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Sunday, November 13, 2016

Trump Economic Fabrication no Different than Obama or Bush Economic Deceptions

GDP Without the Debt Incurred Is Just A Gross Distortion
GDP or gross domestic product is the big lie used by politicians because it neatly avoids the debt undertaken to achieve it's purported growth.  The chart below shows annual US GDP growth back to 1980.
However, the chart below shows both sides of the equation...the annual GDP growth and the annual federal debt incurred, spent, and (thus counted as part of the growth) to achieve the purported growth.


Below, annual GDP minus the annual growth in federal debt to achieve that "GDP growth".  The last eight years were abysmal and 2016 the third worst year in history (this even assumes Q4 GDP comes in at a relatively strong 2.5%).  This trend ain't yer friend.

Over the last eight years, the Obama economy (as measured by GDP) grew $3.9 trillion and federal debt grew by $9.6 trillion...said otherwise, GDP contracted $5.7 trillion when all the new debt is subtracted.  Essentially, America is a nation of renters that never intend to pay off our national debt but pay perpetual rent on this debt.  Unfortunately the rent will only keep going up so long as debt grows significantly faster than the economy that is the basis of tax collection.


Trump's Plan
Trump's big plan is to spend more and tax less...aka run YUUUGE(er) deficits building new and rebuilding existing infrastructure with the intent of goosing economic activity or GDP (also known as Japan's plan for the last two decades) while collapsing tax rates and tax revenue (at least in the "short" term).  Perhaps Donald will push to repatriate those trillions of US corporate dollars, currently sitting abroad, at little to zero tax rates?  Further, Donald wants to brand China a currency manipulator and cripple China's export machine...but China (and Russia) appear to be getting a head start on the president elect by dumping US debt. 


In fact Donald, we have a big problem.  According to the Treasury's TIC data, on a net basis nobody is buying our debt anymore...but us.  Not the Fed (at least officially), not foreigners, and the Intragovernmental buying is fast declining  (due to declining excess social security funds, etc.).  That leaves just US based institutional buyers (banks, pension funds, insurers, corporations) and the odd patriotic private citizen to buy up all that new and rollover debt.  This means a trillion+ dollars a year will go into buying low yielding Treasury debt rather than into equities or research or capital expenditures or or or.


If GDP grows by a half trillion annually but it takes twice as much annually, or one trillion, to buy up the new Treasury debt (new plus rollover debt)...what the hell are we talking about???  The amount of money moving in the economy would continue collapsing?  So, below is a quick review that foreigners (with dollar surplus'), nor the Fed, nor a fading Social Security surplus are recycling dollars back into US Treasury's.


Who Owns America's Debt...& Who's Going to Keep Buying It
The chart below outlines who has owned America's Treasury debt, by period, from 2001 until present (November, 2016).  The largest holder of US debt are foreigners, followed by the US public (again...comprised of US based insurers, pensions, banks, and private citizens), the Social Security driven Intragovernmental holdings, and finally the Federal Reserve.

Below, the total net issuance, by period, and who purchased the Treasury debt during each period.  The massive surge in new debt from '08 through '14 was primarily purchased by foreigners and the Federal Reserve.

However, in the above, you may notice that since the Fed ceased QE at year end 2014, foreigners have also entirely ceased buying US Treasury debt and indeed have been net selling despite surging Treasury issuance.


Below, total foreign purchasing, per period and by whom...first the BRICS ceased buying as of 2011 (China poured 50% of it's trade dollar trade surplus into Treasury's from 2000 until July 2011...the debt ceiling debate...and China hasn't purchased a single net new Treasury since).  The China and BRICS cease in buying was offset by a surge from the BLICS nations (Belgium, Luxembourg, Ireland, Cayman Islands, Switzerland).  But since the end of QE...foreigners have no interest in buying the surging stock of US debt.

Below, what this purchasing looks like as a percentage of total debt issued by the Treasury.

Lastly, if we focus solely on who purchased the marketable debt as a percentage, by period...we realize there is no buyer but us Americans supposedly recycling trillions in still near record low yielding debt.

Finally, the Donald driven surge in new issuance must be purchased by primary dealers.  However what happens in the secondary market with the continuing abandonment of foreign holdings (and Federal Reserve balance sheet normalization...insert polite, knowing giggle here) should be of YUUGE concern.  In short, absent foreigners, Intragovernmental surplus', or pure Fed monetization, either the US Public will go bankrupt buying this low yielding debt or the rates will rise and the US government will essentially go bankrupt printing currency (new debt) solely to pay old debt.


Why Regardless Clinton or Trump, The next 8 Years Will Be The Worst Economic Period In US History
Regardless who was chosen as president for the next two terms, 80% of the population growth in the US will come from 65+yr/olds.  This is the inverse from Bill Clinton's presidency which was the benefactor of the strongest demographic and population changes with 85% of the growth coming from the working age population.  In short, as population growth among the young peaked in the 80's, (and has slowed to a crawl), the Fed has been dropping rates all along to incent the decelerating growth among the young to spend more...but the population growth to consume(r) our way out of this debt bubble is never coming.
Below, the reversing make-up of population growth from the peak under Clinton to the upcoming bottom under President Trump (particularly in the second term).  And all these numbers assume continued current levels of immigration...if that slows (or a Trump deportation occurs), the numbers of young will be even further reduced.

