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Grow Your Way Out Of Debt? Don't Make Us Laugh...!
Submitted by Bill Bonner via Acting-Man blog,
Too Much Debt
But today, we continue with our look at the macro situation at the end of 2014… One way of measuring GDP is to add together consumption, investment, government spending and net exports.
The idea is to measure total spending. And in this way, also measure production. Most things produced are sold. Add up how much spending there is and you get an idea of how much production there’s been.
US GDP is reported to be $18 trillion a year – with $3.5 trillion coming from US federal government spending. Add state and local government spending, and the total rises to more than $6 trillion.
This means that the private sector – the part that pays the bills – is only $12 trillion. Total debt – government, corporate and personal – in the US is now $58 trillion (misreported yesterday as $59 trillion… but what’s a trillion dollars between friends?). That’s nearly five times the real economy that supports it.
And it helps explain why it is so hard to “grow your way out” of debt. Assuming an annual interest rate of 2%, even if you could contain debt increases to 3% of GDP a year, the productive part of the economy would have to grow at 5% just to stay even. No developed economy in the world is growing that fast.
At an interest rate of 3%, the annual interest on $58 trillion is $1.7 trillion. That’s slightly less than 10% of GDP. But it’s 14% – or one of every seven dollars – of the private sector economy.
And as recently as January 2002, the 10-year Treasury note yielded over 5%. If the average interest rate were to rise to that level again – and sooner or later it will – it would take $3 trillion to service America’s debt – or one-quarter of private sector output.
That can’t happen. The wings would fall off first. There would be a bear market in stocks and a depression in the economy – wiping out trillions of dollars of unaffordable debt and unworkable investments.
Total US credit market debt vs. GDP. Even though one is nominal and the other “real” and GDP is an extremely flawed measure of economic activity, there is an unmistakable trend toward more and more debt having to be supported by less and less economic output, via St. Louis Ferderal Reserve Research – click to enlarge.
Bigger Burdens, Weaker Backs
That is how nature deals with debt bubbles. But it’s exactly what the Fed wants to avoid. How? By trying to make the economy grow faster, so that debt – as a percentage of output – is less of a burden.
But let’s see, how does this work? To grow your way out of debt you have to increase income faster than debt. Say you can sustain a healthy rate of GDP growth of 3% a year. That means that additional debt mustn’t exceed 3%.
For 2014, the US fiscal deficit – the gap between what the federal government receives in taxes and what it spends – was 2.8%. It is unlikely to go much lower. That is just the amount borrowed by the feds. The private sector is still two-thirds of the US economy. If it borrowed nothing, debt might contract, relative to the underlying economy.
But without borrowing, the economy will shrink. That is why the feds stepped up to the plate in 2009 and started swinging. The private sector had stopped borrowing. The theory behind Keynesian counter-cyclical policy is that government can offset the lack of private sector demand for credit by borrowing far more than usual.
Over the last five years, the federal government’s counter-cyclical stimulus program added $9 trillion to the nation’s debt. During that time, the private sector scarcely grew at all. Debt can only increase output if it is used to build new productive capacity. If you spend it on Medicaid and wars, it is gone forever.
The private sector ends up with a heavier burden… and a weaker back to carry it. Even when the private sector borrows, it is often merely to boost consumer spending. What’s more, the Fed’s ultra-low lending rates often lure capital into unstable and dangerous investments – such as shale oil or sub-prime auto loans.
So, much of the credit going to the private sector is also wasted. Since the 1970s, private sector growth rates have gone down. Shackled to trillions in debt… duct taped with regulations and restrictions… deceived by phony financial signals from central banks… they will probably remain low and sink lower for the foreseeable future.
Grow your way out of debt? Not likely.

The legacy – Cartoon by Ramirez
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Official: The global financial mafia controls countries through debt!
If the derivative market tanks, the new song from the bankers will be "Brother, Can You Spare A Quadrillion." Hard to believe that the repeal in 1999 of the 1933 Glass-Steagall Banking Act has already led to two market crashes in the 21st century.
You can't grow your way out, but you can definitely erase your debt, we have the technology.
We Lois Lernered some debt.
No issues there, they can print and pay it off. Issue here is that I can't print and pay of my debt.
You can't "pay-off" debt with printed money when your money is debt.
Yes, but even those 'debts' came back to haunt her later...
The more you grow, the more debt you incur.
The infinite power of leverage, and "multipliers".
But, But, But, I'm expecting the hockey stick to kick in any moment now...
"Hard to believe that the repeal in 1999 of the 1933 Glass-Steagall Banking Act has already led to two market crashes in the 21st century"
Not hard to beleive at all.
That's what we were given animal spirits for, son. Now gird up your loins.
Here is some news of interest for bargain hunters:
Whitney’s Fund Said to Drop 11% as Office Put on Market
By Max Abelson
Dec 21, 2014
http://www.bloomberg.com/news/2014-12-22/meredith-whitney-s-fund-said-to...
excerpt:
A fund connected to billionaire Michael Platt’s BlueCrest Capital Management has asked to redeem its investment at least twice, according to the person with knowledge of Whitney’s firm, Kenbelle Capital LP. It started trading in November 2013 with about $50 million from BlueCrest partners and other investors, a fund presentation showed then.
A year later, her office, a 5,500-square-foot space in a Madison Avenue high-rise, is now available to be subleased, according to a listing. It advertises “excellent views on 3 sides; executive bathroom; furniture available.”
Bring Creative Destruction to WS. Heavy on the destructive part!
LOL, It's called hyperinflating out of debt.
Nothing new about hyperinflation. It's occurred in many empires.
They build unsustainable debt and then Hyperinflation occurs. Watch Japan.
Japan is the Federal Reserve's grand PhD experiment in action.
I love that last cartoon.
"misreported yesterday as $59 trillion… but what’s a trillion dollars between friends?"
I've had a running theory since I got to ZH that we're going down the Japan path. Nothing I've seen or read has convinced me that I'm wrong about that. Aside from a gigantic and permanent decline in our stock market. But there's always next year.
Japan is breaking the trail to hell.....
as long as the first derivative of the debt/gdp curve is positive it's all good. /s
Krugmanesque!
For some strange reason, mountains can only be so high.
...Due to the angle of repose. Once it gets so high it must cover the entire nation...
"And as recently as January 2002, the 10-year Treasury note yielded over 5%. If the average interest rate were to rise to that level again – and sooner or later it will"
Have none of these idiots heard of Japan?
Interest rates will never rise again. Except for a brief period between June of 2015 and sometime in 2016. Just enough, then down they go again.
.75 fed funds by year 2015 year end should be just enough for me to get another sandwich.
As of now if they raised the rate to one percent we couldn't afford it...Merry Christmas...
https://www.youtube.com/watch?feature=player_detailpage&v=iwgFRy3XK8o
love how obama called bush "unpatriotic" for ringing-up $8 trillion in debt only to have it grow to $18 trillion in debt. obama's response to that "those are the bills congress has already racked-up ... i have NOTHING to do with that!"
next great lie was the other day in his year-end press conference "the deficts are falling under my administration" - this one is the greatest lie of them all. so not only are we just ignoring the actual debt AND the long-term, unfunded liabilities he's done NOTHING to address, but we are also lying about the current situation. U.S. Treasury a month ago announced that the 4th Q borrowing was $250 billion. soooo, according to my math, thats $1 trillion a year we DO NOT have.
unconcienable
We the people did have the 1T, they just didn't have the balls to take it from us. Not yet. For that you need a sufficient crisis.
You didnt REALLY expect a dying empire that told itself for 200+ years it was "specialer" then the rest of the humans on the planet, to go out quietly, did you???
When you convince yourself that your invincible and suddenly you realize your not, shit gets "unconcienable" in a hurry!!!!
Keep believing the Lib v Con, Dem v Repub propaganda. They have you right where they want you (US) pissed off and divided.
The banksters get what they want and they want war and debt.
Mt. Debtmore. :-)
Mt. DebtMOAR
I see them. When I look closely, I see the busts of our Founding Bankers - Senator Nelson Aldrich, A. Piatt Andrew, Henry P. Davidson, Charles D. Norton, Benjamin Strong, Frank Vanderlip, and Paul Warburg. And, overlooking them from the very top, a bust of the great and benevolent Mayer Amschel Rothschild. :-)
It's all good. It's like buying furniture or a car on credit. Sure, you start with a debt, but pay it off bit by bit and you got yourself a good piece of furniture or a second hand car at the end of a few years, right? And look at the assets America has right now:
Gold (Nope)
Good Infrastructure (Nope)
Space Program (Nope)
Affordable Health Care (Nope)
Good will from all the military action (Nope)
A sound economy (Nope)
An honest & beneficial financial system (Nope)
An honest & beneficial political system (Nope)
Growing employment numbers (Nope)
Sound monetary base (Nope)
Freedom? (To be fair - Relative to a 3rd world shithole? Loads. Relative to a developed nation? Zero)
So, what exactly did 59 trillion dollars buy? Iphones and corruption, apparently.
Yes. Well said. BUT... depending on how one defines freedom (for instance, being able to sell cigarettes on the street corner, or at a stand in front of your house) I think many third world countries can be proud of some FREEDOMS (plural) that are nonexistent in most USA cities, thanks to the lobbying of most Chambers of Commerce.
Yes, but we have a very prosperous and affluent .1% class.
So we got that going for us.....
/s
Everything government touches turns to crap.
-Ringo Starr
they will just import more third world invaders...er, I mean, immigrants.
I suspect that is why they are opening up to Cuba--there are 11 millon bodies there, and they want them in america
HA HA. Depending on who they vote for. Miami "Cubans" have a superpower: they can vote after dying. Politicians there have to make numerous campaign stops at the cemeteries. (To write down all the names?)
I was hoping the USA could start importing Cuban sugar, and thus avoid completely wiping out the Everglades. But, as a pessimist, I can imagine, instead, the USA giving a few million soon-to-be-immigrant-Cubans "refugee" status and building them new homes IN THE EVERGLADES - all paid for by the USA taxpayers, of course. "Growth" is a sugar, isn't it? :-)
The shocking part, is that Cuban immigrants who reliably vote republican when they are alive, turn democrat when they die. I guess the afterlife shows the error of their ways.
No Cuba isn't about immigration, although 11 million socialist would fit right in nicely!
Cuba is about keeping Russia and China from setting up shop 90 miles off our shore, because THIS time Putin or China won't fold and turn the ships around, this time they would call that bluff all day!!
And the three letter factory knows it and preemptively decided to end the embargo instead!!
It's truely an indication of how weak we really are and how afraid we are really getting!!
USSA getting out ahead of a repeat of the "Cuban Missile Crisis" that they themselves provoked doubly by attempted military take-over of Cuba, aka, the Bay of Pigs Invasion, and placing nukes in Turkey and Italy, minutes from Russia. Only then did Cuba request protection from an understandably sympathetic USSR.
Kennedy was no hero there . . . except in the usual twisted American mold.
https://en.wikipedia.org/wiki/Cuban_missile_crisis
USSA is gonna really ratchet up the pressure this time without a viable, equally potent threat from Russia.
Yeah, this rapproachment with Cuba was no favor to anyone . . . though you gotta wonder which Cuban palms got greased to approve it under these circumstances and why Russia couldn't make a better offer.
Cuba will be receiving US foreign aid by the end of 2015, if not sooner. No socialist economy can function without a sugar daddy, and Obama wants the US to be Cuba's sugar daddy, to make up for our intransigence in not supporting Fidel sooner.
Actually once all the riff-raff are gone from Cuba what a wonderful tropical island it will be for the 1%. Used to go to the Keys back in the early 1980's and always thought about how perfect the climate must be only ninety miles away.
Nice shark filled moat for the special while the rest of us slave locked away.
They want the land
When currencies crash what value remains?
Land
Precious metals
Weapons
The fiat paper,or digitized debt should be repayed in similar fiat, worthless, instruments. It's not as though physical assets, eg. Au, were borrowed. Or, if my brother owes me a trillion dollars and can't repay, then tough luck for me - life goes on.
