The Worst Economy Ever?

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Like an army that has outdistanced its supply lines, the stock market runs far ahead of logistical support.

Total market capitalization of U.S. stocks presently ranges to $40 trillion — or twice GDP.

This 2-1 ratio is the highest in history… we might mention.

Analyst John Hussman reminds us the ratio previously topped at 1.9 in 2000.

That is, never before has Wall Street run so far ahead of Main Street.

But like Napoleon racing for Moscow after Borodino, an overextended army is a vulnerable army.

The Grande Armée went into Russia some 450,000-strong in June 1812.

Perhaps 22,000 sad caricatures of humanity staggered out later that year.

We believe the stock market is marching toward its own Moscow… and a similar retreat.

Soon or late it will come limping back — broken, bandaged… beaten.

Main Street cannot maintain the pace of advance.

The Economy Is Advancing in the Wrong Direction

Reuters informs us that government bean counters will likely downgrade their initial 2.6% Q4 2018 GDP estimate.

Falling construction spending is the central explanation on offer.

The unhappy trend will likely continue into Q1 2019.

Goldman now projects 0.9% Q1 GDP growth.

The Federal Reserve’s New York headquarters has it at 0.88%.

And its Atlanta branch now estimates Q1 growth of merely 0.3%.

The Atlanta outfit is known, incidentally, for its blue-sky, cockeyed optimism.

Meantime the American consumer has reached his maximum endurance, and is falling out of rank… exhausted.

In December U.S. credit card debt scaled $870 billion — its highest ever amount.

Similarly, auto loan interest rates teeter at eight-year heights. And a record number of Americans are at least 90 days in arrears of payment.

In all, aggregate household interest payments have spiked to a 15% year-over-year rate.

As Zero Hedge reminds us, recession is on tap nearly every occasion when interest payments rise with such extravagance.

All the while, retail stores are shuttering their doors at a record clip.

We haven’t the heart to continue.

Michael Snyder of The Economic Collapse blog does:

Debt delinquencies are at unprecedented levels, bankruptcies are soaring, retail stores are closing at a record pace; this is the worst economy for farmers since the early 1980s, exports are plummeting and a brand-new real estate crisis has now begun.

Then Why Are Stocks Still So Expensive?

Yet stocks remain in what our old colleague David Stockman labels the “nosebleed section of history.”

The Shiller P/E ratio is a widely recognized barometer of stock market prices.

Stretching through history, its mean score is 16.9.

Even after last year’s near-bear market, today it rises to 30.7 — 81% above the mean.

It is also within an ace of October 1929’s 32.6.

Only 1999’s infinitely obscene 44 outpaces it.

But do today’s economic conditions justify an altitude-induced nosebleed?

The evidence here assembled shouts no.

Yet there they are.

And so a rose blooms from a turnip seed.

But let us take the longer view…

The stock market has been on the march since 2009, with only occasional reversals.

Have underlying economic conditions warranted the ground gained?

“The Current Economy Has Underperformed the Worst Economy”

Jeffrey Snider of Alhambra Investments has compared and contrasted this past decade to decades past.

He notes first that real GDP expanded at an 18.85% cumulative rate, 2007–2018.

Nothing, perhaps, to pound a kettle drum about — but growth it is.

Maybe you are of an age to recall the ghastly stagflation of the 1970s.

At least this past decade has turned in real growth, you say — unlike the inflation-hobbled decade of bell-bottomed trousers and gasoline lines.

You are forgiven for thinking it. But you are far off the facts…

Real GDP expanded 38% between 1969 and 1980 — over double the past 11 years’ 18.85%.

Again, we refer to real GDP. Unlike nominal GDP, it accounts for inflation’s false fireworks.

Just so, you argue.

But the past decade is still miles better, for example, than the locust years of the Great Depression.

Unemployment scaled a hellish 25%. Unemployment never exceeded 10% during the Great Recession.

All comparisons fall short, you continue.

Ah, but once again, have another guess…

Snider reminds us that real GDP 1929–1940 expanded at a cumulative 19.89% rate — outstripping the most recent 11 years’ 18.85%.

Impossible! You howl.

But the facts are the facts.

The Great Depression’s valleys may have been steeper, the winds icier, the hunger more acute.

But it had its years of 12.9% growth… 10.8%… 8.8%… and 8.0%.

Though excluded from our sample, 1941 GDP expanded a sky-shooting 17.7%.

Meantime, not a single one of these past 11 years can crack 3%.

The United States economy appears to be down with a wasting disease.

This, despite maximum efforts of the Federal Reserve and its trillions of dollars of assistance.


What is now established, though, is a mathematical fact. The last 11 years have been worse than the Great Depression. According to the updated estimates, using 2012 dollars as a reference, the current economy has underperformed the worst economy.

Mr. Stockman phrases it in terms harsher yet:

After one decade of the most massive combined monetary and fiscal stimulus in U.S. history, the real growth rate at 1.5% per annum is lower than it’s ever been, even during the 1930s!

Something is not right.

Today’s Stock Market vs. Previous Stock Markets

Economically, we have stacked the past 11 years alongside the 11 years 1969–1980 and 1929–1940.

And we have found them wanting sorely in comparison.

Meantime, the S&P has gained over 300% since bottoming 10 years ago this very day — March 6, 2009.

Shall we compare today’s stock market performance with the Great Depression and 1970s?

The stock market was a seesaw affair for much of the 1930s.

But in nominal terms, it required 25 years of hard labor to recover from the shock of ’29.

Not until 1954 did it recapture its 1929 heights.

Meantime, the present stock market required only six years to reclaim its 2007 highs.

But we cannot asribe this pleasant fact to the economy.

GDP growth averaged 1.14% between 2009 and 2013.

What about the “lost” decade of the 1970s?

Recall that real GDP gains 1969–1980 more than doubled real GDP 2007–2018.

The Dow Jones opened 1969 at roughly 6,500. It opened 1980 near 2,850.

The S&P plunged from 740 to 360 across the same space.

For the stock market, the decade was well and truly lost.

So lost was it that Business Week ran a 1979 cover story pronouncing “The Death of Equities.”

In a peanut shell:

Real GDP 1969–1980 more than doubled real GDP 2007–2018.

But the stock market 2007–2018 at least tripled the stock market 1969–1980.

Should not the opposite be true?

Perhaps this curious fact owes to the multiple rounds of quantitative easing that vastly inflated the stock market post-2008?

Those same multiple rounds of quantitative easing yielded bits… scraps… leavings for the Main Street economy.

Time, the Great Equalizer

But time equalizes as nothing else.

Scales balance, what goes up comes down, what goes down comes up…

The mighty fall, mountains crumble, the meek inherit the earth.

