Tag Archives: Growth

Life’s a Beach Until the Tsunami Hits: Four Waves Nobody Cares About–Yet, by Charles Hugh Smith

The rug is being pulled from under the financial markets. From Charles Hugh Smith at oftwominds.com:

Four monster waves are about to crash onto the Fed’s beach party and sweep away the unwary revelers.

Hey, is the water in the bay receding? Never mind, free drinks are on the Federal Reserve, so party on, life’s a beach, asset bubbles will never pop, we’re safe. Of course you are. The Fed is all-powerful and would never let a rogue wave turn all its precious phantom wealth into broken detritus.

The water is fast receding and a wave is visible if you care to look, but nobody cares to look. Why bother? The Fed is invincible, that’s all you need to know to mint another fortune.

Just to keep life interesting, let’s look anyway. Gordon Long and I discuss four monster waves that are about to crash onto the Fed’s beach party and sweep away the unwary revelers:

1. Declining liquidity: while everyone is focused on the Fed’s ceaselessly repeated reassurance that the liquidity spigot will never be closed, never ever ever, so party on, asset bubbles will never pop, never ever ever, other central banks have already started reducing global liquidity while domestically, the Treasury General Account (TGA) is soaking up liquidity to fund the federal government’s monumental deficit spending.

2. Declining global growth: long before the pandemic swept ashore in 2020, global growth was faltering: the business cycle had not been abolished, despite Fed assurances that growth and asset bubbles will continue expanding until they reach Alpha Centuri and beyond (Dow one trillion, yowza baby!), growth by any conventional measure (PMI, ISM, industrial production, global trade flows, etc.) had stagnated or rolled over.

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One Mad Market & Six Cold Reality-Checks, by Matthew Piepenburg

There are some commonly held notions out there that in no way comport with reality. From Matthew Piepenburg at goldswitzerland.com:

Fact checking politicos, headlines and central bankers is one thing. Putting their “facts” into context is another.

Toward that end, it’s critical to place so-called “economic growth,” Treasury market growth, stock market growth, GDP growth and, of course, gold price growth into clearer perspective despite an insane global backdrop that is anything but clearly reported.

Context 1: The Rising Growth Headline

Recently, Biden’s economic advisor, Jared Bernstein, calmed the masses with yet another headline-making boast that the U.S. is “growing considerably faster” than their trading partners.

Fair enough.

But given that the U.S. is running the largest deficits on historical record…

…such “growth” is not surprising.

In other words, bragging about growth on the back of extreme deficit spending is like a spoiled kid bragging about a new Porsche secretly purchased with his father’s credit card: It only looks good until the bill arrives and the car vanishes.

In a financial world gone mad, it’s critical to look under the hood of what passes for growth in particular or basic principles of price discovery, debt levels or supply and demand in general.

In short: “Growth” driven by extreme debt is not growth at all–it’s just the headline surface shine on a sports car one can’t afford.

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Nothing Can Get Us Out Of This High Debt, High Intervention, Low Default, Low Productivity Loop, by Tyler Durden

This pithy little article hits the nail on the head. From Tyler Durden at zerohedge.com:

On Tuesday morning, Deutsche Bank’s Jim Reid published his 23rd annual default study, a document he first put out in the 1990s which as he says, “makes me feel very old” and adds that the story of this report over the past decade or so has been the increasing divergence between economic growth and defaults. And while defaults have trended down alongside growth, the last 12 months have been a supersized version of this as defaults have peaked at a lower level than during the previous three big default cycles even as growth across many countries was at the lowest levels for several decades or centuries.

According to Reid, the reason for this is simple: it is because debt has become so large over this period, and of such extreme systemic importance, that when each cycle turns there is an ever larger policy move to ensure that many of the most heavily indebted entities don’t default and risk a severe contagion event for the global economy.

