Tag Archives: GDP growth

Nothing Is Forever, Not Even Debt, by John Mauldin

All the so-called economic growth we’re getting is debt-funded. From John Mauldin at interest.co.nz:

John Mauldin sees an ugly conflict coming soon to the US as their official debt levels become unsustainable and they face a “Great Reset”. Will a better wealth and policy balance rise from the impending shambles?

Nothing is forever, not even debt.

Every borrower eventually either repays what they owe, or defaults. Lenders may or may not have remedies. But one way or another, the debt goes away.

One of Western civilization’s largest problems is we’ve convinced ourselves debt can be permanent. We don’t use that specific word, of course, but it’s what we do and is why government debt keeps rising. We borrow faster than we repay previous borrowing—and I mean governments everywhere, China as well as the US.

Our leaders have no real plan to reduce the debt, much less eliminate it. They just want to spend, spend, spend forevermore. And most citizens are okay with that. As I will note below, the Republican Party I grew up with, which back then seemed to constantly talk about deficits and debt, is now comfortable with 5% (and growing) of GDP deficits.

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Why China’s Growth Rate Is Much, Much Lower Than You Think, by Dominique Dwor-Frecaut

China’s economy is not growing at anywhere near the growth rate the Chinese government claims. From Dominique Dwor-Frecaut at zerohedge.com:

Authored by Dominique Dwor-Frecaut, a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns; Courtesy of MacroHive.

China’s True Growth Could Be Half What You Think

China’s GDP data release always generates great market excitement despite rarely straying  more than 25bp below or above the government target. This stability has led a number of analysts to propose their own measures, typically based on a variety of Chinese proxy data but, in the end, not that different from the official numbers. In this article I argue that, based on the performance of countries comparable to China, the latter’s GDP growth could be as low as half the official number and that markets are likely overestimating China’s importance for the global economy. That being said, China has one of the highest levels of corporate debt in the world and slower growth implies greater risks of financial instability.

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A Fiscal Policy “Flop”: The US Gov’t Spent Hundreds Of Billions, And GDP Slowed, by Joseph Carson

The US has gone round the bend: new debt piled on old debt is exacting such a toll in debt service that it’s counterproductive, it slows the economy down. From Joe Carson at zerohedge.com:

Its now nearly two year since the Trump Administration and Congress passed major tax cuts for businesses and individuals and followed that legislative initiative up with a relatively large increase in spending for defense and discretionary non-defense programs. The economic results from these tax and spending programs are in and the overall growth numbers are disappointing to say the least, and it would not be wrong to characterize these legislative initiatives as a fiscal policy “flop”.

Over the last seven quarters real GDP growth has averaged 2.4%, which matches the 2.4% growth in 2017, the year before the entire fiscal stimulus took place. Simply put, even though the federal government spent more money (estimated to be $300 billion for various programs) and reduced taxes for businesses and individuals the underlying growth rate of the economy did not change one iota.

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GDP Growth Isn’t the Same Thing as Economic Growth, by Frank Shostak

Frank Shostak explores the fraud that is the Gross Domestic Product statistic, and its wider implications. From Shostak at mises.org:

To gain insight into the state of an economy, most financial experts and commentators rely on a statistic called the Gross Domestic Product (GDP). The GDP framework looks at the value of final goods and services produced during a particular time interval, usually a quarter or a year.

This statistic is constructed in accordance with the view that what drives an economy is not the production of wealth but rather its consumption. What matters here is the demand for final goods and services. Since consumer outlays are the largest part of the overall demand, it is commonly held that consumer demand is the key driver of economic growth.

All that matters in this view is the demand for goods, which in turn will give rise almost immediately to their supply. Because the supply of goods is taken for granted, this framework ignores the whole issue of the various stages of production that precede the emergence of the final good.

However, in order to manufacture a car, there is a need for coal to be employed in the production of steel, which in turn will be employed to manufacture an array of tools. These in turn are used to produce other tools and machinery and so on, until we reach the final stage of the production of a car. The harmonious interaction of the various stages of production results in the final product.

