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Sunday, July 19, 2015

Growth and Recession - Now Unrecognizable Terms

What is growth or recession if government is allowed to infuse infinite debt into an economy but not subtract that debt from the calculation???  Particularly, when that debt (government debt) is never intended to be repaid.

The chart below highlights the change (by period) of (1) all private debt, (2) all government debt, (3)GDP change subtracting federal debt undertaken, and (4) the average interest rates by period.
  • '95-->'01
    • for every $2 dollars of private debt undertaken at an average rate of 5.5%, $1 dollar of GDP was created and no net government debt was utilized (of course this misses the huge growth of unfunded liabilities but let's leave that aside for this discussion).
  •  '01-->'08
    • a doubling of credit / debt from a combination of private and government sources was utilized at an average of 3%...but this only created a net growth of $1 trillion in GDP when subtracting the new government debt...or 7 cents for every dollar in new debt.
  • '08-->'15
    • private sources choose to refinance and deleverage at record low rates.  Only the federal government was willing to undertake debt (again, debt it never intended to repay but instead only service via driving ZIRP).  However, the result is a massive GDP contraction when the new government debt is subtracted from the remaining economic activity...a loss in excess of <-$1> for every $2 spent.

Now the Fed has ceased increasing it's balance sheet (via buying more bonds, aka QE...however the Fed continues partial QE via continued buying to maintain it's nearly $4.5 trillion dollar balance sheet of Treasurys and MBS).  The Fed says it will raise rates "soon" and the Fed says it will also begin "normalizing" its balance sheet (ie, further slow or stop the QE buying of new bonds for those that mature or, heaven forbid, actually begin outright selling).   The Fed's contention is things are good enough that although private sources only wanted to deleverage with rates at record with rising rates private sources will choose to take out the debt they didn't want at lower rates plus refinance all that existing debt into higher rates???  All this while, judging from collapsing commodity prices, there is a clear lack of demand world over.

It's not hard to see that absent the return of large government deficits and the Fed's QE to mop it up...the private sector debt creation will continue to wane...the lack of global demand is about to get far worse.  And something very wicked this way comes one way or another.


  1. Good post, Chris. The fraud (let's call it what it is) that continues to be perpetrated on the public has reached epic levels, and I agree with you in that it cannot be sustained for much longer.

  2. We tend to discuss our wealth in dollar terms. Unfortunately, ultimately, the dollar is worth nothing.

    Wealth is ownership or control of productive assets, land, property, art and the like.

    Obviously, wealth and dollars are closely linked. Particularly, in the minds of the poor. Chris points out that a change has occurred and he 'hints' that this will lead to more and bigger changes. He is right. The dollar being recognised as worthless is a massive change that we are accelerating towards.

    Such massive changes are unimaginable. As are the consequences. Which is why heretics are dismissed and not listened to. Chris is a heretic and is shouting 'iceberg' when the rest want to go faster. Thus we will (try to) go faster. Doh!

    So, where possible consider your wealth in terms of what you physically own, rather than what your pension provider says you are worth, in dollar terms. (A dollar is worth only what it buys. The thing you buy is of value. Not the dollar. Having a wallet full of dollars is useful, for a time. Ownership of productive assets is useful for a lifetime. Ownership of a large dollar denominated pension is only of value if it serves its purpose. What could possibly go wrong! 1998, 2001 & 2007 were all once in a century events. So, three hundred years before the next one hits?

  3. Chris - Great post. I have looked at this going back to the early 80s when the bond bull market began. Volcker raised rates to halt high inflation and it's been downhill since then. Note - I do not place much emphasis on economic history besides general correlations due to the change in the monetary system in the early 70s. This post is excellent. What is next? Seems that QE4 (which could arguable be occurring through ECB and BOJ right now) could be next. Raising rates very far doesn't seem possible when factoring in the information in this article and IOER.

    David - Excellent comment that many people need to start considering. The roller coaster has crossed the hill and momentum will carry us through....but to what?

    Overall, great article that leads to a lot of thought provoking questions. When I have more questions than answers that means you provoked critical thinking, which seems to be occurring less and less these days.

    Remember that some of the most valuable assets are your relationships! Who can you count on? What skills does your circle have?

    Take care!

  4. I know of many entrepreneurs, myself included, who have deleveraged, i.e. reduced or shunned debt, simply to not contribute anymore to the taxable base. Only when you are close to the Central banks or the teat of government do you profit anymore, so let them suck that teat dry.

  5. Chris
    Since there is no investigative reporting anymore, how about doing a piece on the real Canadian government debt, including Quebec and Ontario. And remember all the debt that is stuffed into "special purpose" crown corporations.

    1. Sounds like a very worthwhile report but unfortunately, I haven't the time to dig all this up. But if you or someone wants to take it on, I'd be happy to post it (for what that's worth).

      On a side note, we were in Vancouver and Blackcomb last week for a long weekend. Really enjoy our little country of "Cascadia" and on the way back home we were touring some colleges including U. of Washington (my son is a HS senior this coming year).
      What I'm astounded by is how colleges no longer seem to be the hot bed of intellectual critical challenge of the status quo. It's seemingly all about how to maximize your investment and find a job at Google or in medicine or whatever. I just don't see the research or critique of the economic, political, social structure that is prevailing. I just get the sense universities have been co-opted not into centers of critical thought (learning how to learn and think independently) but instead primarily into networking opportunities to maximize post graduate income. I just haven't seen college kids coming up with research and reports detailing what is happening across the spectrum and how, if maintained, it's all coming at their expense.
      All right...rant off.

    2. Hi Chris, nice rant. I think it is all related. You can't have too big to fail banks, huge government and the rest. Without an uncritical press, a day dreaming public and career focussed graduates.

      You Chris are the anomaly. You have an ability to think critically, to do your own research and present it concisely and with clarity. Many others could do the same but are never encouraged to do so. Most are encouraged not too.

      I have recently needed medical treatment and have spoken with two consultants. I wouldn't let them wash my car. I hoped a third would be able to perform basic surgery, he was and did. So my hernia is now repaired. They basically shoved a nylon mesh inside me. Not exactly 21st century! But they think very highly of themselves.

      Anyway, ramble over. I may or may not have made sense. I don't have your presentation skills.

      In summary
      Thanks for all your efforts.


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