Posted on 01/03/2017 2:26:29 PM PST by SeekAndFind
For the umpteenth year in a row, mainstream economists and analysts are once again planting the seeds of hope for a return to stronger GDP growth. The White House has hoped for it for the last 8 years, and now President-elect Trump is all but promising a surge in economic growth.
Unfortunately, while promises are great, we must analyze the reality of attaining such a lofty resurgence.
Let’s start with the Congressional Budget Office (CBO) and their projections for the next decade. This is shown in the chart below.
There are several very noteworthy observations which need to be made:
While the data above tells us is that simply the economy is currently operating well below its potential level. While the most visible culprits are employment, wages, industrial production and consumption, these issues are byproducts of the 50-Trillion pound Gorilla sitting quietly in the corner. That seemingly invisible Gorilla is simply – debt.
To get a better idea of what I mean let’s take a look at economic growth in relation to debt levels. Prior to 1980, economic growth was entirely financed by economic activity as debt levels remained well below economic output.
Today, that same $1 dollar of GDP growth requires almost $3 dollars to finance it. That’s right – nearly $3 of debt to finance $1 of GDP.
Therein, of course, lies the problem of returning to 4% economic growth in the foreseeable future. With real GDP currently at $16.7 Trillion and debt estimated at $65 Trillion, the ratio is 3.9:1 debt to GDP.
In order for GDP growth to reach 4% in 2017 (assuming 2% growth in Q4) – GDP would have to expand to roughly $17.7 Trillion. Subsequently, the debt would need to expand to $67.6 Trillion or a whopping $2.6 Trillion in the coming year. So forth, and so on.
Are you seeing the problem here?
The problem is simply the math.
Furthermore, the current economic malaise is not something new that was caused by the financial crisis in 2008. The reality is that economic growth has deteriorated consistently since 1980. Economic growth cannot be supported by debt growth. Increases in debt reduce savings and productive investment. Debt, like cancer, consumes income which detracts from consumption and investment.
The larger the debt, the more consumption it requires.
As interest rates began their long march lower in the 1980’s so did economic growth. As growth rates began to slow, the need to maintain higher standards of living required a reduction in the personal savings rate and increases in debt. In turn, there was less available for productive investment. As each year passed quietly by the cancer of debt spread, undetected and ignored, until it became terminal.
What we now realize, yet still try to ignore, is at the very heart of Austrian economic theory.
“As the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.”
In other words, the proponents of Austrian economics believe that a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment. Low interest rates tend to stimulate borrowing from the banking system which in turn leads, as one would expect, to the expansion of credit. This expansion of credit then, in turn, creates an expansion of the supply of money and, therefore, the credit-sourced boom becomes unsustainable as artificially stimulated borrowing seeks out diminishing investment opportunities. Finally, the credit-sourced boom results in widespread malinvestments.
Does any of this sound familiar?
The problem currently is exponential credit creation can no longer be sustained. The process of a “credit contraction” will occur in fits and starts over a long period of time as consumers, and the government, are ultimately forced to deal with the leverage and deficits. The good news is that process of “clearing” the market will eventually allow resources to be reallocated back towards more efficient uses and the economy will begin to grow again at more sustainable and organic rates.
Most importantly, the demographic and structural shift in the economy remains a major headwind to stronger rates of economic in the future.
The current levels of anemic economic growth in U.S. remain dependent upon the consumer with roughly 70% of GDP tied to personal consumption. Unfortunately, roughly 22% of personal incomes which are used to reach those consumption levels currently comes from government transfers.
Working to reduce the governmental assistance programs, when such a large portion of personal incomes depend on it, will not be a boon to creating the economic growth needed to make the plan work in the future. The problem lies in the demographics.
With over 70 million individuals currently moving into the retirement system, this demographic shift will further complicate the net drag on savings – which are integral to productive investment and the creation of an expanding economy – as well as the increased demand on welfare and healthcare programs. While Trump has proposed reforms to these systems, which are most definitely needed to keep them viable in the long-term, the near-term impact on economic growth will most definitely be felt.
The processes that fueled the economic growth over the last 30 years are now beginning to run in reverse, and when combined with the demographic shifts in the U.S., the impact could be far more immediate and prolonged than the media, economists and analysts are currently expecting.