Within the GDP framework, the aspect of funding economic activity never emerges. In this framework goods emerge because of people’s desires. In the real world, it is not enough to have demand for goods – one must have the means to accommodate people’s desires. The means are various final goods that are required to sustain various individuals in the various stages of production.

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GDP Rose by $1.0 Trillion in 2018, US Gov. Debt by $1.3 Trillion, by Wolf Richter

If an economy “grows” by $1 trillion but takes on $1.3 trillion in new debt, has it grown? From Wolf Richter at wolfstreet.com:

Where would GDP growth be without federal borrow-and-spend?

So the dreams of 3%-plus economic growth in 2018 were fulfilled, after tax cuts and ballooning federal deficit spending, which acted as a huge stimulus: In the fourth quarter, the economy as measured by inflation-adjusted GDP grew by 0.55% from the third quarter, not annualized (we’ll get to the “annualized rate” in a moment).

This brought GDP growth for the entire year 2018 to 3.1%, according to the Bureau of Economic Analysis this morning. This places the year ahead of the top years since the Financial Crisis:

The BEA also reports – this is what you see in all the headlines though it’s the most convoluted and somewhat misleading way of presenting GDP growth – the current quarter’s growth rate but extrapolated out over an entire year; so what this Q4 growth rate of 0.55%, mentioned above, would mean for the whole year if the economy had grown for an entire year at the same rate. For Q4 this seasonally adjusted, inflation-adjusted “annualized rate” of growth was 2.6%.

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The Global Economy Is Not Recovering—Just Look at the Data, by John Mauldin

The data are contradicting the popular synchronized global recovery narrative. From John Mauldin at mauldineconomics.com:

Central banks think the US and global economies are about to break from the post-recession doldrums. They believe their aggressive monetary policies—along with tax cuts and other factors—are finally bearing fruit.

As a result, the Fed is now tightening policy to prevent this inevitable growth sparking too much inflation. My friend Lakshman Achuthan of the Economic Cycles Research Institute (ECRI) is not convinced.

He recently sent some slides I want to share with you.

Economic Growth Is Slowing Down

The first one shows that the present, low-grade expansion phase is the slowest in a series. By the way, the ECRI is as close as we have to an “official” economic cycle watch service in the country.

Source: Economic Cycles Research Institute

This is growth during times when the economy is not in recession, which should be considerably higher than the full-cycle averages. It has been falling steadily since the 1970s and is now below 2%.

If the best we can do is 2% (not counting recessions), it’s hardly time to proclaim victory.

The next chart looks at the ECRI US Coincident Index, which is their alternative growth measure. The shaded areas are cyclical downturns, the three most recent of which did not reach recession status.

Source: Economic Cycles Research Institute

The important point here is we see little or no improvement in the growth rate. Since 2010, it has moved sideways in a tight range. In the last two years, it moved up to about the middle of the range, which is positive but doesn’t mean the US economy is off to the races.

GDP Growth Stalled in the Largest Economies

Finally, and most ominously, Lakshman shows this chart of quarterly GDP growth in the three largest developed market economies.

Source: Economic Cycles Research Institute

We see in all three places that quarterly growth peaked in mid-2017 and then fell in the last quarter. Yet the experts tell us a synchronized global recovery is forming. Really?

What I see here is a synchronized downturn. Granted, it’s just a couple of quarters but early data makes Q1 2018 look lower still.

If a recession is coming, GDP growth will decline from its present level to 0% or below. That process will likely unfold over a few quarters—and may already be beginning.

To continue reading: The Global Economy Is Not Recovering—Just Look at the Data

Is The U.S. Economy Really Growing? by Peter Cook

Back out federal debt issuance, which counts as an addition to the GDP once the proceeds are spent, and the US economy is growing very little, if at all. This has been true since 2009. From Peter Cook at realinvestmentadvice.com, with one of the most analytically correct assessments of the economy SLL has seen (most economists are idiots, charlatans, or both):

“Peter Cook is the author of the ‘Is That True?’ series of articles, which help explain the many statements and theories circulating in the mainstream financial media often presented as “truths.” The motives and psychology of market participants, which drives the difference between truth and partial-truth, are explored.”