We suspect stock market and economy will meet again on fair ground.

Stock market will likely fall to the level of economy before economy rises to the level of stock market.

But if the gods are kind, no time soon…


Brian Maher
Managing editor, The Daily Reckoning

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Another Government Debt Crisis?

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The president has redrawn his March 1 line in the sand.

“Substantial progress” in trade talks with China is the reason he cited.

But another March 1 deadline menaces the United States… like a creeping shadow, dark, broad and doomy.

And Mr. Trump cannot push it back.

Details shortly.

First to the shadows hanging over the world…

Nuclear rivals India and Pakistan are playing with matches in perhaps the world’s largest powder keg — Kashmir.

A terrorist bomb killed 42 Indian paramilitary personnel in Kashmir earlier this month.

Yesterday, India airstruck what it claims to be a training facility of the group responsible.

At least one Indian warbird was downed… and one pilot captured.

Early today, Pakistan unleashed a retaliatory airstrike against Indian targets in Kashmir.

And so the Hatfields and McCoys are once again at each other’s throats — only these feuding clans wield nuclear muskets.

Skittish markets sold off this morning before making good some of their losses.

The Dow Jones closed 72 points lower. The S&P lost a mere point, while the Nasdaq clawed a five-point gain.

But to return to our looming March 1 deadline…

Last February’s “bipartisan” spending bill suspended the debt ceiling — then at $20.5 trillion — until March 1, 2019.

March 1, 2019, falls this Friday.

Friday’s deadline would pass harmlessly if the debt had remained at $20.5 trillion.

But it has not.

Today’s federal debt exceeds $22 trillion.

And after Friday, the United States government cannot legally borrow additional funds — unless Congress raises the debt ceiling to present levels.

Of course… the government runs under perpetual deficit.

And it cannot meet existing commitments without ongoing resort to the credit markets.

The Treasury can take to accounting gimmicks or “extraordinary measures” to keep the government in funds.

But only for a time.

The Congressional Budget Office (CBO) estimates the cupboards would be empty by September — unless the debt ceiling is raised beforehand.

If it is not, the United States government will default on its obligations… and its creditors will go scratching.

Before the U.S. Senate Finance Committee yesterday, Jerome Powell attested “it would be a very big deal,” adding:

It’s beyond even consideration. The idea that the U.S. would not honor all of its obligations and pay them when due is something that can’t even be considered.

But we would advise Mr. Powell to sleep well.

Of course Congress will raise the debt ceiling.

We will eat these words if wrong — without salt, without butter, without chaser.

Would an addict cut himself off from his dealer?

Would a hopeless drunkard willingly throw himself upon the wagon?

Would a crook lock himself up… and toss the key?

The prior two debt ceiling “crises” fell in 2011 and 2013.

Republicans sobbed their crocodile tears about Obama and the spendthrift Democrats.

The debt ceiling must not be raised without spending cuts to match, they raged.

But now one of their own occupies the White House — or at least a fellow with an “R” after his name.

And they themselves have spent like ship-bound sailors turned loose ashore.

The federal government has assumed over $2 trillion alone since Mr. Trump swore the oath.

How could they possibly take their stand now?

What about the Democrats?

Might they try to use the debt ceiling for political advantage, to dig a thumb in Trump’s eye?

Not without being laughed off the floor.

Have you seen some of their spending proposals?

And House Democrats have recently introduced legislation to abolish the debt ceiling entirely.

The new credit card would come without a limit.

And so today we suffer an acute pang of what the Germans call fremdschämen — embarrassment for those incapable of feeling embarrassment.

Each raising of the debt ceiling represents another sad congressional admission:

We cannot control ourselves. We are incapable of living within our means. We are wastrels.

But rather than lower their heads… they extend their hands.


But perhaps we should be kinder.

The entire system rests upon greater and greater infusions of debt.

It would seem somehow inappropriate to stop now. What else can they do?

As our co-founder Bill Bonner has said:

People think what they must think when they must think it.

Meantime, debt is expanding 6% per year — far greater than growth.

As it stands today, the nation’s debt-to-GDP ratio rises above a perilous 106%.

Evidence — though inconclusive — suggests the red zone begins at 90%.

And growth is trending in the wrong direction.

Our crystal ball turns up no reason why it will return to historical levels anytime soon.

But slow-motion disasters are rarely halted before they reach their ultimate conclusion.

Meantime, the can will go kicking down the road… until the day it stops.


Brian Maher
Managing editor, The Daily Reckoning

The post Another Government Debt Crisis? appeared first on Daily Reckoning.

The Approaching Winter: The Super-Cycle Has Turned

This post The Approaching Winter: The Super-Cycle Has Turned appeared first on Daily Reckoning.

How would you describe the social mood of the nation and world?

Would anti-Establishment, anti-status quo, and anti-globalization be a good start? How about choking on fast-rising debt? Would stagnant growth, stagnant wages be a fair description? Or how about rising wealth/income inequality? Wouldn’t rising disunity and political polarization be accurate?

These are all characteristics of the long-wave social-economic cycle that is entering the disintegrative (winter) phase. Souring social mood, loss of purchasing power, stagnating wages, rising inequality, devaluing currencies, rising debt, political polarization and elite disunity are all manifestations of this phase.

There is a template for global instability, one that has been repeated throughout history…

Historian Peter Turchin explores the historical cycles of social disintegration and integration in his new book Ages of Discord.

Turchin finds 25-year cycles that combine into roughly 50-year cycles. These 50-year cycles are part of longer 150 to 200-year cycles that move from cooperation through an age of discord and disintegration to a new era of cooperation.

That we have entered an era of rising instability and uncertainty is self-evident. There will always be areas of instability in any era, but instability and uncertainty are now the norm globally.

Turchin’s model identifies three primary forces in these cycles:

1. An over-supply of labor that suppresses real (inflation-adjusted) wages

2. An overproduction of essentially parasitic Elites

3. A deterioration in central state finances (over-indebtedness, decline in tax revenues, increase in state dependents, fiscal burdens of war, etc.)

These combine to influence the broader social mood, which is characterized in eras of discord by fragmented loyalty to self-serving special interests (disintegration) and in eras of cooperation by a desire and willingness to cooperate and compromise for the good of the entire society (integration).

Rising discord can be quantified in a Political Stress Index. Do we find evidence of Turchin’s disintegrative forces in the present era?

1. Stagnating real wages due to oversupply of labor: check.

2. Overproduction of parasitic Elites: check.

3. Deterioration in central state finances: check.

Is it any wonder that political stress, however you want to measure it, is rising?

