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Why Trump's 4% GDP Will Remain Elusive: It's Not His fault, it is simply a function of math
Zero hedge ^ | 01/03/2016 | Lance Roberts via RealInvestmentAdvice.com

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:

  1. Real potential GDP has been sharply reduced from the long-term exponential growth trendline (green dashed line) to close the gap between real GDP and “hope.”
  2. With the economy heading into its 8th year of growth without a recession, the CBO is currently projecting another 10-years of “recession-free” growth. The reality of such happening is very slim.
  3. While the output gap has closed, by reducing expectations, real GDP continues to underperform significantly against both reduced expectations and long-term reality.

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.


TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: gdp; growth; trump
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To: crz

I was agreeing with you and expanding on your thoughts there.


41 posted on 01/03/2017 6:34:18 PM PST by central_va (I won't be reconstructed and I do not give a damn.)
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To: miniTAX
Besides, I suspect there are more than 2 reasons for GDP growth.

Our GDP is the sum total of all goods and services produced in the U.S. There might be other "reasons" for it, but the end result is that someone has to buy everything and someone has to sell it. These are basically functions of population and productivity.

You're right that working population is the primary factor on the production side, but there are plenty of sales of products and services even with non-working people (elderly, children, etc.).

42 posted on 01/03/2017 7:57:52 PM PST by Alberta's Child ("Yo, bartender -- Jobu needs a refill!")
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To: DannyTN
Only 60% of our working age people are actually working. So if you put them back to work, you have a huge productivity boost. You go from not producing anything to producing something.

That's a very good point, but there's a flip side to this. I look around at all of the job postings and unfilled positions in various industries in my area, and I wonder how many of those 40% are even capable of working in decent jobs at all.

43 posted on 01/03/2017 8:01:27 PM PST by Alberta's Child ("Yo, bartender -- Jobu needs a refill!")
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To: Alberta's Child

Making welfare/food stamps/section 8/energy assistance and all the other freebies a little less lucrative and people might be a bit more willing to earn their keep.


44 posted on 01/03/2017 8:04:58 PM PST by meyer (The Constitution says what it says, and it doesn't say what it doesn't say.)
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To: SeekAndFind

If Obama can keep the GDP growth in the positive range, Trump should be able to get to 4% quite easily, given the same conditions.


45 posted on 01/03/2017 8:23:36 PM PST by Crucial
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To: SeekAndFind

LOL! More of those heavily invested in the current set of circumstances trying to explain why we really can’t change things - just too dang hard and here’s the charts to prove it.....


46 posted on 01/04/2017 4:41:19 AM PST by trebb (Where in the the hell has my country gone?)
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To: Alberta's Child

That’s a valid point. I have an uncle who is a manager in the rain garment industry. They’ve offshored and are just a distribution point now. He says there is no skilled labor left in America.

That may be true. But it seems like they trained foreigners easy enough. I don’t believe Americans are not trainable.


47 posted on 01/04/2017 9:15:50 AM PST by DannyTN
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To: DannyTN
I have met more than a few business owners who tell me that a lack of work skills aren't the biggest problem they face in prospective employees, but work ethic and personal initiative.

Here's a sobering article about this subject:

Click Here

On-the-job training does nothing for people who don't have basic standards of human behavior, drug problems, or a combination of these things.

48 posted on 01/04/2017 10:51:08 AM PST by Alberta's Child ("Yo, bartender -- Jobu needs a refill!")
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To: DannyTN
He says there is no skilled labor left in America that will work for third world wages.

Fixed it.

49 posted on 01/04/2017 10:55:31 AM PST by central_va (I won't be reconstructed and I do not give a damn.)
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To: Alberta's Child; central_va

I’m for doing interventions for these type of people.

It doesn’t make sense to do interventions until you have jobs available. But once there are jobs available, those that don’t go back to work willingly, need to have help, they need supervision, they made even need training in basic standards of human behavior.

They will be a drag on society until it’s addressed. So we might as well give them a hand up, even if it’s a push or shove.


50 posted on 01/04/2017 11:00:22 AM PST by DannyTN
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Comment #51 Removed by Moderator

To: central_va
I come to FreeRepublic for intelligent interaction with other people -- many of whom may disagree with a lot of things I post here.

"Intelligent" is the operative word here ... which is why this will be the last thing I ever post in response to you.

52 posted on 01/04/2017 11:15:42 AM PST by Alberta's Child ("Yo, bartender -- Jobu needs a refill!")
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To: DannyTN

Interesting idea, but who will do the “intervention” in these cases?


53 posted on 01/04/2017 11:16:51 AM PST by Alberta's Child ("Yo, bartender -- Jobu needs a refill!")
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To: Alberta's Child
Interesting idea, but who will do the “intervention” in these cases?

Government would have to coordinate it. Social services is already used to coordinating therapy / rehab /training with third parties. I wouldn't give it to them, since they instantly would want to take any kids in the household. But you could model it after them.

Step one, would be an assessment that attempts to identify why the person isn't working. What does the individual claim? What do past employers say? What do family members say? Might make sense to run through through some basic assessments, psych test, skills test, etc.

Then you go from there. Could be mandatory education classes, mandatory therapy, drug tests, drug rehab, assistance applying/maintaining jobs, possibly even placing cameras in the home for a week or month, to identify behavior problems.

54 posted on 01/04/2017 11:49:44 AM PST by DannyTN
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To: Alberta's Child
which is why this will be the last thing I ever post in response to you.

Good news that.

55 posted on 01/04/2017 11:57:29 AM PST by central_va (I won't be reconstructed and I do not give a damn.)
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To: crz
Excise taxes are not "bad".

But what they are, are taxes.

They take money out of the pocket of some citizens, under penalty of imprisonment, in order to benefit other citizens.

And they are every bit as susceptible to cronyist manipulation as is our current tax system.

As long as we all keep that in mind, we'll be OK.

56 posted on 01/05/2017 7:58:11 AM PST by Eric Pode of Croydon
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