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Is the economy really growing?

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.)



  1. Is it “growth”…or just the first signs of forthcoming rampant inflation?

    Based on anecdotal evidence, I still see more empty retail spaces, “available” commercial and office space than 6-minths ago. What I also see are rising retail prices fro consumer products, groceries and still-sky-high gasoline. Despite being vary careful about value-purchasing, my monthly grocery bills have increased 15-20% for the same basics…in-part since less items are available on-sale or discounted.

    – Even on-sale, the price of chicken parts have risen from $0.99/lb. to $1.29/lb. minimum. A decent roaster is $2.99 a pound!!
    – Beef sale prices has risen from $3.00/lb. to $4.49/lb. for the cheapest cuts. Stew meat and hamburger should not cost $4.99/lb. on-sale!!
    – A can of Campbell’s Cream of Mushroom has risen from $1.69 to $1.99 a can recently.
    – Bread is $4.49 a loaf (16 slices). French or Italian loaf’s $3.99, and they are mostly air. Hotdog and hamburger roils should not be $3.99 for a package of 8.

    In 18-months, my monthly grocery bills have climbed from $369.03 in Aug 2011 to $479.53 for Feb 2013 a month for two-people…up almost 30%.
    . . . And Herr Dr. Professor Krugman tells me real inflation is less than 2%?? **snert**

    Overall dollar-volumes may be increasing due to insidious, creeping inflation…but I certainly don’t see the “Economy” improving.

    Comment by Ted B. (Charging Rhino) — March 11, 2013 @ 12:47 am - March 11, 2013

  2. When Weimar Germany got their printing presses rolling, they got unemployment down to 1%. For awhile. Real wages (living standards) were falling, people felt they simply had to work.

    Revolutionary France did an entire hyperinflation without ever seeing workers’ wages rise. Some would say, well that means they didn’t really have inflation.

    I paid $19 for a whole chicken a couple weeks ago. Couldn’t believe it. Granted, it’s California and the chicken was a bit large, range-fed and all that… still, it wasn’t a high-end supermarket, and it was their main brand of chicken. It had to be $3.99/lb.

    Comment by ILoveCapitalism — March 11, 2013 @ 1:16 am - March 11, 2013

  3. Excellent illustration!

    Comment by Nan G — March 11, 2013 @ 5:17 am - March 11, 2013

  4. Ironic, isn’t it, that the same people who pointed to the success of Wall Street financiers as proof that Bush’s policies only helped “the rich” are now pointing to the success of Wall Street financiers as proof that Obama’s policies are “working.”

    Comment by V the K — March 11, 2013 @ 6:15 am - March 11, 2013

  5. Very!

    Comment by ILoveCapitalism — March 11, 2013 @ 9:16 am - March 11, 2013

  6. Of course the stock market is at an all-time high, Bernanke is backing it at the rate of $85 Billion a month. If Bernanke were backing Greece at the rate of $1 Billion a month, Greece would be out of the woods.

    However, all the Bernanke money is borrowed and spent in exactly the same way all the Social Security “contributions” were blended into general income for the elephantine federal government and Social Security got a “lock-box” full of I.O.U.’s in exchange. Ponzi would be proud.

    This Bernanke fiat “currency” is holding inflation numbers down “artificially” and soon enough the stock market and the entire economy will have to face the devaluation (degradation) of the U.S. Dollar.

    The real estate market will be “bouncing back” when you see the empty homes in the subdivisions across the country start to become scarce. The truth is that banks are sitting on huge numbers of foreclosed properties and not even offering them. Furthermore, while we were sleeping, the Obama administration got right back into the Freddie/Fannie scheme of subprime lending to unqualified buyers.

    The unemployment rate is only going down if you accept the fiddled-to-death numbers the government is putting out. The numbers to watch involve jobs created that are going unfilled. Many of the unemployed have moved onto the food stamp and other welfare rolls. Until we see welfare numbers decrease, there is no quid pro quo job growth.

    This whistling past the graveyard may be good for one’s momentary psyche, but it does nothing to change reality.

    Comment by heliotrope — March 11, 2013 @ 6:12 pm - March 11, 2013

  7. The foreclosure backlog here in NJ is clearing the Courts and the RE Markets so-slowly that current estimates are it will be 50-YEARS til the backlog is cleared. …WTF??

    Comment by Ted B. (Charging Rhino) — March 11, 2013 @ 8:37 pm - March 11, 2013

  8. First, let me say that I hate Keyensianism. I hate government intervention of any (or most) kinds in markets. All corporate welfare – subsidies, tax credits, tariffs, whatever give phony price signals that distort markets and ultimately lead to malinvestment. That’s my firm belief and it’s why I have opposed nearly every economic policy that’s come from the FED and the Obama administration.

