In The First Quarter $250 Billion In Federal Debt Bought Negative $74 Billion In GDP

As everyone knows by now, in Q1 the US economy "grew" (we use the term loosely because the correct term is shrank) by the lowest amount in Q1 since 2009. More to the point, the -2.9% collapse in GDP was the 17th worst quarterly print in US history.

That much is largely known by now. What may not be known is that while there has been at least one quarter in the past 5 years in which the US economy shrank on a CAGR basis (at least until a new and improved definition of GDP revises that away) since 2009 there has never been a quarter in which the economy shrank sequentially in nominal terms. Which is what it did in Q1, when it declined by $74 billion.

Which brings us to the topic of marginal utility of debt, extensively covered here in the past. In brief, it describes how much in "economic growth" every dollar in federal debt buys. The bad news: in Q1, US total Federal debt rose by $250 billion, to a record (duh) $17.6 trillion. This debt "bought" a negative $74 billion in GDP, which declined to $17.0 trillion. Said otherwise, this was the first quarter since the end of the recession when debt rose (by a whopping amount), and when GDP declined sequentially in nominal terms.


Which, for the Keynesians out there, those who hold that absent substantial debt injections, either in the public or private sector, an economy is unable to grow, should be a flashing red light. Because US public debt expansion is now "tapering" if only until some time in 2017 when the healthcare cliff slams the US and the US Treasury will be working in overdrive to fund the US welfare state. And if said debt impulse is gone (and certainly the private sector is nowhere near being able to offset the public sector injection), it also means that GDP will suffer alongside it. 

Ironically, it may well be that the slow down in drunken sailor debt issuance, something Obama has been happy to boast about in recent months, is precisely what caused the economy to grind to a halt: not the weather, not the BEA's incorrect accounting for Obamacare.

If indeed this is the case, and unless the private sector debt creation really picks up the pace (and we are not referring to student loans here although these most certainly are used for other purchases besides tuition and room & board), which it won't considering the collapse in mortgage lending, prepare for everyone to be shocked as the Q2 GDP estimate, somewhere around 4% also tumbles in the coming months.