Cycles are the result of the interaction of complex dynamics, and so they are not entirely predictable in terms of pinpointing the exact moment of crisis or the outcome of a systemic crisis.

These long cycles parallel the cyclical analysis of David Hackett Fischer, whose masterwork The Great Wave: Price Revolutions and the Rhythm of History.

In Fischer’s well-documented view, there is a grand cycle of prices and wages which turn on the simple but profound law of supply and demand; all else is detail.

As a people prosper and multiply, the demand for goods like food and energy outstrips supply, causing eras of rising prices.

Long periods of stable prices (supply increases along with demand) beget rising wages and widespread prosperity. Once population and financial demand outstrip supply of food and energy — a situation often triggered by a series of catastrophically poor harvests — then the stability decays into instability as shortages develop and prices spike.

These junctures of great poverty, insecurity and unrest set the stage for wars, revolutions and pandemics.

It is remarkable that the very conditions so troubling us now were also present in the price rises of the 13th, 16th and 18th centuries.

Unfortunately, those cycles did not have Disney endings: the turmoil of the 13th century brought war and a series of plagues which killed 40% of Europe’s population; the 16th century’s era of rising prices tilled fertile ground for war, and the 18th century’s violent revolutions and resultant wars can be traced directly to the unrest caused by spiking prices.

(The very day that prices for bread reached their peak in Paris, an angry mob tore down the Bastille prison, launching the French Revolution.)

After a gloriously long run of stable prices in the 19th century — prices were essentially unchanged in Britain between 1820 and 1900 —the 20th century was one of steadily increasing prices.

Fischer challenges the notion that all inflation is monetary; the supply of money (gold and silver) rose spectacularly in the 19th century but prices barely budged. In a similar fashion, eras of rising prices have seen stable money supplies.

Monetary inflation can lead to hyper-inflation, of course, but there are always mitigating factors in those circumstances. Fischer argues the long wave is not one of hyper-inflation but of supply and demand imbalances undoing the social order.

Americans are inherently suspicious of anything which seems to threaten constraint of the American Dream; thus it is not surprising that cycles of history are largely unknown in the U.S. As Fischer explains:

This collective amnesia is partly the consequence of an attitude widely shared among decision-makers in America, that history is more or less irrelevant to the urgent problems before them.

Fischer notes that he describes not cycles but waves, which are more variable and less predictable. In response to this great rise in prices of essentials, both commoners and governments debased the currency.

In old days, this meant shaving the edges of coins, or debasing new coins with non-precious metals. The debasement was an attempt to increase money to counteract the rise in prices, but it failed (of course). Every few decades, a new undebased coinage was released, and then the cycle of debasement began anew.

Just as insidiously, wages fell:

But as inflation continued in the mid-13th century, money wages began to lag behind. By the late 13th and early 14th centuries real wages were dropping at a rapid rate. This growing gap between returns to labor and capital was typical of price-revolutions in modern history. So also was its social result: a rapid growth of inequality that appeared in the late stages of every long inflation.

And what happened to government expenditures? It’s deja vu all over again — deficits:

Yet another set of cultural responses to inflation created disparities of a different kind: fiscal imbalances between public income and expenditures. Governments fell deep into debt during the middle and later years of the 13th century.

Crime and illegitimacy also rose. Fischer summarizes the end-game of the price-rise wave thusly:

In the late 13th century, the medieval price-revolution entered another stage, marked by growing instability. Prices rose and fell in wild swings of increasing amplitude. Inequality increased at a rapid rate. Public deficits surged ever higher. The economy of Western Europe became dangerously vulnerable to stresses it might have managed more easily in other eras.

And there you have our future, visible in the 13th, 16th and 18th century price-revolution waves which preceded ours.

It is hubris in the extreme to think we have somehow morphed into some new kind of humanity far different from those people who tore down the Bastille in a great frustrated rage at prices for energy and bread they could no longer afford.

It is foolish to blame “speculators” for the rise in food and energy, when the human population has doubled in 40 years and the consumption of energy and food has exploded as a result.

Based on the history painstakingly assembled by Fischer and Turchin we can thus anticipate:

— Ever higher prices for food, energy and water.

— Ever larger government deficits which end in bankruptcy/repudiation of debts/new issue of currency.

— Rising property/violent crime and illegitimacy.

— Rising interest rates (until very recently this was considered “impossible”).

— Rising income inequality in favor of capital over labor.

— Continued debasement of the currency.

— Rising volatility of prices.

— Rising political unrest and turmoil (see “Revolution”).

And there you have our future, visible in the 13th, 16th and 18th century price-revolution waves which preceded ours.

With this list of manifestations in hand, we can practically write the headlines for 2019-2025 in advance.


Charles Hugh Smith
for The Daily Reckoning

The post The Approaching Winter: The Super-Cycle Has Turned appeared first on Daily Reckoning.

The Coming Economic Winter

This post The Coming Economic Winter appeared first on Daily Reckoning.

To everything there is a season, Ecclesiastes tells us…

Is the economy entering winter?

In spring the thrusting saplings of tomorrow shoulder their way out of the earth.

Buds form upon the trees. The days lengthen with the late-afternoon shadows.

It is the season of possibility.

Summer is nature in full flower. It is green. And lush. It is the promise of spring come to fruition.

The days are long, they are radiant… and they are carefree.

In autumn the first wrinkles of age appear. The trees go gray. And they begin losing their hair.

The first frosts arrive a foretaste of days to come.

Then comes winter. Snow. Ice. Dark. Desolation. It is the season of death.

It can be said economies follow a similar cycle of the seasons. They sprout, blossom, fade… and die.

The Daily Reckoning’s Charles Hugh Smith has argued winter may be closing in…

Charles says the world is marked by “souring social mood, loss of purchasing power, stagnating wages, rising inequality, devaluing currencies, rising debt, political polarization and elite disunity.”

“These are all characteristics,” Charles laments, “of the long-wave social-economic cycle that is entering the disintegrative (winter) phase.”

Charles leans on the work of historian Peter Turchin.

Turchin explores historical cycles of social disintegration and integration over 50-, 150- and 200-year cycles in his book Ages of Discord.

He identifies three primary forces driving these cycles:

An oversupply of labor that suppresses real wages… an overproduction of parasitic elites… a deterioration in state finances (Charles explores these in greater detail below).

These cycles are as natural as the seasons… and maybe as inevitable.

Turning to America…

Real American wages have been essentially flat for decades. Evidence suggests the bottom half of American adults earn no more than they did in the 1970s.

An overproduction of parasitic elites? We append no comment.

A deterioration in state finances? The Treasury groans under a $22 trillion national debt that is growing… daily.

Meantime, unfunded liabilities such as Social Security and Medicare currently exceed $50 trillion by some estimates.

