A Mountain of Debt and no Growth

 

Too Many Geezers

So far, we’ve proposed two reasons why the 21st century has been such a dud …

First … the developed nations are cursed with too many geezers. We have nothing against old people (especially as we hope to be one ourselves all too soon). But old people do not build a new economy; young people do. And today, there are not enough young people to power the kind of economic growth we’ve gotten used to.

Second… rules, regulations, subsidies, laws and orders now protect established financial interests against upstart competitors. Businesses get older along with the population, as government creeps over more and more of the economy.

The feds use monopoly force to prevent competition and reward today’s voters and capital owners. The baby born in 2015 finds himself subject to debts, obligations and restrictions that were meant to benefit his grandparents. Today, we give you another reason for the flop that is the 21st century. As you will see, they are all related…

 

1-2014-3_FR pages_webimage2013Pages in the Federal Register. There was a brief reprieve from over-regulation in the Reagan era, but shortly thereafter the regulatory State went into action again at full blast. Capitalism is slowly but surely asphyxiated, and with it any chance to escape the debt trap is dying with it (chart source: the George Washington University regulatory studies center) – click to enlarge.

 

Caveat Creditor

We begin with this report from Fox Business:

 

Mortgage finance giant Fannie Mae just debuted its new “Home Path Ready Buyer Program,” which lets first-time home buyers get up to a 3% rebate of a home’s purchase price if they buy a Fannie Mae property, so long as they complete an online home buyer education course which costs $75.

The new Home Path Ready Buyer Program, as described by Fannie Mae, could create $4,500 in savings on a $150,000 home for first-time buyers (defined as borrowers who have not owned a home in the prior three years). In addition to the 3% rebate, Fannie Mae will refund the cost of the home buyer education course. […]

This new program comes after Melvin Watt, director of the Federal Housing Finance Agency, announced last December that Fannie Mae and Freddie Mac would soon start buying mortgage securities backed by 30-year loans with just 3% down payments, which banks largely halted delivering two years ago, instead demanding 20% down.”

 

That’s right: We’re back to 3% down payments, rebated. And we’re back to the feds (Fannie Mae is a government entity) encouraging people to load themselves down with mortgage debt. “Stimulus,” is what they call it. “A debt trap” is what it really is.

Housing is essentially a form of consumption – of lifestyle enhancement – instead of capital enhancement. And consumption debt has become so weighty that it drags the entire world economy down. Even the International Monetary Fund says so. Here’s Ambrose Evans-Pritchard in British newspaper The Telegraph:

 

“The International Monetary Fund has sounded the alarm on the exorbitant levels of debt across the world, this time literally. The IMF’s World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China’s workforce is shrinking by three million a year.

The report warned of a “persistent reduction” in the global growth rate since the Great Recession of 2008-2009, with no sign yet of a return to normal. “Lower potential growth will make it more difficult to reduce high public and private debt ratios,” it said.

Christine Lagarde, the Fund’s managing director, calls it the “New Mediocre.” […]

The world has been drawn deeper into a Faustian Pact.

Total public and private debt levels have reached a record 275% of GDP in rich countries, and 175% in emerging markets. Both are up 30 points since the Lehman crisis.

Nobody knows for sure whether this is benign, or how it will end. The haunting fear for the lords of global finance at IMF headquarters this year is that it may never be repaid. Caveat Creditor.”

 

2-Gross public debtGross public debt ratios with a likely overoptimistic estimate. So far nothing indicates that public debt will grow at a slower pace than GDP, especially not in the developed world. When the current bubble bursts, we will see another giant lurch higher in debt ratios. Quite possibly the final one prior to the death of the current monetary system (chart source: IMF World Economic Outlook)  – click to enlarge.

 

The Root Cause of the Global Slump

Mediocre? Not at all: Mediocrity would be a big improvement. What we’ve got here is awfulness. Debt doesn’t only slow GDP growth. It pushes it into reverse. That is what we’ve seen so far in the 21st century. The typical American has less money to spend today than he had in 1999. The century has set him back.

