Some make the case for how well things are going, in the U.S. economy. The statistics say that GDP has been edging up, and unemployment ticked down to 7.7%. One GP commentor recently put it like this:
…the stock market is reaching all time highs, the real estate market is bouncing back and the unemployment rate is going down. Yes, the unemployment rate needs to go down lower but overall, things seems to be really improving.
But I say, look at how we’ve gotten here: not in any way that can end well.
Last week, I mentioned that the markets are most likely up because the Federal Reserve Bank is pumping out $85 billion per month in new money. That’s a rate of about $1 trillion per year. By no coincidence, the government’s FY2013 deficit is projected to be around $1 trillion.
Please let me borrow, print-n-spend $1 trillion a year (or more), and I will also get you higher GDP numbers, along with financial market bubbles, $4.50 gas, and job growth that is positive, only after several years (and with a lot of part-time jobs). But, how much real wealth?
Analogy: Say your spouse is out of work. You have a family business. You create a job paying your spouse $50,000. The job doesn’t really produce much. You created it so your spouse will feel good. Paying for it tips your business into a loss, that you make up by borrowing. Has your household gained? Your tax return says that your household income is $50,000 higher. Is it?
The income isn’t an economic gain, if all you did was borrow money to simulate earned income. That’s what the government does. It borrows money, spends it on un-economic jobs (e.g., bureaucrats, bailouts, or paying the unemployed to do nothing), and says “Look – the national income (GDP) is up!” (^^)
I’ve said for a couple of years that GDP is not a number we should care about. We should look at GDP net of new debt.
According to this chart, in the four years of Obama’s reign so far, the U.S. has added around $1.1 trillion to its GDP level, and around $2 trillion in cumulative GDP (giving Obama credit for all amounts above the deep-recession GDP level that he inherited). In the same calendar period, the U.S. added $5-6 trillion in debt.
That’s a disaster. In the name of government deficits to “stimulate” the economy, we have, over several years, added much more in debt than we’ve gotten in GDP increases.
It’s not all Obama’s fault. But he’s captain of the ship, and beneath the surface, he has an iceberg ripping its side. And he wants to steer deeper into it.
Under CBO projections, the federal government is NOT on a path to solvency. Its deficits drop for a couple of years, then balloon toward $1 trillion again. So we’ll keep adding to our debt, until a crisis forces us to stop.
And the CBO’s projections are best-case. Reasons to suspect things will be worse:
- The CBO often makes assumptions that are too rosy.
- We know that Obama is determined to keep increasing government spending. Forget about growing into a balanced budget, and ignore Obama’s rhetoric: he will find reasons to spend any revenue growth, especially if he re-takes the House in 2014.
- The national debt is already so large that a relatively small one-point rise in interest rates will add $100 billion by itself, to federal spending. We know that interest rates can’t stay at 0% forever; long-term rates will rise if the Fed ever stops QE.
- As conservatives always suspected, Obamacare will be a large burden on the economy and will cost hundreds of billions more than its proponents originally claimed.
We are enjoying dinner on the Titanic. Obama’s giant-spending, giant-deficit, giant-debt policies must sooner or later drive us to one or more of the following outcomes, in some combination:
- A debt crisis;
- Deep government spending cuts;
- crashes in the stock and real estate markets that are worse than 2008 in real (inflation-adjusted) terms;
- a bond market crash (or equivalently, a painful rise in interest rates);
- a recession worse than 2008;
- or/and: Argentina-style inflation, if the Fed “helpfully” tries to prevent the above by printing trillions in new money, year after year.
Sorry, folks! Remember, I’m only the messenger.
(^^ At this point in discussion, Keynesians would invoke ‘multiplier theory’ to claim that the borrowed-and-spent money has larger wealth-creating effects. But it doesn’t. The multiplier is undermined by counter-acting effects that Keynesians typically fail to notice.)