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.