Here is Lacy Hunt and Van Hoisington of Hoisington Investment Management:

 

“Over the more than two thousand years of economic history, a clear record emerges regarding the relationship between the level of indebtedness of a nation and its resultant pace of economic activity.

The once flourishing and powerful Mesopotamian, Roman and Bourbon dynasties, as well as the British Empire, ultimately lost their great economic vigor due to the inability to prosper under crushing debt levels.

In his famous paper “Of Public Finance” (1752) David Hume, the man some consider to have been the intellectual leader of the Enlightenment, wrote about the debt problems of Mesopotamia and Rome. The contemporary scholar Niall Ferguson of Harvard University also described the over-indebted conditions in all four countries mentioned above.”

 

Since 1940, real per capita GDP in the US grew by 2.5% a year. That’s mediocre. But since the 21st century began, real per capita growth has averaged only 1% a year. That’s downright awful. Hunt and Hoisington explain why:

 

“The reason for the remarkably slow expansion over the past decade and a half has to do with the accumulation of too much debt. Numerous studies indicate that when total indebtedness in the economy reaches certain critical levels there is a deleterious impact on real per capita growth.

Those important over-indebtedness levels (roughly 275% of GDP) were crossed in the late 1990s, which is the root cause for the underperformance of the economy in this latest expansion.”

 

3-Nominal GDPNominal GDP since 1948. Once debt levels began to explode in the wake of Nixon’s gold default, economic growth rates almost immediately faltered. This should surprise no-one, but looking at the arguments forwarded by modern-day policy markers and their claque of statist advisors, they are either completely clueless or they are lying to cover their behinds (chart source: Hoisington Q1 2015 report) – click to enlarge.

 

Non-farm business productivity is rising at the slowest rate in 50 years. And the velocity of money – the speed at which each unit of currency changes hands and a key component of inflation – has fallen to the lowest level in half a century. Why?

Because of the declining marginal utility of debt. When there is little debt, you can add cash and credit to a system and get a boost. The money circulates. The economy revs up. But the more you add, the greater the burden of debt becomes… and the less of a boost you get from it.

Finally, you’ve ballooned the Fed’s balance sheet to $4.5 trillion and you’re getting a measly 1% per capita GDP growth in return. And then… as in the first quarter of this year… the growth falls to near zero. All the “stimulus” since 2000 was a scam. It stimulated nothing but more debt – which slows the rate of real growth.

 

4-Total credit market debtTotal credit market debt vs. GDP. It is often said that “additional debt buys less and less growth”, but that is actually the wrong way to look at it. In reality, credit expansion from thin air actively destroys capital. As long as there is a market economy, there will still be some wealth-generating activities that allow growth to continue, but at a much lower level than would otherwise be the case. The manipulation of the money stock and interest rates distorts relative prices and thereby falsifies economic calculation. Capital malinvestment and ultimately capital consumption are the inevitable result – click to enlarge.

 

Charts by: St. Louis Federal Reserve Research, George Washington University Regulatory Studies Center, Hoisington report, IMF

 

Image captions by PT

 

The above article originally appeared as “More Proof We’re Sliding Into a Global Recession at the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

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Dutchman
Dutchman

I’m soon to be 66. I am a higher income earner – around $150k / yr. I’m going to work as long a possible (can’t be at home with my wife 24/7/365) and my profession, comp sci is mostly desk work.

At 66 i will be able to collect my ‘full’ Social Security benefit – which is almost $3,000 a month. Additionally my wife is going to collect half my benefit – $1,500 a month.

We will have to pay taxes on 85% of the SS distribution.

So the gubmint is going to pay us $4,500 a month * 12 = $54,000 a year!

They better get a lot of Mexicans / Somali’s working min wage jobs to fund my SS.

ss
ss

We still have privatized gains, socialized losses. The losers are middle class taxpayers and small businesses, the real backbone of our economy. Subsidize the rich, subsidize (bribe) many others while screwing the middle class. If this isn’t enough, dump more debt onto middle class taxpayers while FLOODING our country with low wage and often illegal workers who take jobs from citizens who face increasing hardship and poverty from long-term unemployment because of insane trade deals.

