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.
“Simply a function of math.”? I see, like the unemployment rate below 5%.
So there you have it, folks: there’s never been a better time to buy gold. Which is why I’m selling it.
“Let’s start with the Congressional Budget Office (CBO) and their projections...”
When I started out as an accountant, I thought up an account name that sounded impressive and would confuse people. "Prepaid Accrued Cash". Many intellectual discussions around staff lunch tables with that one. And now we have "Real Potential GDP".
And much of this article talks about one expense (interest expense, cost of money) as being the primary reason that economic growth / revenue (GDP) can't grow. Very interesting, similar to adding Social Security Numbers together and looking for a meaning or purpose.
Author is an idiot!
He thinks to have $1 of growth in the economy takes $3 of government debt. It’s not the debt that drives growth. The debt reflects that government has been spending more than it takes in. And that is reflective of poor economic results.
He ain’t listened to anything Trump has said. Instead he is looking solely at trends of our current incompetency and assuming more of the same.
Trump will soon have both the economy growing and debt shrinking. Then this idiot author will then assume that in order to grow the economy you have to shrink debt.
Nice article. Hey! Did you know NYC is ungovernable? And nationally milease is the rule. Yep. Because Democrats can’t fix any of these things no one can...
Get rid of the restraining departments and strangling regulations and return them to what they were in, say, 1969, and the economy will explode in growth.
(Oh, this needs to be done at all levels of government, not just the federal level. The states and counties have “fee’d” and regulated their companies into a low maintenance level with near zero growth.)
I agee with you 100%
I would not be shocked to see 6% growth in time. But, Trump needs to get his tax agenda passed and the complete repeal of all the federal government regulations and obamacare.
Oh gee, another “Trump will fail” article!
Under Trump, so many rules and regs will change that ANY prediction based on the current environment is useless.
Deregulation is great but that is not enough. It will take some pretty high tariffs to convince these globalist chimps that the cheap labor party is over. Make it here or pay up.
meh
When tax rates for corporations go to 15% and off shore funds are brought homethen we will see
More tariffs and less income taxes. That’s the ticket.
“More tariffs and less income taxes. “
We actually don’t need tariffs, which would precipitate a trade war. Nobody wins a trade war. What we need is less regulation and paperwork. I own six pieces of rental property. It takes four man-weeks to get ready for taxes. (Oh, and as a landlord it is illegal for me to do my own repairs or put on my own roof. Thus, the costs of those things is prohibitively high.)
Like the election math did not add up either. That is until Trump won.
People that comment import tariffs would start a trade war are really not worth reading. They are either duplicitous or stupid, or both. WE ARE IN A TRADE WAR NOW. Been in one for 30 years. Only we don’t fight back because of Free Traitors™..
I cant disagree with much of that either.
The founders felt the best way to make commerce REGULAR with foriegn nations was through tarrifs.
Yet there are those even on this stie that claim that that was not to regulate commerce, but was to fund the federal government only.
I am against UNREGULATED FREE trade. I am for FAIR and FREE trade. You send me 1 dollars worth of goods and I get to send you 1 dollars worth of goods.
China taxes the hell out of stuff coming into their country from ours. That, and they play with their funny money. Tax the livin piss out of their crap comming into our country or they dont get to send it in here.
Projections = Dice
There is no Constitutional right to free trade with foreign countries. None what so ever. Actually the opposite is true.
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