Tag Archives: economic growth

The US Recovery Is Weak, Especially Given the Size of the “Stimulus”, by Daniel Lacalle

If the GDP grows at 6 percent, which in a $21 trillion economy is about $1.26 trillion, but government stimulus, was twice that and the Fed’s balance sheet expanded by an incredible $7 trillion, can you really say the economy has in any meaningful sense grown? Only in the sense that you get “wealthier” by running up your credit card balances. From Daniel Lacalle at mises.org:

The United States: Hardly A Recovery

There is an overly optimistic consensus view about the speed and strength of the United States’ recovery that is contradicted by facts. It is true that the United States recovery is stronger than the European or Japanese one, but the macrodata shows that the euphoric messages about aggregate GDP growth are wildly exaggerated.

Of course gross domestic product is going to rise fast, with estimates of 6 percent for 2021. It would be alarming if it did not after a massive chain of stimuli of more than 12 percent of GDP in fiscal spending and $7 trillion in Federal Reserve balance sheet expansion. This is a combined stimulus that is almost three times larger than the 2008 crisis one, according to McKinsey. The question is, What is the quality of this recovery?

The answer is: extremely poor. The United States real growth excluding the increase in debt will continue to be exceedingly small. No one can talk about a strong recovery when industry capacity utilization is at 74 percent, massively below the level of 80 percent at which it was before the pandemic. Furthermore, labor force participation rate stands at 61.5 percent, significantly below the precovid level and stalling after bouncing to 62 percent in September. Unemployment may be at 6 percent, but it is still almost twice as large as it was before the pandemic. Continuing jobless claims remain above 3.7 million in April. Weekly jobless claims remain above 500,000 and the total number of people claiming benefits in all programs—state and federal combined—for the week ending March 27 decreased by 1.2 million to 16.9 million.

These figures must be put in the context of the unprecedented spending spree and the monetary stimulus. Yes, the recovery is better than the eurozone’s thanks to a fast and efficient vaccination rollout and the dynamism of the United States business fabric, but the figures show that a relevant amount of the subsequent stimulus plans have simply perpetuated overcapacity, kept zombie firms that had financial issues before covid-19 alive, and bloated the government structural deficit and mandatory spending.

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EU Economy Traveling Along Same Worn Dead-end Road, by Bruce Wilds

The problem with the majority of Europeans is they really think economic growth comes from and is directed by governments and central banks. From Bruce Wilds at brucewilds.blogspot.com:

With so many countries across the world facing difficulties, many people have yet to notice the Euro-Zone has become a place where hope goes to die. The last round of elections in the Euro-Zone should bring little comfort to those supporting a stronger Europe. Huge gains were made by forces seeking more power for the populist agenda. In short, it is a boost for the rights of individual nations to have more say in how they are governed.  Two of the most pressing issues are that insolvent Italy struggles with a stagnant economy and Spain is coming apart politically with Catalan separatists defying Spain’s Prime Minister.

To avoid the union coming apart at the seams and a miserable future, the European Commission recently unveiled an unprecedented  €750BN CoVid-19 recovery plan. It consists of €500 billion in grants to member states, and €250 billion would be available in loans. This means they are asking for the power to borrow. This is geared to tackle the worst recession in European history and shore up Italy. It would mean transforming the EU’s central finances to allow for it to raise unprecedented sums on the capital markets and hand out the bulk of the proceeds as grants to hard-pressed member states.

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“The 2-Child Policy Has Failed”: China’s Birth Rate Hits Record Low As Growth Slows, by Tyler Durden

At its present birth rate China cannot sustain the growth rates that have made it an economic powerhouse. From Tyler Durden at zerohedge.com:

China finally abandoned its controversial one-child policy in November 2013. But more than six years later, millions of Chinese couples are still unwilling to have a second child. And that’s a huge problem for the Communist Party, whose legitimacy in the eyes of the public depends on its ability to deliver on promises of unbridled growth and prosperity.

And who can blame them? Entrenched behaviors die hard, and after the government’s brutal treatment of citizens who defied its policy (which was initially imposed to ward off famine), we can sympathize with Chinese who simply believe that having two children isn’t in keeping with the fundamentals of patriotic socialism with Chinese characteristics.

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The Population Collapse Behind Interest Rates, Debt, & The Asset Price Explosion, by Chris Hamilton

It’s demographically baked into the cake that the population growth rates that have propelled so much economic growth will fall precipitously. From Chris Hamilton at economica.blogspot.com:

This may not be a surprise to many males, but human females are unlike the rest of the animals on earth.  Human females have a unique and totally differentiating factor from nearly all other animal life; their bodies cease being capable of pregnancy approximately half way through their life cycle.  This natural change to sterility (menopause) does not happen in the animal kingdom (nor in human males) essentially so long as they live (ok, actually there may be a couple of whales and porpoises that may also go through menopause…but I digress).  Animals and male humans are still able to reproduce nearly until the end.  But not human females.  Even before menopause fully takes over, typically around 50 years of age, fertility rates drop radically after 40 and miscarriages surge among those able to get pregnant.  By 45, pregnancies essentially cease.