If all this isn’t enough, all the low wage workers shipped in to take jobs from citizens to boost corporate profits can’t afford to consume much even after their rent, food, and healthcare are subsidized since they earn to little and MANY citizens can’t build savings because of of Fed ZIRP and therefore can’t spend much to help our economy.

So federal politicians via federal reserve easy money throw dollars at their respective state governments so the state governments can throw dollars at various industries and corporations to prop them up and allow some to hire people – often unemployed union members or foreign workers.

Various businesses are also being propped up to keep them from laying off workers many of whom are idle and produce little since our economy is grinding down while the isolated financial community of big banks and Wall Street gamble excessively as the Fed artificially props up the stock market.

All of this as other countries who have previously been financially allied with us flock to the Asian International Investment Bank (AIIB) and abandon our Fed corrupted, dollar-devaluing, debt destroying, spy intrusive, propaganda spewing, bribery busting, dictatorial, extreme HFT/Derivative, increasingly corrupt and socialistic Ponzi scheme economic system.

No one can accurately predict when economic collapse will occur but there is no doubt that it will likely sooner than later thanks to greedy, corrupt politicians owned by greedy, corrupt very rich people all supported by blindly loyal economic slaves known as citizens. Big banks, Wall Street, and big investors along with puppet politicians did more damage to our economy and country in 2008 than all of our foreign enemies combined.

I don’t blame any who leave our country and can’t believe that anyone in our military, most of whom struggle financially, would want to defend such a country or risk their lives to enrich a greedy, corrupt, minority.

Those who don’t want to bite the hand that provides for them have no right to complain when the corrupt groups associated with that hand exploit, impoverish, and destroy their lives and the lives of their children.

robert h siddell jr
robert h siddell jr

At the Madison livestock auction today, over 90% of the sellers were older than me and I’m 70. Rural Geezers produce a lot of the beef and pork people eat. PS: The prices be very good…so ya’ll must be enjoying it a lot.

TE
TE

Our GDP is more government paid-for (printed) than it has EVER been.

Our fellow inhabitants are more in debt than they have EVER been.

Pensions and SS require a constant, never-faltering, doubling of business every 20 years, or so, to support. They are a mathematical impossibility in a finite resources world.

The REASON government’s GDP portion is so big (and so understated/lied about) is because they have been needing to double their revenue/printing for a long, long, long, time. Plus they are being paid like it is 1998 and there are few good applicants and lots of necessary jobs. For the majority of the rest of us, it is the exact opposite of that.

During these fake money/credit run ups one thing is for certain, once the PRIVATE & State/Local 401(k)s, IRAs and pension plans re-tally their assets, there is going to be a WHOLE lot of promises that will not/cannot be met. With the way most of those are being run, I don’t give it long.

Funny how 20 hour a week, minimum wage, employees aren’t truly contributing to those asset plans, or credit card/revolving loan debt. Although the part-time temps at our school districts do have to pay the dues and the pension/health care weekly expense (only collected on the weeks they actually work, isn’t that nice of the them?) but DO NOT get pensions and healthcare. I expect that this tactic is going to be used to “save” their plans with all our paychecks.

Cripes. I’m beginning to think I should have lived high on the credit hog, driven the new, beautiful car for $150 a month, took out student loans and then filed bankruptcy on it all when this place turns to shit.

