse...
Its over. We are in the throes of a long term economic and sovereign decline. The fed continues to decieve though, leading us down a misty path laden with candy apples and sugar canes that they take out of our own napsack of supplies. This path leads us off a cliff. God help us.
Its been over for a while.The occaisional twitch from the corpse, and
the final bowel evacuation is all thats left.
Great article. How come the people running the joint don't understand this? The only thing I'd add is another reason for the real economic boom was the demographics of the baby boomers moving through their spending life cycle, which, now that they are retiring and spending less is yet another drag on the economy going forward. And, of course, the main culprit of the debt boom was removing the restraint of gold backing from the ability to issue debt.
Gold and silver are acting perfectly for being a bit overbought as they consolidate at the highs of last Thursday's big move. Gold has a clear, defined uptrendline from the $1240 low that will force action sometime in the next week. This is typical of gold. If its even stronger than I think, it will blast upward without waiting to touch that uptrendline, otherwise, a strong move off the touch will be very encouraging. The bulls should defend it.
Another sizable move up should break through the recent high and the $1332 horizontal resistence. Assuming that happens, chances are high that gold will test its downtrendline from the $1434 and $1392 highs that currently runs thru $1360-ish, but I won't make it all the way there without taking at least partial profits in the mid to high $1330s. Maybe I'll get a chance to reload on a dip. If for some reason gold loses its uptrendline from the $1240 low on a closing basis, that would be bad. Otherwise, all is looking fine at the moment. I'm hoping to see silver breach $22.18 as well. Then it's time to reassess how deep the pullback will go. Because it will come. And I would love to see it come from mid $22 or $23 in silver and $1360 in gold. That pullback will reveal a lot about the long side conviction in this market. But first it needs to get there.
The day they invented 30year mortgage the day you signed your name into slavery!
The people that bought with 30 yr notes in period ~1960-2000 make out like bandits assuming they did not refi out their equity...
Almost totally metastasized "debt cancer!"
Although that was an interesting article, it was another typical gross understatement of how serious the situation actually is. The foundation of the system for more than Century was government enforced frauds, which were able to "pay" for strip-mining the planet's natural resources, in order grow the economy on that basis.
Those actual fundamentals were hidden by the triumphs of frauds. There are NO possible "reforms" which are going to happen, much less any that would be adequate. There can only be a runaway process of things getting way worse, until they get bad enough for the "patient" to die, because the "debt cancer" has metastasized so thoroughly that there is no possible treatment. The prognosis is that the situation is terminal sickness.
The situation is no longer merely debt slavery, nor merely too much "debt cancer." The situation has become runaway debt slavery whose almost totally metastasized condition has generated numbers which are debt insanities. "The clearing process" for debt insanities is the psychotic breakdown of the established systems, which will happen through severe social storms. That is especially the case because there is wide-spread deliberate denial and willful blindness towards the diagnosis, since that diagnosis is actually OUTSIDE of anything still inside the notions about how to "invest" in the economy, because everything about that economy had a foundation of fraud, which would take "corrections" which are OUTSIDE of anything still inside that system.
For more than a Century, the American economy has been based on fundamentally fraudulent financial accounting systems, which had to deliberately ignore everything outside of their own little world of triumphant frauds financing the strip-mining of the world's natural resources. Since 1971, the system lost any limitations still in contact with the physical world, wherein the "most important multiplier effect" was the ability of fundamentally fraudulent accounting to become increasing divorced from the real world, while leveraging and rehypothecating itself up to crazier and crazier ratios of the relationships between the relatively more objectively realities versus the fictional numbers based on thoroughly triumphant frauds.
Since the foundation of the whole system was the fictional, fraudulent, privatized creation of the public "money" supply out of nothing as debts, the entire economy was based on frauds, piled on top of frauds, piled on top of more frauds, through which there were layers after layers after layers of deliberate ignorance and willful blindness towards the real world, where nothing could be created out of nothing, nor sent to nothing, except that the "money" to "pay" for everything could, and was, more and more created out of nothing, in ways which enabled the entire economic system to deliberately ignore its actual environment, and that has been going on and on and on for a lot longer than merely several decades!
The gaps that now exist between the physical world of energy and matter versus "money" made out of nothing, are wider than can be bridged. The previous growth was enjoyed by those using "money" made out of nothing to finance strip-mining the planet. However, of course, the fundamentally fraudulent accounting systems did NOT have to account for that. Rather, they only had to "account" for operating within the established systems of enforced frauds. The economic development was based on the triumph of organized crime dominating the political processes, in order to legalize integrated systems of fraudulent financial accounting. Those who remain within that frame of reference, which is still practically everybody, mostly do not have a clue how serious the situation is, because everything is still based on the same systems as created the current "debt cancer," while such a cancer has been getting worse at an exponential rate.
Ideally, the treatment is more radical truth about the financial frauds, to at least begin to be realistic about the natural environment that the economy operates within. However, that treatment is something that the "patient" will not take. Although this article above was interesting, and well-presented within its own frame of reference, that was still way too superficial compared to how serious the deeper problems actually are!
The inflation is in the stock and bond markets. Once people realize there is little to no upside left, the markets will shit the bed and all of that cash will flow into hard assets. The peasants will have less and less buying power and the Keynesians will print and print based on their stone-age understanding of economics. Then stocks and bonds will reflate....rinse and repeat until the .01% own fucking everything and send the peasants to war so they can have even more.
Buy gold bitches. For now.
Much of the economic landscape is beginning to look like something out of "Alice And The Looking Glass" A bizarre and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality.
Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. What was once the "long run" or "distant future" may be getting much closer. More on this in the article below.
http://brucewilds.blogspot.com/2013/01/what-happens-after-momentum-ends_...
What was once the "long run" or "distant future" may be getting much closer.
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
-- Albert A. Bartlett
The "debt cancer" has been on a 99% perfect match to an exponential function since the 1970s, BUT, that was "money" made out of nothing to "pay" for strip-mining the planet. Since the fundamental structure of the established economic system was built on enforced frauds that demanded exponential growth, the situation is far worse than anyone who does not attempt to understand exponential functions can imagine. However, even those who try their best to do so still tend to fail to fully comprehend the consequences of that!
It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward. At some point the return on loaning money is simply not worth the risk!
Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008.
When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants. More on this subject below.
http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit...