Guest Post: The Great American Economic Lie

Tyler Durden's picture

Submitted by Lance Roberts of Street Talk Advisors

The Great American Economic Lie

gdp-growth-091411-2 The idea that the economy has grown at roughly 5% since 1980 is a lie.   In reality the economic growth of the U.S. has been declining rapidly over the past 30 years supported only by a massive push into deficit spending.

From 1950-1980 the economy grew at an annualized rate of 7.70%.   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 were 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.

As we have discussed previously in "The Breaking Point" and "The End Of Keynesian Economics", 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 effect, is partially responsible for this transformation.   The decline in economic output was further exacerbated by increased productivity through technological advances, which while advancing our society, 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 been growing at 5% since 1980 is grossly misleading.  The trend of the growth is far more important, and telling, than the average growth rate over time.

consumer-spending-wagesThis 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 house built of credit cards occurred.

This is why the economic prosperity of the last 30 years has been a fantasy.  While America on the surface was the envy of the world for its apparent success and prosperity; the underlying cancer of debt expansion and lower personal savings was eating away at core.

The massive indulgence in debt, what the Austrians refer to as a "credit induced boom", has now reached its inevitable conclusion.  The unsustainable credit-sourced boom, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities.  Ultimately these diminished investment opportunities lead to widespread mal-investments.  Not surprisingly, we clearly saw it play out "real-time" in everything from subprime mortgages to derivative instruments which was only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk.

economic-deficitWhen credit creation can no longer be sustained the markets must began to clear the excesses before the cycle can begin again.  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 is currently requiring roughly $4 of total credit market debt to create $1 of economic growth.  A reversion to a structurally manageable level of debt would involve a nearly $30 Trillion reduction of total credit market debt.  The economic drag from such a reduction will be dramatic while the clearing process occurs. 

debt-to-finance-gdp-091311This is one of the primary reasons why economic growth will continue to run at lower levels going into the future.   We will witness an economy plagued by more frequent recessionary spats, lower equity market returns and a stagflationary environment as wages remain suppressed while costs of living rise.  However, only by clearing the excess can the personal savings return to levels which can promote productive investment, production and ultimately consumption.  

The end game of three decades of excess is upon us and we can't deny the weight of the balance sheet recession that is currently in play.   As we have stated in the past - the medicine that the current administration is prescribing to the patient is a treatment for the common cold; in this case a normal business cycle recession.   The problem is that this patient is suffering from a cancer of debt and until we begin the proper treatment the patient will continue to wither.

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reader2010's picture

There is no lie if you've been on the right side of the trade.

falak pema's picture

No personal lie but a general die. One lie  to a hundred die. Malthus would be proud.

reader2010's picture

True lies. But the fact is that bonuses on Wall Street have been getting huger and huger every year. More and more Wall Streeters own their Golfstreams. No?

A.W.E.S.O.M.-O 4000's picture

Fake profits. Real bonuses.

 

Instead of too big to fail it's too big to jail

falak pema's picture

How about don't put it in jail just nail it to lampost. Or mail it to outer space.

Segestan's picture

American decline is the result of Internationalization of Finance. Take over then out source.

Republi-Ken's picture

Hey! U Left Out THE REAGANOMICS FAILURE ... growth was all tax spending as new debt.

The Entire REPUBLICAN ECONOMIC THEORY was run up our credit card to the max limit. 

A FRAUD. A SHAM. A CON. A FARCE. WHERE IS THE GOP REPENTANCE?

One Lone Voice Of Truth...David Stockman: "REPUBLICANS BANKRUPTED AMERICA"

Segestan's picture

What...I suppose I should write a novel? 

Dick Fitz's picture

Yes, the Republican Reaganomic Credit Boom was awful, but the Keynesian policies of the Democrats would've been even worse. Until we return to a rule of law, sound money, FREE-MARKET (none of this socialist hybrid bullshit) then America will continue to die.

Why do you think Ron Paul broke with Reagan on the 80s and left the party? Because he KNEW the policies they were pursuing would result in this. He has 30+ years of public statements that bear this out- unlike the rest of the prez contestants.

A.W.E.S.O.M.-O 4000's picture

I think I'm gonna call false Left / Right paradigm bull shit on your post. Sorry.

 

"We suck less than the other guys" is not a campaign slogan.

Henry Chinaski's picture

For a long time I realized that something broke at about the same time we put a man on the moon. I wasn't sure what exactly went wrong, but I was pretty confident about the timing. Now, many years later, I see that the decline of US prosperity ("American Dream") coincided with abandonment of the gold standard.

sushi's picture

If we can afford to put two guys to work on the moon how come we cannot do the same thing in Kansas?

plane jain's picture

Oh all of these things looks a lot like the other ones, all of these things look like they belong...coincidence?

http://dieoff.org/page125.htm

By late-1993, I had further tested the Olduvai theory against several more sets of data, e.g., Davis (1990) and the UN (1993). In both cases, the historic peak occurred in about 1978. Again, the Olduvai theory prevailed (Note 4). I reported these results in a paper, "Sustainability—Is There a Middle Road?: The Transient-Pulse Theory of Industrial Civilization" (Duncan, 1993a).

Syrin's picture

Yeah, so you say.   When your choice is between Satan and an irritating uncle who is somewhat clueless, it is absolutely relevant

NotApplicable's picture

You'd be a much more effective troll if you'd get your partisan panties out of a wad. Otherwise, you'll have to go over to FreeRepublic if you want to get any real action. Around here, as with any partisan stance, it just looks childish.

vote_libertarian_party's picture

Didn't you hear Rep. Stark?  Debt is income.

 

Get with the program.

sitenine's picture

Yes, debt is money.

www.youtube.com/watch?v=Dc3sKwwAaCU

Bernank has said the same, and as we all know he even went so far as to say flat out that, "no, Gold is not money."  Something he probably regrets saying, but still something he very much believes to be true.

HedgeAccordingly's picture

 

 90% of america.. they seem to be fine with lies.. sad

ride the train http://www.hedgeaccording.ly/2011/07/when-robots-are-driving-you-gotta-r...

reader2010's picture

Edward Hopper, 99.99% Americakkans can't tell the reality is an illusion. 

vast-dom's picture

On a long enough timeline even shit will have to decompose at some point. 

 

Markets curently shiniest pile of highly polished turds.

Careless Whisper's picture

The Evening Careless Whisper Report

 

Mad Scientist Creates Synthetic DNA

http://www.guardian.co.uk/science/2011/sep/14/synthetic-dna-in-yeast-bre...

Tweet This: Two Disembowled Bodies Found Hanged From Bridge In Mexico With Message Attached

http://edition.cnn.com/2011/WORLD/americas/09/14/mexico.violence/

Campaign Laughing Stock

http://www.youtube.com/watch?v=-XYKRokgX00

Tony Bennett & Amy Winehouse Duet Released Today; Body & Soul

http://www.youtube.com/watch?v=_OFMkCeP6ok

 

 

 

pods's picture

Sounds like that synthetic DNA thing is going to be a winner.  See no problems there.

Hmmm, I just got a hankerin to watch "I am Legend."

pods

Timmay's picture

Put another way, we're F-ed. Where have I heard that before?

SWRichmond's picture

No recovery until the markets clear, until assets are repriced at confidence-inspiring valuations.  IOW, no recovery until the interventions stop and are unwound.  IOW, no recovery until we end the Fed.

End the Fed, bitches.

AGuy's picture

Oh-No, Not this again. We been through this before:

"Put another way, I'm F-ed."

X.inf.capt's picture

how much money was made by selling out to inter. bankers?

how much suffering of U.S. citizens?

tell you what,

i wont lynch these rich bastards,

but i wont stop it

Landotfree's picture

The financial system will collapse just like all the previous ones in history have collapsed.  You can't sustain the unsustainable which is a economic system based on borrowing at a rate of interest or compounding interest.  

NotApplicable's picture

Why it'll last until we eat the last kernel of seed corn.

adr's picture

Yes but yesterday Target stores were mobbed by thousands of ZigZag pant speculators buying thousands of dollars worth of Missoni apparel to resell on Ebay. Within the first hour of the stuff going on sale over 25k items were listed on Ebay to sell. Unbelievably hilarious.

My store must have missed out on the hype since most of the stuff was still there today. I guess if a few stores in NY and CA were trashed by mobs of people it must have happened at every store right?

I guess women really are stupid enough to pay three times retail for ugly sweaters just to be "cool". Who am I kidding, I know they are since they pay $500 for a vinyl purse made in China for $4.

NotApplicable's picture

Any day now, my investment in Beanie Babies is gonna pay off, big time.

plane jain's picture

The play:

Buy hyped crap on credit.

List on eBay.

Sell it, or return it, before the credit card payment comes due.

Wonder how much will be back in the stores in about 20 days?

combatsnoopy's picture

So whose batting on behalf of America in lieu of a global expansion?  The lobbyists?  

Why do I hear crickets?  

zorba THE GREEK's picture

Since it is political suicide for politicians to allow the unwinding of credit and the pain that will accompany

the unwinding, we will have to wait until the economy crashes for that to happen. When the crash occurs,

it will be far more painful than most people expect.

jmc8888's picture

Actually our physical economy has been contracting since '68.  Also, the declining wages wasn't on 'advances', it was because of outsourcing and FREE TRADE.  Saying it was 'advances' that caused lower wages is a bit like saying the Jell-o made you full.

Which coincidentally, (free trade) also was the factor in destroying our manufacturing base, and leaving us with 'service' and 'financialization'.

Overall it is the policies of MONETARISM, which is inherently anti-american, or in a broader scope anti-any country, that causes this.

MONETARISM is a farce...keynesian, austrian, or other.  Monetarism is not a way to build a physical economy for everyone to participate in, it is bullshit dogma to keep the power elite at the top at the expense of opportunity.

Glass-Steagall

 

Dick Fitz's picture

"Free Trade", which is politically managed, isn't the same thing as FREE TRADE where people from various countries can buy and sell without political interference. It is the former which has destroyed our economy, and it is a return to the latter that will save us.

Please don't confuse the two, and read up in Austrian analysis of FREE TRADE before condemning it. BTW, until a sound money policy is implemented (aka free-market in methods of payment, not just a gold standard, but that would be nice) then even FREE TRADE won't save us. If people can't save money, and lend it fairly (since they can be sure to get an appropriate level of return) then capital formation cannot occur, and society dies.

Read some Rothbard and get back to us.

NotApplicable's picture

Given the ideas behind all words are corrupted over time, perhaps it's time to abandon the tainted one known as FREE TRADE (which has morphed into corporatism).

Whenever I talk to any of my lefty friends, I instead use the word Voluntarianism, which they have no problem aligning with (though they likely still will refuse to see the state as coercive).

http://www.voluntaryist.com/

Dick Fitz's picture

N/A- I love your posts, and get the "voluntarism" meme, but it's "free trade" vs FREE TRADE, and you used the wrong version. :-(

FREE TRADE= good, "Free Trade" = bad, cronyist, corporatist, gov't controlled.

I do like using the phrase "voluntarism", as in "voluntary, above board, no scheme trade" and can see why it appeals to leftists. My college EX has turned out to be a big lefty, and the language has been so corrupted that having a conversation with him about "capitalism" vs "the free market" has become an exercise in clearly defining terms.

Orwell was a big socialist, but he was prescient in his understanding of how TPTB have corrupted language. Look at how the word "liberal" (and I'm a BIG liberal) has been co-opted by the collectivists. Fucking assholes!!!

phasor's picture

why?

Tax cuts with no offsetting spending cuts.

First Reagan then Bush cut taxes but continued to increase spending.

Tax cutting is no economic miracle.

bigelkhorn's picture

Well for the 30 years , US may be loosing its prosperity but in the eyes of world , it was still one of the major power center...

The Credit boom happened due to excessive and blind borrowing , the 9/11 war ,the unemployment , higher inflation ..everything is combined effects of all these years' ignorance..

To avoid the risks, I follow http://www.forecastfortomorrow.com/ they give an accurate predictions about the market and other happenings

Seize Mars's picture

Well for the 30 years , US may be loosing its prosperity...

I can't stress this enough. Please look up the difference between the words "loose" and "lose." "Loosing" is what one does with an arrow. "Losing" is what one does with prosperity.

NotApplicable's picture

While I've been known lose an arrow, I've never loosened one.

My bowels? Well, that's a different story.

Debugas's picture

imagine a world where everything is produced by robots.

Where do you see savings going up in this scenario ?

Seize Mars's picture

imagine a world where everything is produced by robots.

Where do you see savings going up in this scenario ?

 

If you buy a car made by robots, it costs less than a car made by people. Then take your cost savings and, well, save it. Hence savings goes up. I suggest you learn about Austrian economics. Quickly.

Dick Fitz's picture

Seize Mars- THANK YOU!

If I created a machine that made bread, milk, beans, broccoli and spam from household garbage, that can be installed in any house for $100, the "prosperity" (in terms of calories & nutrients needed to survive) goes up 100%. No one would ever need to die of starving. The very poor could never spend another penny on food, and yet eat forever.

That doesn't mean that all food production would stop- even the poorest of the poor would want a filet, or salad, or chicken sandwich or burger now and then. They would have MORE disposable income to spend on that since all their basic caloric and nutritional needs could be met with garbage.

If all houses could be built from garbage in the same way, and constructing a new house cost $100, no matter the size, then it would free up capital for custom wallpaper, or nice art, or great mattresses or 3D TVs.

Advancing tech just frees up capital to be employed in new arenas.

A world where all basic needs were met via machines, virtually for free, would unleash a Renaissance that would make the era of DaVinci and Michelangelo look like cave painting.

Seer's picture

Only time and energy can be "wasted."  The "garbage" that you talk about is most likely excess to begin with- with a reduced input stream (due to people not being able to over-indulge to begin with) will result in a reduced "waste" stream.  One need only follow the logic put forward by all the (then) waste veggie oil (to run your car) folks- it's "free!" Yeah, energy problems solved, just build more McDonald's!

Additionally, MANY animals are fed "waste." (and since we then eat Them, it's not really "waste")

Funny is, the planet is quite capable of producing all the food that we need, without "tech!"  Tech eats oil (go ahead, find any "tech" process that doesn't require fossil fuel inputs), something that's in decline (based on our grow-or-die behaviors).  Yet, man's hubris just won't step aside, for He can do better than nature (which has polished its system over the course of billions of years).

Nonetheless, it's good to see discussions that tend toward the true fundamentals: Food, Shelter and Water.

Dick Fitz's picture

Seer-

Language and culture are technology, and without them we would still be living in trees and eating grubs and bark. Fire is technology. The wheel is technology.

7B humans could not survive on the earth without technology.

Seer's picture

"Fire is technology. The wheel is technology."

NO!  Fire is fire and the wheel is a wheel.  TECHNOLOGY is a PROCESS which defines how to create.  And without energy or materials technology is merely a thought.

As far as living in trees and eating grubs, wouldn't that have been a cultural thing too?  Meaning technology (communicated)?

"7B humans could not survive on the earth without technology."

Well, it's 6B+, but, again, all us "humans" survive because of the sun (direct as well as stored [fossil fuels]) and mineral/physical resources.  Thought processes represented in technology allow us to EXPLOIT energy and physical resources: well, some things, like metabolizing food aren't a thought process, isn't a "technology."

Without a doubt, without the physical resources "7B humans" cannot be sustained via technology's processes.

Technology does NOT create that which doesn't already exist.  That is, it may TRANSFORM, but it cannot create out of thin air.  Hm... if it could, would that mean that we could over-mass the earth, cause it to collapse?

Sorry, but the "technology will save us" mantra gets a bit old after a while.  It is, I find, a convenient way to con people.

Leraconteur's picture

 

"7B humans could not survive on the earth without technology."

Well, it's 6B+, but, again, all us "humans" survive because of the sun (direct as well as stored [fossil fuels]) and mineral/physical resources.

Current figures are that it is 6.98 B. Margin of error could easily place it at 7.00 B or greater, so the OP is correct.

World Population is 7.00 B, or will be within 4 months.

Sorry, but the "technology will save us" mantra gets a bit old after a while. 

 Look at world history from 1350 to present. Technology HAS enabled the population growth - Oil was present for only a short period of those 661 years.

 

Dick Fitz's picture

Perhaps I should have broken it down more simply for Seer-

CONTROL of fire is technology, ditto the wheel. Both exist in nature but humans are the only that use it. Of course monkeys that live in trees and eat grubs have a primitive culture, but no means of expanding it. We do. It, in the form of the technology of LANGUAGE and HIGHER CULTURE has allowed us to go from a global "carry capacity" of +/- 1M people a few thousand years ago to +/- 7B today. Less than 100 years ago it was +/- 1B, so tech has allowed us to septuple (think about the concept of "septuple"- the mix of language and math, without which we would still be living in trees) that capacity in 100 years. Continued refinement of that ability to extract and refine and REUSE resources will mean a virtually unlimited carrying capacity as long as we don't allow our global masters to drive us back to the dark ages.

Seer, I suspect that you are utterly ignorant of economics, history and the mechanics of progress. I am only responding to you in case some other reader sees your reply and thinks you have a point. You do, but it is on the top of your head. Put down the Time and People magazine, turn off the CNN and Fox News(sic) and learn about the rich and amazing power of human ingenuity. Malthus was wrong 200 years ago, and will be wrong 200 years from now.

NidStyles's picture

Agree with you, but disagree with how you went about the discussion.