Because I can see the writing on the wall, first the institutional “buyers” will hit the exits and crash my “wealth” in stocks, no day will go by that 100% of my available cash will be outside the hands of the banks and FDIC, then my house value – as if anyone will be able to buy it anyway – will plummet, but the loan will stay exactly as is. Lots of us will lose our jobs as the reality of business loans becomes readily apparent, again. (for the uninitiated, commercial loans and mortgages are constantly renegotiated and usually are 100% contingent on the value of your assets. Many businesses that closed in ’07-’10 were not closing strictly due to the economy/sales, they were closed because after property crashed, then Wall Street, the banksters yanked the loans while putting extra piglets on the government’s teats, it will be the same next time)

Pensions will go to the Guaranty of the feds, as all the Enrons have before. At least they will be dramatically cut when it happens. Then when all those union employees are SCREAMING about Fed employees and “rich” guys still getting “all” their money, for equality, fairness and some new Krugman finance plan, they will force our private savings – 401s, IRA, etc – into government bonds for our good and safety, bonus that it gifts it back to the banksters and .gov to strip it and pay their employees and friends and families for a few more months/years.

The only good thing is that the much reduced value of my retirement – at that point, all contingent on not being able to keep market artificially levitated – won’t have much left anyway.

Nowhere to run, nowhere to retain wealth unless you are the top of the top, labor stolen at every turn (all banks are now charging for any transaction in a “savings” account over 6 a month. I used to put a big chunk in every week (4-5 times a month depending on number of paydays), and move money twice to meet my bills. Now it would cost me $30-$45 in fees. They want our money in non-interest bearing accounts because the FDIC regulation states the bank, or the government, can, for ANY number of reasons, call a “holiday” on our accounts and not allow a payment to be made, or check to clear, for up to 30 days, repeatable for another 30 without new reason.

When I found out of the change in availability (happened after TARP, around Cash for Clunkers time), I started my planning. Now they have screwed me royally.

But wait,there’s more, once we go cashless I will be completely, utterly, screwed. As well as any of us that have, and continue, to “do the right thing.”

Screw this world, I sometimes want off. Thanks be for my kids, they are the only reason I continue to care about the world and want to improve it. Instead of blowing it up. Which sounds better by the day.

Pirate Jo
Pirate Jo

“There are not enough young people to power the kind of economic growth we’ve gotten used to.”

Oh poppycock. First, more people are not the solution to too many people, any more than more debt is the solution to too much debt.

Secondly, there are plenty of young people – staffing ain’t our problem. It’s that very few of them can find good-paying jobs. What good is it to produce more young people when they are going to end up in the dependent class just like their grandparents?

We simply aren’t going to have “the kind of economic growth we’ve gotten used to,” no matter what.

Sensetti
Sensetti

Today’s safety net as viewed in the very near future.

comment image

Between the Boomers and all the morbidly obese youngsters the social safety net will be torn too shreds. You better get healthy and stay healthy or you will die before your time.

IndenturedServant

In a debt based fiat economy the only way to get growth is to expand debt. We are at a crossroads between what was and The Great Regression. Guess which one wins.

starfcker
starfcker

Send our productive industries to china, give women the ability to destroy a marriage on a whim, and it becomes equally difficult to vet a 30 year mortgage, or find someone who wants to sign on to one. No job security, no houseold security, and a tenfold increase in taxes and insurance.. reap what you sow.

Chicago999444
Chicago999444

I believe more and more of us will die before our time.

Is it just a personal observation derived from watching 4 people very near and dear to me die in the past 2 years, all of whom were under 80, and two pretty far under that age, or have life spans indeed peaked?

I believe the latter- that lifespans are beginning to drop, due to greater economic stress and reduced access to timely medical care, among other factors- and that when we have the benefit of the rear view mirror, we will see that the G.I. generation (b 1900-1924) was the not only the most prosperous generation in this country, but the healthiest and longest-lived on record, and that every generation after is doomed to a shorter average lifespan. The Silents (b 1925-1944) look to be dying at earlier ages, as cancer rates rise and medical care becomes more expensive and difficult to access, and more people fall into working poverty. We Baby Boomers will probably live even shorter lives.

We are seeing now how overpopulation and resource depletion cascade through an economy and through the population, with falling incomes, a greater wealth divide, ever more grotesque politics and state oppression, and evermore people becoming redundant as the economies of the world contract.

ss
ss

TE – Bravo!

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