Again, it is simply a function of math.
“WE ARE IN A TRADE WAR NOW. “
The difference is between a cold war and a hot war. The trick, which I think Trump can pull off, is to end the cold war without igniting a hot war.
Real GDP growth comes from one or both of the following: (1) growth in population, and (2) growth in productivity.
As our population ages, productivity declines for many of our citizens. So where does the GDP growth come from if any population growth has to offset the negative productivity of a large number of near-term retirees?
Just like Ronald Reagan, Donald Trump - whom the pundits, media and inside-the-beltway types view as a fool, a well-meaning dunce - will have to prove that it is those bloviating fools who actually don’t know what they are talking about. Since Trump is far more business-saavy than Reagan was, I would expect that the economic situation will be even better under Trump than it was under Reagan (assuming, of course, that he gets what he wants in a timely manner from Congress).
Anyhow, economic growth comes from productivity gains, which come from investments in human and technological capital. Business does that routinely, as does anyone who is educating him/herself. Remove the shackles of high taxes and onerous environmental and compliance-oriented regulations, and the growth that we used to experience naturally will return. In doing so, we will REDUCE debt (though not in Trump’s first year - that’s asking a bit much). Didn’t we have growth in the ‘90s while reducing government debt?
“Congressional Budget Office” — same office that said Obamacare would lower the cost of healthcare and be deficit neutral.
And there is no way Trump has a path to 270 electoral votes and Hillary Clinton is 98% certain to win
Growth in productivity = robots. Yet that is a problem as well, because workers displaced by robots can’t afford the products the robots make.
The fact is, we have a perfect storm of excessive government (debt, taxes and regulation), excessive consumer debt, aging population and negative population growth (the dirty secret of pro-immigration ideology is that they’ve been trying to shore up gdp with population growth through immigration).
I have no idea what is going to happen, but it will be interesting and uncomfortable
Can you point to anything in my reply to you where I mentioned the constitution and free trade?
Or are you one who likes to come on here simply to argue?
Projection, curves, maths... I’m impressed!
I project that the author predicted a market crash if Trump wins.
False premise IMHO : real GDP growth comes from growth in WORKING population and not “from growth in population”. There is room for growth in working population given the low workforce participation rate.
Besides, I suspect there are more than 2 reasons for GDP growth.
Zero Hedge?
More like, Zero respect for the American people.
“...as a landlord it is illegal for me to do my own repairs or put on my own roof.”
Never heard of such a thing. Is that a Florida regulation?
Stuff like this are true....until it isn’t.
““...as a landlord it is illegal for me to do my own repairs or put on my own roof.”
Never heard of such a thing. Is that a Florida regulation?”
It is a county law/regulation. I am virtually forbidden to do plumbing, electrical, or any roof repair over (I think it’s $250.) I must obtain a permit and hire a contractor.
(Now, all of that aside, it’s a rural county and I have bought houses off the main roads. So, I have done everything myself, but not legally. One problem with that would be selling or insuring the structures. I can’t prove, for example, when a roof was put on as it must be proven by a permit. I am also not permitted to hire unlicensed people. I can, however, use family. So, the guys are briefed on the family relationship to claim. Also, I will stand there, with a practiced, straight face and swear I am moving in myself. It is permitted to use family members to work on your own home. But, not for roofs or plumbing unless they are licensed.)
The rents in this rural county have gone up twenty percent from last year to this. That’s because bigger landlords simply can’t cut corners as they are too well known and their properties are on main roads.
Of course, they mean little in the real world.
I can hardly think of a better way to milk the donor class for dollars than to play the game of who gets tariff protection and who does not.
Thank you!
He said of all abhorrent taxes, the tax on consumption was the least burdensome. And of these, the least abhorrent was that of taxes on foreign commerce.
Go back and take a look at Reagans during his first term.
Then his second...and then after the one worlders took over, it went down.
GHW Bush was NOT a very good president.
But if you don't stop the offshoring and bring the industries back, you won't see automation here. You will see it in other countries and our unemployment will keep getting worse. Our national debt will increase and we will become increasingly poor.
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