$50 trillion liabilities cannot be met. They can only be repudiated in one form or another.

It is fashionable in some quarters to compare the present United States to ancient Rome.

The comparisons are often overwrought. Often but maybe not always.

Rome had its spring. It had its summer, its fall… and then its winter.

That seasons glided one into the next so easily hardly anyone noticed.

From The Empire of Debt, co-written by our founders Addison Wiggin and Bill Bonner:

In Rome, the institutions evolved and degraded faster than people’s ideas about them. Romans remembered their Old Republic with its rules and customs. They still thought that was the way the system was supposed to work long after a new system of consuetude fraudium — habitual cheating — had taken hold…

As time went on, the empire came to resemble less and less the Old Republic that gave it birth. The old virtues were replaced with new vices.   

We cannot help but think of these United States as we reflect upon these lines.

Our nation shows many of the same telltales, in ways large and small.

But we are cynical by nature. And a man sees what he expects to see. Perhaps the best days are to come.

We cannot truly identify America’s present season. Our vision simply does not extend the required distance.

But we have our jacket and gloves ready… just in case.


Brian Maher
for The Daily Reckoning

The post The Coming Economic Winter appeared first on Daily Reckoning.

Three Cheers for the “Do Nothing” President

This post Three Cheers for the “Do Nothing” President appeared first on Daily Reckoning.

“Had the opposition party… won the election,” said the president Tuesday,“ the Stock Market would be down at least 10,000 points by now.”

Instead, Mr. Trump exulted, “We are heading up, up, up!”

And for the moment “we” certainly are.

The stock market has largely been heading up, up, up two months running.

We are convinced the Federal Reserve’s newfound dovishness is far more responsible than the president.

Yet we confess a sneaking admiration for any man so certain of his stars, so certain of whom the angels are for… and whom they are against.

No modesty hangs about him. No self-doubt gnaws at him. No scruple enchains him.

In Trump we have the popinjay pure and perfect, the supreme chest-pounder, the peacock of peacocks.

We concede the fellow may be no deeper than the skin that encases him.

But intellectual depth is vastly overrated in a president…

Watch out for the “Deep Thinkers”

It is the “deep thinkers” who often think the Republic into its deepest fixes.

They are drunk on their thoughts… as the corner sot is drunk on alcohol.

Do you trust a drunk man with the keys?

The “Sage of Baltimore,” H.L. Mencken, surely hooked onto something when he wrote:

“We suffer most when the White House bursts with ideas.”

Woodrow Wilson, for example, was the first doctor of philosophy to seize the White House.

He presided over Princeton University before he presided over the United States.

It was Mr. Wilson who signed the Federal Reserve Act into law. As it was Mr. Wilson who signed the income tax into law.

The same Mr. Wilson ordered the doughboys “over there”… 116,000 of whom will remain forever over there.

And the Versailles Treaty that closed the “war to end all wars” spawned the “peace to end all peace.”

WWI was “The Great War” until an even greater war forced a Roman numeral arrangement.

In contrast we find Wilson’s successor once removed — Calvin Coolidge.

In Mencken’s telling, Coolidge…

Slept more than any other president, whether by day or by night… There were no thrills while he reigned, but neither were there any headaches. He had no ideas, and he was not a nuisance.

Loftier praise for any president can scarcely be imagined:

He was not a nuisance.

Being a nuisance, alas, is how presidents nudge their way onto the history pages.

Whom do historians slobber over — a Calvin Coolidge or a Franklin Roosevelt?

A Grover Cleveland — or a Theodore Roosevelt?

Trump Could Have Been the Right Kind of Nuisance

But our criticism of Trump is not that he is a nuisance… but that he has been an insufficient nuisance.

The right kind of nuisance is just what the country could use. Trump was elected, in fact, to be a nuisance.

Not a statesman, that is — but a demolition man.

A political outsider, Trump would “drain the swamp.”

He would end the forever wars… and disentangle the United States from entangling alliances.

And did he not pledge to retire the debt?

But rather than demolition man, Trump has largely been kept man.

The president promises x.

But the deep state immediately shows him its fangs, his swampish advisers take him by the ear…  and before he knows what has struck him… his position is y.

That is, his position is the status quo.

Despite his cyclonic bluster, despite his relentless onslaughts against the pieties, Trump’s chief legislative accomplishments could have been Jeb Bush’s chief legislative accomplishments.

And so the swamp remains as deep, as thick, as gaseous as ever…

The United States remains entangled as ever… and more indebted than ever.

The national debt has expanded over $2 trillion since Mr. Trump sank his caboose in the presidential desk chair.

Deficits are supposed to contract during economic expansions… not increase.

But it is not our purpose to bring the president into contempt or ridicule. We have no heat against the fellow.

His presidency vastly entertains us, in fact… as a circus entertains us, as a street brawl entertains us, as the sight of a man with his shirt on backward entertains us.

Besides, we never thought for one second that Trump stood a chance. The entire capital is against him — including over half his party.

He is simply out of his depth.

But even a George Washington would be out of his depth today.

The termites have eaten too deeply into the floorboards beneath… and the rafters above.

How much solid timber remains?

U.S. Economic History Says Recession Can’t Be far Off

Meantime, the current economic expansion will be U.S. history’s longest come July.

And we suspect the end is getting close…

We detect ominous signs in the heavens, black ravens circling overhead, frightful warnings from mysterious oracles.

GDP growth, for example, has been trending in the wrong direction.

We still await Q4 2018 GDP numbers. But the evidence does not encourage.

As revealed last week, November–December retail sales suffered the largest monthly drop since September 2009.

January U.S. industrial production also endured a good falling off.

The soothsayers in turn slashed their Q4 GDP estimates.

Barclays revised its Q4 growth forecast from 2.8% to 2.1%.

JPMorgan’s dropped from 2.6% to 2.0%. Goldman likewise revised its forecast to 2.0%.

Even the Federal Reserve’s Atlanta branch — famous for its wildly optimistic GDP projections — lowered its forecast from 2.7% to 1.5%.

What about Q1 2019?

The Federal Reserve’s New York bastion has slashed its 2.17% forecast to 1.4%.

Meantime, the Congressional Budget Office (CBO) estimates debt is expanding at a 6% annual rate.

All the while, the global economy goes along at a limp.

Our own Charles Hugh Smith warns we have come upon “credit exhaustion.”

“The signs are everywhere,” Charles laments: “credit exhaustion is global, and that means the global growth story is over.” More:

The global economy is way past the point of maximum debt saturation, and so the next stop is debt exhaustion: a sharp increase in defaults, a rapid decline in demand for more debt, a collapse in asset bubbles that depend on debt and a resulting drop in economic activity, aka a deep and profound recession that cannot be “fixed” by lowering interest rates or juicing the creation of more debt.