What the hell does this have to do with economics, you may be asking yourself? Judging the size and change of humankinds population is quite different than any other species on earth because of this truncated period of fertility among human females. Thus, to gauge the direction of our species, and the future consumption and potential economic activity, we must focus on annual births versus the 20 to 40 year-old female population and understand that the post childbearing, 40+ year-old female population is, from a fertility perspective, simply an inert echo chamber. The 20 to 40 and 40+ year-old populations shown below through 2040 are not estimates or projections but actual persons which already exist and (absent some pandemic, world war, or change in life spans) will slide through the next 20 years.  All data (except where noted) comes from the UN World Population Prospects 2019 and they collect / compile all the data from the national and regional bodies.  The only real variables in what I’ll show below are immigration, deaths, and births over the next 20 years.  I also primarily focus on the world excluding Africa.  Africa consumes so little, has relatively very low emigration rates, is highly reliant on the rest of the world for it’s economic growth, but from a population perspective, is growing so rapidly as to skew the picture.

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As the Madness Turns, by MN Gordon

Government debt is growing much faster than the economy, which can only lead to disaster. From MN Gordon at economicprism.com:

The first quarter of 2019 is over and done.  But before we say good riddance.  Some reflection is in order.  To this we offer two discrete metrics.  Gross domestic product and government debt.

GDP for the quarter, as estimated by the March 29 update to the New York Fed’s GDP Nowcast, grew at an annualized rate of 1.3 percent.  For perspective, annualized GDP growth of 1.3 percent is akin to getting a 1.3 percent annual raise.  Ask any working stiff, and they’ll tell you…a 1.3 percent raise is effectively nothing.

By comparison, the U.S. budget deficit for fiscal year 2019 is estimated to hit roughly $1.1 trillion.  This amounts to an approximate 5 percent increase of the current $22.2 trillionnational debt.  In other words, government debt is increasing about 3.85 times faster than nominal GDP, which is about $21 trillion.

These two metrics offer a rough perspective on the state of the economy.  Deficit spending is grossly outpacing economic growth.  Heavy treatments of fiscal stimulus are being applied.  Yet the economy’s practically running in place.  In short, the state of the economy is not well.

And as the economy slows and then slips into reverse later this year, and as Washington then applies more fiscal stimulus, these two metrics will move even further towards madness.  What’s more, the Fed is gearing up to promote this greater state of madness in any and every way possible…

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Government Spending Doesn’t Create Economic Growth, by Frank Shostak

The key question: where does government get the money that it spends to support economic growth. From Frank Shostak at mises.org:

According to many commentators, outlays by government play an important role in the economic growth. In particular, when an economy falls into a slower economic growth phase the increase in government outlays could provide the necessary boost to revive the economy so it is held.

The proponents for strong government outlays when an economy displays weakness hold that the stronger outlays by the government will strengthen the spending flow and this in turn will strengthen the economy.

In this way of thinking, spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the flow of spending. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts his spending.

Following this logic, in order to prevent an emerging slowdown in the economy’s growth rate from getting out of hand, the government should step in and lift its outlays thereby filling the shortfall in the private sector spending.

Once the flow of spending is re-established, things are back to normal, so it is held, and sound economic growth is re-established.

The view that an increase in government outlays can contribute to economic growth gives the impression that the government has at its disposal a stock of real savings that employed in emergency.

Once a recessionary threat alleviated, the government may reduce its support by cutting the supply of real savings to the economy. All this implies that the government somehow can generate real wealth and employ it when it sees necessary.

Given that, the government is not a wealth generator, whenever it raises the pace of its outlays it has to lift the pace of the wealth diversion from the wealth-generating private sector.

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The Economic Consequences Of Debt, by Lance Roberts

America’s ever increasing debt load will inevitably slow down its economy, eventually to zero or negative growth. From Lance Roberts at realinvestmentadvice.com:

Not surprisingly, my recent article on “The Important Role Of Recessions” led to more than just a bit of debate on why “this time is different.” The running theme in the debate was that debt really isn’t an issue as long as our neighbors are willing to support continued fiscal largesse.

As I have pointed out previously, the U.S. is currently running a nearly $1 Trillion dollar deficit during an economic expansion. This is completely contrary to the Keynesian economic theory.

Keynes contended that ‘a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.’  In other words, when there is a lack of demand from consumers due to high unemployment, the contraction in demand would force producers to take defensive actions to reduce output.

In such a situation, Keynesian economics states that government policies could be used to increase aggregate demand, thus increasing economic activity, and reducing unemployment and deflation.  

Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.”

Of course, with the government already running a massive deficit, and expected to issue another $1.5 Trillion in debt during the next fiscal year, the efficacy of “deficit spending” in terms of its impact to economic growth has been greatly marginalized.

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We Are Already In Depression (If Borrowing Money Is Not Income), by Baker and Co. Advisory Group

Back out the “growth” from borrowed money since the 2008 financial crisis and the US has had negative actual growth. This is one of best recent articles written on economics. From Baker and Co. Advisory Group:

  • The U.S. economy is not as solid as it appears.
  • Statistical anomalies hide profound weakness.
  • I will examine actual GDP and actual employment.
  • Warning: not for the faint of heart.