    But what you may be missing is that at the corporate level there has been a massive substitution of technology for labor since the crisis began. Both S&P500 corporate profit margins ad absolute corporate profit levels are now higher than they’ve ever been. In history. “Smart guys” have thought for the past 12-18 months that as companies continue to hire new employees, those margins would start to decline. So far, they haven’t. It’s a productivity miracle. Think about it like this. Nominal GDP is now higher than pre-crisis levels, but there are several million fewer people working. AND S&P 500 earnings are now reaching records in terms of margins and absolute levels, and corporate managers are achieving that with millions fewer employees. Larry Kudlow likes to say that “profits are the mother’s milk of stock prices”. Well, corporate profits have been booming. S&P margins troughed at about 8% during the crisis and now they are at record peaks of about 14%.

    Now look at the consumer cyclicals. Auto production troughed at about 9.5 million units on a seasonally adjusted annual rate (“SAAR”). Now they’re at 15.3 million SAAR. In other words, we’re producing about 6 million more care PER YEAR than we were at the trough. New housing starts troughed at about 400,000 SAAR units back in ’09, the lowest ever since record keeping began in the 1950s when the population was well less than 200 million people. Now housing starts are back up to about 900,000 (by far, the biggest bounce has come in multi-family units like duplexes, triplexes, quads and apartment buildings). Prior to the crisis, autos peaked at about 17 million unit SAAR in 2007. However, since then we’ve added several million people to the population. Housing starts peaked at something like 1.5 million units in ’06 (to be sure, both autos and housing were fueled by irresponsible lending during the last cycle so those numbers are artificially inflated). However, considering population growth since then, it does appear that the two most economically sensitive consumer sectors of the economy, autos and housing, have quite a ways to go before we hit a new cyclical peak.

    Our side likes to say that this has been the worst recovery in the post WWII era, which is absolutely true when measuring the recovery against either GDP or job growth. But in large part because of the substitution effect of technology for labor, it’s been one of the best recoveries ever if you measure it by the rebound in corporate profitability. That’s why the stock market has been on such a tear.

    Conventional wisdom says that the tax hikes that occurred on the rich in January, the expiration of the payroll tax holiday on EVERY worker that occurred in January, the sequester cuts, the reduction in productivity from hiring new employees, and the increased phase in of Obamacare ought to cause corporate profit margins to stall if not turn down, and that the stock market ought to be discounting that by now. So far, that hasn’t happened.

    Comment by Scott — March 12, 2013 @ 11:43 am - March 12, 2013

  9. at the corporate level there has been a massive substitution of technology for labor since the crisis began

    As well there should be. It’s a blessing and I call it names like “productivity growth”, “capitalism” (the use of capital to relieve crushing human labor), and so forth. It’s a blessing because the freed-up labor is available then for new jobs, new enterprises. The question becomes: why haven’t we had more new jobs/enterprises?

    – Partly because Obama has raised the cost of creating jobs (example – Obamacare raising the cost of full-time jobs), driving employers to create part-time jobs – or no jobs at all, if possible.
    – Partly because of the shadows cast by (1) Obama’s extensive, yet unpredictable interference in business, and (2) Obama’s giant-spending, giant-deficit, giant-debt policies.
    – Additional causes, that I may yet touch on.

    Item (2) brings us back to the point of my post. The deficit/debt problem represents a threat of future tax increases (certain if you count money-printing as an indirect tax, which I do). That threat lowers the value of all business efforts (not that standard NPV calculations would take it into account – they don’t – but, “people know”).

    the two most economically sensitive consumer sectors of the economy, autos and housing, have quite a ways to go before we hit a new cyclical peak


    it’s been one of the best recoveries ever if you measure it by the rebound in corporate profitability. That’s why the stock market has been on such a tear

    Disagree. Again, another explanation is possible for why corporations have been hoarding cash: because of the clouds hanging over them. (Some additional clouds could be the instability of other economies, like Europe or China.)

    As for the stock market: take away the Fed’s $85 billion a month of pumping new money into the bond markets (which then seeps into all the financial markets), and what would stocks be doing? Not setting new highs! We know it – it’s not just me guessing – because the stock market’s uptrend started in line with the Fed’s cash hitting the markets. (They started buying MBS in September I believe, but those purchases have a 90-120 day settlement process, so the cash didn’t “arrive” at the large banks until December – January.)

    Conventional wisdom says that the tax hikes…the sequester cuts, the reduction in productivity from hiring new employees, and the increased phase in of Obamacare ought to cause corporate profit margins to stall if not turn down, and that the stock market ought to be discounting that by now [ed: thus, stocks declining]. So far, that hasn’t happened.

    Exactly. Again, see: Federal Reserve Bank. QE makes the markets irrational. (Although, as I see it, the Bush tax cuts being “settled” in law and the sequester cuts taking place are two economic pluses that should now legitimately, if only slightly, raise business confidence and hiring.) You said it yourself, that government intervention in markets causes phony price signals and malinvestment. There’s your Exhibit A.

    Comment by ILoveCapitalism — March 12, 2013 @ 12:26 pm - March 12, 2013

  10. Chicken update for Ted – Turns out the $3.99/lb chicken was my fault. I’d gotten the ‘organic’ brand by mistake. Was back at the store today. Their main brand is in fact $2.99/lb – which, as you point out, is still a good deal higher than just a few years ago.

    Comment by ILoveCapitalism — March 12, 2013 @ 10:10 pm - March 12, 2013

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