Ah, but that will not stop them trying.

As with the addict, so with the crank — more debt is never enough.

They will be at the ready with zero interest rates, negative interest rates, helicopter money, Modern Monetary Theory, New Deals of various hues, etc.

The same old wine, that is — in new bottles.

Only this time, we suspect it will prove too weak to intoxicate.

Next comes the stiff cup of coffee… and the freezing shower…


Brian Maher
for The Daily Reckoning

The post Three Cheers for the “Do Nothing” President appeared first on Daily Reckoning.

The Crumbling Chinese Market

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A Chinese financial and economic crisis has been in the forecasts of many analysts for years, including my own. So far, it has not happened. Does this mean China has solved the problem of how to avoid a crisis? Or is the crisis just a matter of time, set to happen sooner than later?

My view is that a crisis in China is inevitable based on China’s growth model, the international financial climate and excessive debt. Some of the world’s most prominent economists agree. A countdown to crisis has begun.

Jim Rickards speaking on stage

Your correspondent addressing a conference of the chief economists of major Chinese banks and foreign banks doing business in China. This conference took place in Shanghai and offered great networking opportunities to discuss issues of mutual interest with the top financial economists in China. These meetings included the chance to have breakfast with the heads of precious metals operations of the four largest gold dealers in China.

As I explained above, China has hit a wall that development economists refer to as the “middle income trap.” Again, this happens to developing economies when they have exhausted the easy growth potential moving from low income to middle income and then face the far more difficult task of moving from middle income to high income.

The move to high-income status requires far more than simple assembly-style jobs staffed by rural dwellers moving to the cities. It requires the creation and adoption of high-value-added products enabled by high technology.

China has not shown much capacity for developing high technology on its own, but it has been quite effective at stealing such technology from trading partners and applying it through its own system of state-owned enterprises and “national champions” such as Huawei in the telecommunications sector.

Unfortunately for China, this growth by theft has run its course. The U.S. and its allies, such as Canada and the EU, are taking strict steps to limit further theft and are holding China to account for its theft so far by imposing punitive tariffs and banning Chinese companies from participation in critical technology rollouts such as 5G mobile phones.

At the same time, China is facing the consequences of excessive debt. Economies can grow through consumption, investment, government spending and net exports. The “Chinese miracle” has been mostly a matter of investment and net exports, with minimal spending by consumers.

The investment component was thinly disguised government spending — many of the companies conducting investment in large infrastructure projects were backed directly or indirectly by the government through the banks.

This investment was debt-financed. China is so heavily indebted that it is now at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt.

China’s other lifelines were net exports and large current account surpluses. These were driven by cheap labor, government subsidies and a manipulated currency. These drivers of growth are also disappearing due to demographics that reduce China’s labor force.

China is facing competition by even cheaper labor from Vietnam and Indonesia. Trade surpluses are also being hurt by the trade wars and tariffs imposed by the U.S.

Meanwhile, the debt overhang is growing worse. China’s creditworthiness is now being called into question by international banks and direct foreign investors.

The single most important factor right now is the continuation and expansion of the U.S.-China trade war. When the trade war began in January 2018, the market expectation was that both sides were posturing and that a resolution would be reached quickly.

I took the opposite view. Trump waited a full year from his inauguration before starting the trade war. Trump has given China every opportunity to come to the table and work out a deal acceptable to both sides.

China assumed it was “business as usual” as it had been during the Clinton, Bush 43 and Obama administrations. China assumed it could pay lip service to trading relations and continue down its path of unfair trade practices and theft of intellectual property.

By January 2018, Trump decided he had been patient enough and it was time to show China we were serious about the trade deficit and China’s digital piracy. Since the trade war began, the U.S. has suffered only minor impacts, while the impact on China has been overwhelming.

The deteriorating situation in China is summarized nicely in this excerpt from an article dated Feb. 5, 2019, and titled “The Coming China Shock,” by economists Arvind Subramanian and Josh Felman:

Back in September, we saw some discontinuity in China’s economic performance as inevitable. Even if the country was not heading for a full-blown crisis, we believed it would almost certainly experience some combination of rapidly decelerating growth and a sharply depreciating exchange rate. That prognosis has since become even more likely. With global economic growth and exports declining, China’s economy is on track to slow further relative to the 6.4% growth recorded in the fourth quarter of 2018. The double-digit average achieved from the 1980s until recently has never seemed more distant.

The impact described by Subramanian and Felman is illustrated in the chart below. This chart shows the price and volume of trading in the iShares China Large-Cap ETF (NYSE:FXI).

FXI peaked at $54.00 per share on Jan. 26, 2018, almost exactly on the day the trade wars began. The index has trended steadily downward from there to the current level of about $42.50 per share, a 21% decline with volatility along the way.


This decline is only a partial reflection of the trade war impact. Wall Street has consistently underestimated the hard economic toll the trade war has taken on China. Wall Street formed the view that the trade war would be short and of minimal impact. Instead it has stretched for 14 months with no end in sight.

The tariffs imposed by the U.S. on China so far have dramatically slowed the Chinese economy. Yet those tariffs are minor compared with what’s in store.

March 1, 2019, is the deadline for the current “truce” in the trade war intended to facilitate negotiations. U.S. demands — especially in the area of verifiable limitations on the theft of U.S. intellectual property — are impossible for China to meet because it depends on such theft to advance its own economic ambitions.

It is highly unlikely that the outstanding issues will be resolved by March 1. Some minor issues may be resolved and some “deal” announced. A deal may include a reduction in the U.S.-China trade deficit through larger purchases of U.S. soybeans by China.

But the big issues including limits on U.S. investment in China, forced technology transfers to China and theft of intellectual property will not be resolved.

The best case is that the deadline will be extended and the trade talks will continue. The worst case is that the truce will fall apart and the U.S. will impose massive tariff increases on Chinese exports to the U.S. as planned. Either way, China’s export-driven economy will continue to suffer.

Given these economic, trade war and political head winds, weakness in China is only getting worse.

And China’s leadership can only hope the damage can be limited before the people begin to question its legitimacy.


Jim Rickards
for The Daily Reckoning

The post The Crumbling Chinese Market appeared first on Daily Reckoning.

China Snared in “Middle-income Trap”

This post China Snared in “Middle-income Trap” appeared first on Daily Reckoning.

A large number of China analysts are concluding that growth in China is slower than the official government reports. In fact, growth is even worse than the pessimists imagine.