Most people are aware that GDP growth has been lower than expected in the aftermath of the Global Financial Crisis of 2008 (GFC).  For example, real GDP growth for the past decade has been closer to 1.5% than the 3% experienced in the 50 years prior to 2008.  As a result of the combination of slow economic growth and deficit spending, most people are also aware that the debt/GDP ratio has been rising.

However, what most people don’t know is that, over the past ten years, the dollar amount of cumulative government deficit spending exceeded the dollar amount of GDP growth.  Put another way, in the absence of deficit spending, GDP growth would have been less than zero for the past decade.  Could that be true?

Let’s begin with a shocking chart that confirms the statements above, and begins to answer the question.  The black line shows the difference between quarterly GDP growth and the quarterly increase in Treasury debt outstanding (TDO).  When the black line is above zero (red dotted line), the dollar amount is GDP is growing faster than the increase in TDO.  From 1971 to 2008, the amount of GDP typically grew at a faster rate than the increase in TDO, which is why the black line is generally above the red dotted line.

Chart 1

During the 1971-2008 period, inflation, budget deficits, and trade deficits varied widely, meaning that the relationship between GDP growth and TDO was stable even in the face of changes in other economic variables. Regardless of those changing economic variables, the US economy tended to grow at a pace faster than TDO for four decades.  The only interruptions to the pattern occurred during recessions of the early 1980s, early 1990s, and early 2000s when GDP fell while budget deficits did not.

The pattern of GDP growth exceeding TDO changed after 2008, which is why the black line is consistently below the red dotted line after 2008.  A change in a previously-stable relationship is known as a “regime change.”  Focusing first on 2008-2012, the increase in TDO far exceeded GDP growth, due to an unprecedented amount of deficit spending compared to historical norms.  Focusing next on 2013-2017, the blue line has been closer to the red dotted line, meaning that the dollar amount of GDP growth was roughly equal to TDO.


To continue reading: Is The U.S. Economy Really Growing?

Contemplations on America and 4% GDP Growth, by Chris Hamilton

Sustained 4 percent GDP growth in the US isn’t going to happen. From Christ Hamilton at economica.blogspot.com:

Economic prognosticators (Jamie Dimon, among them) suggest that 4% GDP growth is likely and that economic good times have returned.  I haven’t a clue what they are smoking.  I’ll lay out how the US economy has grown ever more reliant on cheap debt to buy ever more intangible services creating a decelerating number of full time jobs among a population that is growing ever more slowly (the basis of a growing consumer base).  And that’s just scratching the surface.

To provide some context, the chart below shows the Federal Funds Rate (black shaded area) versus the annual change in federal debt (red), consumption (yellow), government consumption (blue), and private investment (white).  Noteworthy since the GFC is the surging annual change in consumption versus tame growth in government spending and decelerating private investment.  BTW, since ’81, a rising FFR % coupled with decelerating federal debt growth (as we now have) has resulted in declining private investment and imminent recession.

America the Service Economy:  Since 1960, consumption as a percentage of GDP has risen from 60% to nearly 70%, as of 2017.  However, the make up of the three components that comprise consumption has drastically changed (chart below).  Durable goods (those deemed to last 3+ years) has been steady at about 8% of GDP while non-durable goods has nearly fallen in half.  Conversely, services have risen from just more than a quarter of the total economy to nearly half of total GDP!  A service is a type of economic activity that is intangible, is not stored, and does not result in ownership.  A service is consumed at the point of sale.

So America is an economy where nearly half of all spending results in nothing tangible or durable to show for it…except more debt to be serviced?!?

To continue reading: Contemplations on America and 4% GDP Growth