People are counting on the fact that in case of hyperinflation, you just need to own real estate or physical stuff and the paper debt you are holding against it will be inflated away also for private persons. IMHO that won't happen. For government debt - yes of course, for private persons or companies debt - sorry, no way. They will not let anybody with real assets and debt get away so easily, because somebody will have to "pay" for this mess. And only the ones with real assets will be able to "pay".
So best is to have no debt (and no assets?).
That one is easy. Have no debt is a good idea. If you have assets, also have no liens against those assets, because then you really don't own them anyway. But your point is well taken: how many Americans can afford to save the cash to buy a new car, much less pay for a house with cash? Or even 20% down on a house?
The wings would fall off first.
Sounds like a job for "RED BULL".
Why should this generation have to pay the debts of a prior generation? If a deceased father borrowed money he couldn't repay, why should his sons... ? The repayment risk lies with the lender.
Pay the debts? Naw, we've barely even touched the interest, let alone the principal. Fuck, they're still rolling forward debt from the "Civil" War.
Maybe they're betting on a quantum mechanic type of reaction where infinite debt can subdue it's current trap of negative marginal productivity?
Well, either that or WWIII, I'm not sure which.
Without overtly saying it... This article makes a strong argument that government spending should not be included in GDP figures.
Government spending is usually spent on wars, cronyism and welfare. That is spending, like taking out a loan on your home to go out to eat, instead of starting a business or improving the house.
In fact I think I could make a strong argument that government spending should be subtracted from GDP.
I can only go by what my ancestors told me, because everyone from that pre-1930's generation is now passed and I have never seen it. But the consensus was " Get out of debt...because if you owe one dollar, and do not have a dollar to repay your debtor, they can take every thing you own to get that one dollar"
I may be wrong...but with plastic today, how many people even have a dollar? Hyperinflation could happen and it would only show up as digits on accounts. Unless we could access actual money to pay our mortgage, we could be thrown out on the street. The banks need only to withdraw our plastic credit by deleting accounts on their computers. The banks don't even have hard copy files anymore when I go into the bank to show our deposits, or equities at the broker's...everything is on computers. If the banks doors are closed, computers are shut down, or smart phones don't work, the public will go crazy. The banks don't even want to send me a paper record each month anymore, they charge me to do it. How many people drop the paper record and just download it?
2008 was a a little test when people has sub prime mortgages for a fraction of their house's worth, and yet could not get renewals. Banks foreclosed on million dollar homes, simply because the home owner did not have $10,000 cash.
In hyperinflation, from history, people lose jobs because employers give up trying to make ends meet. Real estate may skyrocket in value, but if average consumers don't have cash or credit, the banks will just scoop it up.
People that lived through the depression saw the inflation and the failure of financial markets.
They already knew how much a $USD had devalued in just 20 years.
A lot to be said about your comments. We moved because while I was a kid they built a highway through our back yard. When we got to our new house, it was bigger than the one we moved from by a couple of rooms. But my parents priorities were paying off the mortgage before they bought new furniture. They managed to do that in just eight years. After that, they never carried any debt. They lived modestly. It worked out very well for them, and they both had enough to carry them in comfort to the end of their days.
NO NO NO NO NO NO NO!
You cannot grow your way out of debt. Debt is a purely monetary phenomenon. More money means more debt. Growth MEANS more debt!
Only an IDIOT who doesn't understand what money is would ever suggest you can grow your way out.
Actually no. Diogenes corollary states that:
"The wealthy and powerful did not become wealthy and powerful through ignorance or stupidity. Therefore the deficiencies of the wealthy and powerful can never be adequately explained by ignorance or stupidity."
If I remember this right, the figures I saw required an annual growth rate of 8% for 15 years. Then all the spending in place would work. Unlikely. That post was up recently, and it explored all options the Fed could take. None were very pretty. One of the problems is that federal growth is non-productive and non-wealth creating. No value added and not efficient as is the private sector. Plus, market does not determine a federal paycheck, some federal commissar does. Does a professor's federally funded study of mosquito wing vibrations merit his $145,000 a year salary and golden parachute pension? What value is created from this study? How does this produce added value that produces more tax revenue from the economy? It sucks having to crash to the bottom than reverse analyze this, because that will not be happy, either.
The debt bubble is much too large to do anything about now...
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...