The statistics on Chinese GDP growth for the fourth quarter of 2018 and the full-year have been widely reported. Quarterly growth was 6.4% (annualized), the lowest ever reported. Full-year growth for 2018 was 6.6%, the lowest since 1990.

Those weak figures have to be adjusted downward to take account of consistent cheating by China in terms of accurate reporting of data. Private surveys show even lower annual growth, about 5.7%, compared with the official figures of 6.6%.

But that’s not the end of the downward adjustments. Both the official Chinese growth figures and the private surveys show investment is about 45% of total Chinese growth. About half of Chinese investment is pure waste in the form of white elephant infrastructure that is unneeded and cannot pay for itself and ghost cities that will never be occupied or used before they are obsolete.

These infrastructure projects do provide hundreds of thousands of jobs and billions of dollars spent on cement and excavation, along with steel and glass, but they produce no value. If China’s reports were subject to customary accounting standards, that “investment” would be written down to zero.

This write-down puts actual Chinese growth closer to 4.2%. Considering the exponential growth in debt needed to support these investments, China is best viewed as an inverted pyramid of massive debt supported by modest growth; this is a recipe for a debt panic and financial collapse.

As dire as these numbers may be, there’s no surprise in them. China is behaving like almost every emerging-market economy, albeit with more debt. Only naive Wall Street analysts and cheating Chinese Communist officials would extrapolate the former high-growth figures into the future. Expert development economists know better.

Multilateral agencies such as the IMF and the Organisation for Economic Co-operation and Development (OECD) divide economies into “low income,” “middle income” and “high income.” The dividing lines are measured in annual per capita income denominated in U.S. dollars. Low income is zero to $7,000 per year. Middle income is $7,000–17,000 per year. High income is above $17,000 per year.

China today is about $8,800 per person; near the center of the middle-income category. For comparison, the U.S. figure is about $60,000 per person and Switzerland is about $80,000 per person.

As late as the 1960s and 1970s, development economists believed that the most difficult economic task for poor countries was to move from low-income to middle-income. From there, it was believed that the path to high-income would be direct and self-sustaining. It turns out these assumptions were incorrect.

Moving from low-income to middle-income is actually straightforward. It’s just a matter of reducing corruption, providing for a reasonable rule of law and facilitating migration from the countryside to cities.

From there, simple assembly-type jobs will be plentiful with the help of domestic savings and foreign capital. The path to middle-income status follows directly.

The truly difficult task in development economics is moving from middle-income to high-income. For this transition, more is needed than simple low-cost manufacturing. The economy must employ high technology and create more high-value-added products.

This is difficult because of the resources needed to obtain the high technology in the first place and the expense and time needed to train a workforce to utilize the technology. This is why companies such as Apple guard their technology so carefully and why countries like China work so hard to steal the technology.

The only countries since the Second World War to make the transition from middle-income to high-income are South Korea, Taiwan, Japan and Singapore. The rest of Asia, South America and Africa (if they are not low-income) are stuck in what’s called “the middle-income trap.”

In short, it’s easy to grow at 10% per year (China’s growth rate just a few years ago) when millions are flocking from the countryside to the cities and low-value factory jobs are plentiful.

It’s not easy to grow above 4% when the migration stops, the factory job growth stagnates and a trade war begins. China is moving quickly to the 4% growth plateau, a not-unusual result in emerging markets.

China has no clear path out of the middle-income trap despite their well-honed ability to steal Western technology. Technology theft is being made more difficult by Trump’s confrontation with China over trade.

China’s problems will not be going away anytime soon.


Jim Rickards
for The Daily Reckoning

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Multiple Risks Are Converging at Once

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Since the end of QE and the “taper” in October 2014, the Fed has been trying to “normalize” their balance sheet and interest rates. The balance sheet needed to be reduced from $4.5 trillion to about $2.5 trillion through “quantitative tightening” or QT, which is tantamount to burning money.

Interest rates needed to be raised to around 4% in stages of 0.25%. The purpose of QT and rate hikes was so that the Fed would have the capacity to lower rates and increase the balance sheet (“QE4”) again to fight a new recession.

The rate hikes started in December 2015 (the “liftoff”) and the balance sheet reductions started in October 2017. Both started slowly but have gained momentum. Rates are now up to 2.5% and the balance sheet is just below $4 trillion.

The Fed’s problem was that actual rate hikes were about 1% per year and the balance sheet reduction at $600 billion per year had the effect of another 1% of rate hikes. Would the Fed be able to achieve its goals of 4% rates and a $2.5 trillion balance sheet without causing the recession they were preparing to fight?

It turns out the answer is no. In late December, Fed chair Powell announced the Fed would be “patient” on rate hikes. That means no more rate hikes until further notice. Now, the Fed has also apparently thrown in the towel on balance sheet normalization.

When QT began, Janet Yellen said it would “run on background” and would not be an instrument of policy. Ooops. Now the Fed is ending it so it clearly is an instrument of policy.

Right now, my models are saying that Powell’s verbal ease is too little too late. Damage to U.S. growth prospects has already been done by the Fed’s tightening since December 2015 and the Fed’s QT policy that started in October 2017.

The 2009–2018 recovery has already been the weakest recovery in U.S. history despite a few good quarters here and there. And there’s little reason to expect it to pick up from here. In fact, growth is slowing.

GDP expanded 3.4% in the third quarter of 2018, which looks good on paper. But the trend is pointing down. Q2 growth was 4.2%. This trend tends to confirm the view that 2018 growth was a “Trump bump” from the tax cuts that will not be repeated. And Q4 GDP, which has been delayed due to the government shutdown, will probably be lower than Q3.

Some of the major banks have downgraded their Q4 GDP forecasts after yesterday’s poor retail sales report.

Goldman Sachs, for example, previously projected fourth-quarter GDP to expand at 2.5%. Now it’s down to 2.0%. Its projections for the rest of the year are no better. JPMorgan also revised down its previous Q4 forecast from a previous 2.6% to 2.0%. And Barclays lowered its Q4 forecast from 2.8% to 2.1%.

Even the Atlanta branch of the Federal Reserve, which is known for perpetually overestimating GDP, has cut its Q4 forecast by almost half. A little over a week ago its reading was 2.7%. But after yesterday’s retail sales report, its latest forecast comes it at just 1.5%.

We also have other signs the economy is slowing down. A report this week revealed a record seven million Americans are now at least 90 days behind in their car loan payments. There is also a student loan crisis unfolding.

Total student loans today at $1.6 trillion are larger than the amount of junk mortgages in late 2007 of about $1.0 trillion. Default rates on student loans are already higher than mortgage default rates in 2007. This time the loan losses are falling not on the banks and hedge funds but on the Treasury itself because of government guarantees.