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Females & Births, As Rudimentary As We Can Get, by Chris Hamilton

Demographic charts say deleveraging, deflation, and depression are in our future. Read ’em and weep. From Chris Hamilton at econimica.blogspot.com:

First, chart of the century…literally.  For those engrossed in the current and engulfing repo fiasco, QE, and monetization…it is helpful to pull back and clarify what it is that is causing the existing economic and financial system to fail?  It was, is, and will be a Ponzi to its last day and Ponzi’s fail for lack of new suckers.  In this case, those willing and able to undertake new credit (debt) that enlarges the money supply in our fractional reserve system.  The chart below shows the global annual growth of the 20 to 65 year-olds versus 65+ year-olds (both excluding Africa).  20 to 65 year-olds world over utilize credit (debt) while 65+ year-olds extinguish debt (deleverage).  So long as the growth of those levering up outstripped those deleveraging, the system could continue.  But as you’ll note, in 2008, the entire global system shuddered as accelerating growth of potential workers ceased and began decelerating…while the growth of non-workers accelerated.  By about 2024, the annual growth of non-workers (deleveragers) will overtake annual growth of potential workers (debtors).  Those rapidly extinguishing debt in old age will outnumber those undertaking the new debt.  Those in retirement or in death offloading assets will outnumber those buying those assets.  The non-technical name for this is a “shit-show” and this is why central banks, federal governments, and ultra wealthy are aligning ever tighter to save themselves.

Putting Monetization Into Perspective. Or “When It Becomes Serious, You Have To Lie”, by Chris Hamilton

The government borrows more money than the actual growth of the economy. In other words, a dollar’s worth of debt no longer buys a dollar’s worth of growth, even by the government’s screwed-up definition of growth. From Chris Hamilton at economica.blogspot.com:

Since 2007, marketable federal debt has exploded by $12 trillion while Intragovernmental debt has risen a relatively gentle $2 trillion…all while the Federal Reserve directed Federal Funds Rate has been pushed to zero.  And after a short respite from ZIRP, another push to ZIRP is almost surely in process, or even a furtherance, moving into NIRP and the paying of lenders to undertake loans.  But why?

 

We Can’t “Grow Our Way Out” of Debt, by Bill Bonner

We’re no longer getting enough economic bang from each additional buck of debt to reduce the debt pile. From Bill Bonner at bonnerandpartners.com:

YOUGHAL, IRELAND – Today, we turn to something no one cares much about, even though it threatens to cause the biggest financial calamity in US history:

Debt.

Glorious Valhalla

Total U.S. debt – public and private – now approaches $74 trillion. The economy that supports this debt has grown steadily, but nowhere near fast enough to keep up with it.

As we remarked yesterday, money is time. So when you owe money, what you really owe is time. And time is not something you can fool around with. It comes and it goes… no matter what you think or what you do.

Historically, Americans have owed 1.5 days of work in the future for every day of work in the present. That is, the ratio of debt to GDP averaged about 1.5 to 1 for the first eight decades of the 20th century.

Then, debt went up, and now stands at 3.5 days of future GDP for every day of present output.

Have we arrived in some great and glorious Valhalla, where the old rules no longer apply, where debt no longer matters… or where time is no longer our master, but our servant?

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The Three Ds of Doom: Debt, Default, Depression, by Charles Hugh Smith

The world is at the precipice of a gigantic debt-contraction and depression. From Charles Hugh Smith at oftwominds.com:

“Borrowing our way out of debt” generates the three Ds of Doom: debt leads to default which ushers in Depression.

Let’s start by defining Economic Depression: a Depression is a Recession that isn’t fixed by conventional fiscal and monetary stimulus. In other words, when a recession drags on despite massive fiscal and monetary stimulus being thrown into the economy, then the stimulus-resistant stagnation is called a Depression.

Here’s why we’re heading into a Depression: debt exhaustion. As the charts below illustrate, the U.S. (and global) economy has only “grown” in the 21st century by expanding debt roughly four times faster than GDP or earned income.

Costs for big-ticket essentials such as housing, healthcare and government services are soaring while wages stagnate or decline in purchasing power.What’s purchasing power? Rather than get caught in the endless thicket of defining inflation, ask yourself this: how much of X does one hour of labor buy now compared to 20 years ago? For example, how much healthcare does an hour of labor buy now? How many days of rent does an hour of labor buy now compared to 1999? How many hours of labor are required to pay a parking ticket now compared to 1999?

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The slow return of Eurosclerosis, by Thomas Kirchner and Paul Hoffmeister

Eurosclerosis, the slow or no growth disease caused by overtaxation, overregulation, too much government, and rigid labor markets, is creeping up on Europe once again. From Thomas Kirchner and Paul Hoffmeister at camelotportfolios.com:

With protests by yellow vests in France approaching their six month anniversary and the European economy showing signs of not a temporary dip, but prolonged weakening, it is a good moment to take a step back and analyze the current situation as well as its implications for the medium to long-term outlook for Europe.As we see it, European economies have been weakening significantly, and even worse, Germany, the European Union’s largest economy comprising almost 21% of the area’s GDP in 2018[i], is on the verge of recession. With Germany the economic locomotive of the euro area, there may not be much reason to be optimistic. The country’s economic problems appear to be structural, due to high taxes, excessive government spending, failed energy policies and other regulatory constraints. Thinking about the years ahead, we aren’t optimistic that the policy response from the German government — as well as other European governments such as in France, Italy and Greece — will be strong enough to avoid a prolonged economic malaise for the continent. As a result, we believe that the global economy will suffer from Eurosclerosis in the coming years.