Do you consider debt as income? Before you answer that, let’s perform a thought experiment. Imagine that you had taken a long cruise last fall and charged $10,000 to an American Express card. When you did your taxes this year, would have told the IRS that you had $10,000 income from American Express? Of course you wouldn’t. Suppose a major oil company issues $800 million worth of bonds to develop a new old field. Would the company report that as income to the stockholders or the IRS? Of course they wouldn’t. I am sure those sound like silly questions as the answer is a self evident “NO!” We do not consider borrowed money as income. It is a liability that must be paid back. Then why do we count Federal Government debt when measuring national income? I will leave speculation as to the “why” to the readers and focus on the fact that we do count new Treasury Debt as income.

 The modern concept of GDP was first developed by the Department of Commerce in 1934. Commerce commissioned Nobel Laureate Simon Kuznets of the National Bureau of Economic Research to develop a set of national economic accounts. Professor Kuznets headed a small group within the Bureau of Foreign and Domestic Commerce’s Division of Economic Research. I picture them meeting to develop statistical measures that would help the government to determine if the economy was recovering from the Depression. They are debating on how to measure all of the various sources of income. One economist suggests that regardless of the source of his income, there are only two things he can do… Spend it or invest it and we know how to measure consumption and investment (& savings). This was the foundation of the expenditure approach to measure GDP. I can imagine another one of the economists suggesting that when we sell more to other countries, the excess should be added to national income and subtracted if we buy more than we sell (Balance of Trade). Then another economist suggests that there is a third alternative to the idea that he will either spend or invest his income and that is paying taxes. Since the government takes a portion of National Income and spends it, they decided to add Government spending into the GDP calculations. While each component of this basic formula for GDP breaks down into hundreds or thousands of sub-components, the final calculation is:

GDP= PI + BT + GS

To continue reading: We Are Already In Depression (If Borrowing Money Is Not Income)

Atlanta Fed GDPNow Forecast Spirals Ever Closer to Zero, by Wolf Richter

Real economy indicators are fading. From Wolf Richter at wolfstreet.com:

Retail sales and inflation did it.

The Atlanta Fed’s GDPNow model, which forecasts GDP growth in the US, dropped to 0.5% seasonally adjusted annualized GDP growth for the first quarter. This “annualized rate” means if the economy grows like at this pace for four quarters in a row, it would edge up only 0.5% for the year, which would make it by far the worst year since the Great Recession.

By comparison, in 2016, which matched 2011 as the worst year since the Great Recession, GDP growth was 1.6%.

A week ago, the GDPNow forecast had already dropped to 0.6%. At the time, I mused, “I hope the model is wrong.” This hope is now even more fervent.

What did it today? Retail sales and inflation.

The ugly retail sales report this morning in combination with the Consumer Price Index, also reported this morning – more on that in a moment – pushed down the GDPNow forecast for growth of “real” consumer spending (adjusted for inflation) from 0.6% before today to a miserable 0.3% today. Real consumer spending is a dominant factor in GDP. It captures not just retail spending, but also spending on rents, healthcare, tuition, insurance, etc.

The GDPNow model gets more accurate in predicting GDP growth as reported by the Bureau of Economic Analysis in its first estimate for that quarter. So now, as the March data is coming in for the first quarter, the GDPNow forecast is heading south toward zero. I added the red arrow. Note how the forecast has plunged since April 4, when it was still 1.2%, and from the end of February when it was sill 2.5%:

To continue reading: Atlanta Fed GDPNow Forecast Spirals Ever Closer to Zero

Not Nearly Enough Growth To Keep Growing, by Raúl Ilargi Meijer

Growth has been in a long-run downtrend, and the Chinese credit spigot that has kept the global economy afloat is running into the law of diminishing returns. From Raúl Ilargi Meijer at theautomaticearth.com:

It’s amusing to see how views start to converge, at the same time that it’s tiresome to see how long that takes. It’s a good thing that more and more people ‘discover’ how and why austerity, especially in Europe, is such a losing and damaging strategy. It’s just a shame that this happens only after the horses have left the barn and the cows have come home, been fed, bathed, put on lipstick and gone back out to pasture again. Along the same lines, it’s beneficial that the recognition that for a long time economic growth has not been what ‘we’ think it should be, is spreading.

But we lost so much time that we could have used to adapt to the consequences. The stronger parties in all this, the governments, companies, richer individuals, may be wrong, but they have no reason to correct their wrongs: the system appears to work fine for them. They actually make good money because all corrections, all policies and all efforts to hide the negative effects of the gross ‘mistakes’, honest or not, made in economic and political circles are geared towards making them ‘whole’.

The faith in the absurd notion of trickle down ‘economics’ allows them to siphon off future resources from the lower rungs of society, towards themselves in the present. It will take a while for the lower rungs to figure this out. The St. Louis Fed laid it out so clearly this week that I wrote to Nicole saying ‘We’ve been vindicated by the Fed itself.’ That is, the Automatic Earth has said for many years that the peak of our wealth was sometime in the 1970’s or even late 1960’s.

To continue reading: Not Nearly Enough Growth To Keep Growing