Not only are student loan defaults soaring, but household debt has hit another all-time high. Student loans and household debt are just the tip of the debt iceberg that also includes junk bonds corporate debt and even sovereign debt, all at or near record highs around the world.

But it’s not just the U.S.

China and Europe are both slowing at the same time. China’s problems are well-known. And while the causes may vary, growth in all of the major economies in the EU and the U.K. is either slowing or has already turned negative. Markets see the global slowdown (despite Fed ease) and are preparing for a recession at best and a possible market crash at worst.

Still, why has growth slowed down at all?

The answer has to do with debt, Fed policy, political developments, as well as currency wars and trade wars. Specifically, the U.S. and China, the world’s two largest economies, are discovering the limits of debt-fueled growth.

According to the Institute of International Finance (IIF), it required a record $8 trillion of freshly created debt to create just $1.3 trillion of global GDP. The trend is clear. The massive debts intended to achieve growth are piling on every day. Meanwhile, many of the debts taken on since 2009 are still on the books.

The U.S. debt-to-GDP ratio is now 106%, the highest since the end of the Second World War. The Chinese debt-to-GDP ratio is a more reasonable 48%, but that figure is misleading because it does not include the debts and guarantees of provinces, state-owned enterprises, banks, wealth management products and numerous other entities that the government in Beijing is directly or indirectly obligated to support.

When that additional debt is taken into account, the real debt-to-GDP ratio is over 250%, about the same as Japan’s.

Debt-to-GDP ratios below 60% are considered sustainable; ratios between 60% and 90% are considered unsustainable and need to be reversed; and ratios in excess of 90% are in the red zone and will produce negative growth along with default through nonpayment, inflation or other forms of debt repudiation.

The world’s three largest economies — the U.S., China and Japan — are all now deep in the red zone.

What is striking is the speed with which synchronized global growth has turned to synchronized slowing. Indications are that this slowing is far from over. While growth can create a positive feedback loop, slowing can do the same.

Warnings of economic collapse are no longer confined to the fringes of economic analysis but are now coming from major financial institutions and prominent economists, academics and wealth managers. Leading financial elites have been warning of coming collapses and dangers.

These warnings range from the IMF’s Christine Lagarde, Bridgewater’s Ray Dalio, the Bank for International Settlements (known as the “central banker’s central bank”), Paul Tudor Jones and many other highly regarded sources.

Coming back to the U.S., the Fed may have avoided a recession for now, but they have left themselves far short of what they’ll need to fight the next recession when it comes. That could lead to another lost decade. The U.S. looks more like Japan with each passing day.

Investors can profit from this with a combination of long-volatility strategies, safe-haven assets, gold and cash.


Jim Rickards
for The Daily Reckoning

The post Multiple Risks Are Converging at Once appeared first on Daily Reckoning.

More Evidence of Coming Recession

This post More Evidence of Coming Recession appeared first on Daily Reckoning.

The stock market took a wobble yesterday.

The Dow Jones slipped 104 points, the S&P seven.

The Nasdaq worked a slight gain… but the bears won the day’s combat by majority decision.

The averages roared back today. But what accounts for yesterday’s loss?

The American consumer evidently caught a flu last quarter.

November–December retail sales suffered the largest monthly drop since September 2009.


U.S. retail sales recorded their biggest drop in more than nine years in December as receipts fell across the board, suggesting a sharp slowdown in economic activity at the end of 2018. The shockingly weak report from the Commerce Department on Thursday led to growth estimates for the fourth-quarter being cut to below a 2.0% annualized rate. 

Dismal retail numbers suggest fourth-quarter GDP will vastly disappoint expectations.

(Q4 GDP was originally scheduled for Jan. 30 release. The government “shutdown” has delayed it.)

The crystal gazers immediately slashed their Q4 growth estimates.

Barclays had pegged Q4 growth at 2.8%. But after yesterday’s report… 2.1%.

JPMorgan’s previous forecast was 2.6%. It is now 2.0%.

Goldman likewise revised its forecast to 2.0%.

Even the Federal Reserve’s Atlanta outpost — notorious for its comically optimistic GDP projections — hacksawed its previous estimate nearly in half.

From 2.7% on Feb. 6… it now envisions Q4 GDP growth of 1.5%.

But what about internet retailers? Is not the internet displacing the brick-and-mortar shop? Maybe they took up the slack.

Alas… they did not.

Internet sales dropped 3.9% — their largest swoon since November 2008.

“Truly a surprise” is how National Retail Federation (NRF) chief economist Jack Kleinhenz described the results — “in contradiction to the consumer spending trends” in previous operation.

To what foul causes do we attribute the latest retail slippage?

NRF president and CEO Matt Shay:

It appears that worries over the trade war and turmoil in the stock markets impacted consumer behavior more than we expected. There’s also a question of whether the government shutdown and resulting delay in collecting data might have made the results less reliable.

Just so.

But could the weak numbers simply indicate recession?

Recessions only become visible post factum.

Like a man halfway into a minefield alerted to his situation only after an explosion astern… recessions begin six to 12 months (or more) before economists can identify them.

One omen of looming recession is slackening industrial production.

We are informed this morning that United States industrial production sank 0.6% last month — the first drop in eight months.

Analysts had forecast a 0.1% gain.

Meantime, December industrial production was downgraded 0.2% from initial estimates.

Trade war, an overall global slowdown and a hefty dollar are the explanations in general circulation.

Is weakening industrial production another straw in the wind, a foreshadow of recession?

Diane Swonk, chief economist at Grant Thornton LLP:

The 0.6% drop in industrial production in January was as disturbing as the drop in retail sales in that it was so broad based. 

Meantime, the unemployment rate sank to a 3.7% low in September. It has been on the creep ever since, like a thief on tiptoe.

January’s reading came in at 4%.

As we explained this week, data from the National Bureau of Economic Research indicates recession is often on tap nine months after unemployment bottoms.

But our discussion would be incomplete without mention of the Federal Reserve…

It has already backed off its rate hikes. The most recent retail sales data will likely keep it on ice.

Explains Citigroup economist Andrew Hollenhorst:

Until [yesterday] morning, Fed official hesitance to hike further was based on risks emanating from global growth and from financial markets, despite a strong domestic outlook. The decline in retail sales calls into question the domestic growth assumption.

But will the Federal Reserve soon return to cutting rates?

The futures market says its next move will likely be a rate cut — not a hike.

But as we also explained recently, watch out for the next rate cut.

The past three recessions struck within three months of the rate cut that ended a hike cycle.

For reasons we need not look far…

Monetary policy runs to a lagging schedule of perhaps 12–18 months.