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Figure 1: GDP of EU Member States and Share of Total. Source: Statistics Times.

The State of the Economy, by Paul Craig Roberts

Paul Craig Roberts takes apart contemporary government “economics” and “economic statistics.” From Roberts at paulcraigroberts.org:

Dear Readers: We live in a Matrix of Lies in which our awareness is controlled by the explanations we are given.  The control exercised over our awareness is universal.  It applies to every aspect of our existence.  In the article below I show that not only is our understanding of the economy controlled by manipulation of our minds, but also the markets themselves are controlled by official intervention.  

In brief, you can believe nothing that you are officially told.  If you desire truth, you must support the websites that are committed to truth.

The State of the Economy

Paul Craig Roberts

The story line is going out that the economic boom is weakening and the Federal Reserve has to get the printing press running again.  The Fed uses the money to purchase bonds, which drives up the prices of bonds and lowers the interest rate.  The theory is that the lower interest rate encourages consumer spending and business investment and that this increase in consumer and business spending results in more output and employment. 

The Federal Reserve, European Central Bank, and Bank of England have been wedded to this policy for a decade, and the Japanese for longer, without stimulating business investment.  Rather than borrowing at low interest rates in order to invest more, corporations borrowed in order to buy back their stock.  In other words, some corporations after using all their profits to buy back their own stock went into debt in order to further reduce their market capitalization!  

Far from stimulating business investment, the liquidity supplied by the Federal Reserve drove up stock and bond prices and spilled over into real estate.  The fact that corporations used their profits to buy back their shares rather than to invest in new capacity means that the corporations  did not experience a booming economy with good investment opportunities. It is a poor economy when the best investment for a company is to repurchase its own shares.

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The Faster America “Grows”, The Faster America Goes Bust, by Chris Hamilton

Since 10/1/07, the US has achieved 44 cents worth of growth for every dollar worth of debt. As the title implies, we’re “growing” our way to insolvency. From Chris Hamilton at economica.com:

As of October 1st of 2007 (the start of the 2008 Federal Government fiscal year), federal debt stood at $9 trillion and 70 billion.  In the subsequent ten years and five months, the US federal debt has grown $11 trillion and 805 billion and now stands at $20 trillion and 875 billion (chart below).  Over the same period, US GDP grew $5 trillion and 169 billion.  Simply put, for every $1 of new federal debt undertaken, the US achieved $0.44 cents of economic activity or “growth”.

However, as the chart below shows, the huge increase in federal debt (red line) was accompanied by a minimal increase in interest payable on all that debt (blue line).  The boxes detail the total debt incurred during each period against the annual increase in interest payments on that additional debt.  The Federal Reserve is primarily to thank for the cheapening of debt and encouragement to undertake all that debt, but many fear the same Fed is set to hike those interest payments with its ongoing rate hikes.

In five months of fiscal year 2018 (through Feb 28), the Treasury has already issued $630 billion in new debt.  The Treasury is on pace to issue $1.2+ trillion in new debt (2017 was a mere $672 billion increase).  But let’s be conservative and assume the Treasury reins it in and “only” issues another $370 billion over the next seven months…for a nice round $1 trillion in new debt.  Big numbers are hard to comprehend, so I’ll show just the added responsibility from the debt undertaken in 2018, per every full time employee in the US (there are 127 million FT US employees):

+$31 per work day
+$157 week
+$658 month
+$7.9 thousand annually

This would be in addition to the $163 thousand every full time employee is already responsible for.  But, sadly, this vastly understates the issue.  According to the Treasury’s 2017 Financial Report of the US Government, the “total present value of future expenditures in excess of future revenues” is $49 trillion in addition to the federal debt!!!  Simply said, Social Security and Medicare require $49 trillion here and now to allow that money to grow at a compounded annual rate in conjunction with estimated future tax revenues to meet the present and future payouts that have been promised.

To continue reading: The Faster America “Grows”, The Faster America Goes Bust