The impact of previous tightening is not immediate. Once the economy absorbs its full effects, the numbers give off their alarms.

The monetary authority then decides it must cut rates once again.

But it is too late.

Recession has already been “baked into the cake.” And the cake is contracting.

We expect the pattern to hold.

You can therefore expect recession within three months of the next rate hike.

We could be wrong, of course. But we could also be right…

Below, Jim Rickards shows you why multiple risks are converging on the economy at once. Does the U.S. face a “lost decade”? Read on.


Brian Maher
Managing editor, The Daily Reckoning

The post More Evidence of Coming Recession appeared first on Daily Reckoning.

One Step Closer to Ruin

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“Blessed are the young, for they shall inherit the national debt.”
Herbert Hoover

Today we pause to acknowledge a sad mile marker… another waypoint on the road to the poorhouse…

This week — for the first time in its 244 years — total United States debt exceeds $22 trillion.

The last $2 trillion has piled on since Mr. Trump donned the imperial purple.

The United States required 205 years to ring up its first $1 trillion debt — but only 11 months for its 22nd.

That is, what was previously the work of two centuries… is now the work of 11 months.

Here is progress — of a peculiar and exotic sort.

But large numbers exert a dulling effect on the sober senses… like large bottles of wine.

A $10,000 dinner bill, for example, will freeze your blood.

It will torment you, stagger you, hagride you, kill you — because though extravagant, you can relate to figures in this range.

But a trillion-dollar bill will glaze your eyes.

Not in 100 lifetimes could you hope to satisfy it. A trillion ranges beyond all fathoming, all imagination.

You would laugh it away… and depart the restaurant instructing the owner where he can place his bill.

So let us attempt to reduce the airy abstract to solid concrete…

How to Imagine $1 Trillion

The nonprofit Employment Policies Institute places 1 trillion into this perspective:

Let’s say someone told you to wait for something. If you waited 1,000 seconds, it’d only take about 17 minutes. If you waited 1 million seconds, you’d have to wait about 11.5 days… But if you waited 1 trillion seconds, you’d have to wait 31,688 years.

Returning to our poor example, perhaps you can tell the restaurateur he will have his money in 1 trillion seconds.

Your offer would likely appear very reasonable.

Let us mix the figure some…

Assume for the moment you are placed in command of the printing press. But you are limited to $1 bills.

Being exceptionally energetic, you produce one $1 bill each second of the day, 365 days of the year.

How long would you require to print 1 trillion $1 bills?

Author Bill Bryson:

If you initialed $1 per second, you would make $1,000 every 17 minutes. After 12 days of nonstop effort you would acquire your first $1 million. Thus, it would take you 120 days to accumulate $10 million and 1,200 days — something over three years — to reach $100 million. After 31.7 years you would become a billionaire… But not until after 31,709.8 years would you count your trillionth dollar.

But your sole concern is the national welfare. You therefore consecrate yourself to retiring the national debt.

In that case, you multiply the preceding by 22. Here is what you find:

Writing off today’s $22 trillion debt would require 697,615.6 years of ceaseless labor.

Assume the Almighty grants you your threescore and 10 — 70 years.

In 9,965.9 lifetimes, you would complete the business.

Heaven, indeed, can wait. Fortunately… so must hell.

But you say we conjure a phantom menace.

The United States’ GDP is $20 trillion. Put next to it, a $22 trillion debt is not half so daunting.

But the trend is…

Debt Is Growing Faster Than the Economy

Michael Peterson, CEO of the nonpartisan Peter G. Peterson Foundation:

“Reaching this unfortunate milestone so rapidly is the latest sign that our fiscal situation is not only unsustainable but accelerating.”

GDP has increased some 35% since 2008. But the national debt… 122%.

Meantime, average real annual economic growth since 2009 runs to 2.23%.

And the Congressional Budget Office (CBO) estimates GDP growth will limp along at an average 1.9% per annum the next decade.

But it estimates debt is expanding at a 6% annual rate.

Once again… the trend.

But CBO’s growth forecast may be optimistic. It fails to account for possible recession.

The current expansion is the second longest in U.S. history. By July it will become the longest — if the gods are merciful.

How much longer can the economy peg along without a recession?

Permanent Deficits Are the New Religion 

In a growing economy, the old Keynesians preach a gospel of fiscal restraint.

It is the time to squirrel away acorns… and save against a season of lean kine.

When recession inevitably arrives, the government can then meet the emergency with a full war chest.

“Countercyclical” policy, academic men term it.

But even the old Keynesian religion has gone behind a cloud.

In its place we find the religion of perpetual deficit.

Analyst John Rubino on the new catechism:

Even Keynesianism, generally the most debt-friendly… school of economic thought, views deficit spending as a cyclical stabilizer. That is, in bad times governments should borrow and spend to keep the economy growing while in good times governments should scale back borrowing — and ideally run surpluses — to keep things from overheating.

But now we seem to have turned that logic on its head, with fiscal stimulus ramping up in the best of times, when unemployment is low, stock prices high and inflation stirring. New… fiscal policy seems to call for continuous and growing deficits pretty much forever.

When recession is finally upon us — depend on it — the spending floodgates will open.

And today’s trillion-dollar deficits will trifle in comparison.

“We get a recession,” affirms analyst Sven Henrich, “and you are looking at $2–3 trillion [annual] deficits.”

A “Tripartisan” Approach to Government Spending

But perhaps we can plug the holes to keep current debt levels even.

It is possible in theory… but impossible in practice.

CBO estimates Congress would have to increase revenues 11% each year… while simultaneously slicing the budget 10%.

Will Congress spend 10% less each year?

As well imagine a circular square… a flying whale… or an honest liar.

Within 10 years, CBO projects federal spending will surge from today’s 20.8% of GDP to 23.0%.

This is of course a bipartisan effort. Rather, it is a tripartisan effort we the people are as responsible as the politicians we elect.

Meantime, the United States spent $523 billion servicing its debt in fiscal year 2018 — a record.

And CBO projects debt service will rise to $915 billion by 2028 — nearly 25% of the entire budget.

$915 billion roughly approximates last year’s combined Medicare and Medicaid costs.

Rising debt service will likely lower the curtain on the entire show, as rising borrowing costs swamp the economic machinery.

At that point the entire illusion that deficits do not matter will crash upon the rocks of mathematical fact.

As we have written before…

“The divine wrath is slow indeed in vengeance,” said Roman historian Valerius Maximus nearly 2,000 years ago…

“But it makes up for its tardiness by the severity of the punishment.”

The current recovery is nine years old… and counting…


Brian Maher
Managing editor, The Daily Reckoning

The post One Step Closer to Ruin appeared first on Daily Reckoning.