Below (focusing on the 0-4yr/old US population headwaters) what the Census Bureau's '08 estimate looked like, what the current '14 estimate looks like, and what the likely '16 revision to population growth should look like based on all incoming data.  And these massive downgrades since 2008 to population growth absolutely undercut present and future demand.
This isn't a blip or "transitory" change but likely a half century or more secular shift.  And to be clear, economic growth is all about a growing consumer base...it doesn't matter if you have 327 million or 7.3 billion in total...growth is only determined by the change in consumers annually and their ability to consume (income/savings/access to credit).  When this population growth numerator begins declining (essentially now)...the growth equation (and support of the existing system leverage) fails.


What all this portends for real estate...HERE or HERE.


What About the Big World Beyond America?
Unfortunately (fortunately?) for the US, the advanced and developing world are much worse off (below).  The peak growth in the annual combined working age population (15-64yr/olds) among the 35 wealthy OECD nations, China, Brazil, and Russia has collapsed since its 1981 peak.  The annual growth in the working age population among these nations has fallen from +29 million a year to just +1 million in 2016...but from here on, the working age population will be declining every year.  Declining buyers vs. surging sellers among these nations are plain to see ever since.  These nations make up almost 3/4's of all global demand for oil and exports in general.  Their combined working age populations will shrink every year from here on (surely for decades and perhaps far longer).  Global demand for nearly everything is set to suffer.
Still not convinced?  The chart below shows what world population looks like with Africa removed (or ex-Africa) according to the UN!  The global population of under 45yr/olds that matter economically (and are capable of child birth) have peaked.  And global demand has peaked with them.  Nearly all ex-Africa population growth from here forward is the 45+yr/old population living far longer (particularly among the 65+yr/old population living on fixed incomes, no incomes, or solely on unfunded social security style incomes).

Conclusion
America and the globe face an imminent collapse in demand that even central banks, NIRP, monetization schemes, tax cuts nor infrastructure spending won't likely be able to paper over any longer (but not before they literally try everything and anything in quick cascading fashion).  A systemic collapse is likely dead ahead...and I'm quite sure Hillary would have done nothing but pour gasoline on the fire...and this seems true for Trump as well.  America and the globe need a restructuring (also known as a bankruptcy) and Trump is honestly the king of bankruptcy...perhaps he'll take the highly unpopular action and do what he's actually good at...and use a bankruptcy to reset and restore balance to the system (but I won't hold my breath).


If I've got the plan (or lack there-of) right, then right now is a very good time to rethink this one???  If you are curious why all this is happening, it is outlined domestically HERE and globally HERE or HERE.

24 comments:

  1. Here is an article that looks at one of the main reasons why the global economy will remain stagnant:

    http://viableopposition.blogspot.ca/2015/11/total-factor-productivity-innovation.html

    The impact of near zero interest rates has been relatively insignificant.

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  2. I have for some time heard of this notion and need for a Global reset on debt. Could you further this thesis and postulate how countries would look financially on the other side of such an event, assuming war was not part of the equation. What would a debt wipe across the board do and how would it then calculate into post wipe currency valuations?

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    1. Hi Anon - that is a very big question. Wiping out the debt is essential but every debt is also someone's asset, on the flip side. But the basis for capitalism (if that is the model we chose to go forward) is respect for capital...a finite resource that must be employed with care. ZIRP and monetization are antithetical to capitalism. Forcing average people to buy stocks or RE to avoid the scourge of currency devaluation is current Fed / Gov policy...and these highly risky assets have the average man (alongside institutional buyers) living on pins and needles hoping the bubble doesn't pop. But to re-engage the Millennials and future generations the system must respect money and create opportunity...not simply try to maintain the unsustainable.

      The bubble will pop, one way or another, and how the world looks after the pop is simply guesswork. Still, we should look to emphasize the foundation for the future which respects hard work, savings, and gives those willing to make the effort the opportunity to succeed. Unfortunately, at present the system is entirely premised on maintaining a system falsely premised on perpetual growth. A new system based upon the new little to zero (to potentially contracting) reality we face must be recognized without the legacy issue of unrepayable debt and unfunded obligations.

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  3. Very good article, thank you for that. As you rightly say, the mostly likely path forward is monetization (likely under a different name). Japan has been on that road for as long as I care to remember and there is still no obvious catalyst to change course. Is this not likely to be the way forward for the US and Europe as well? What is there to suggest that the ponzi will have to collapse in the foreseeable future?

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    1. Hey Toomas - great question and no easy answer. However, I looked at that same question in the linked article. http://econimica.blogspot.com/2016/10/3-variables1-big-problemzero-good.html

      Glad to hear your thoughts.
      Chris

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  4. I'm not familiar with your Blog, my daughter sent me a link as we discuss these things from time to time.

    Forgive me for picking, but I think the story is better told by the "Total Credit" statistic (TCMDO at the St Louis FED FRED site) after you plot TCMDO you can add GDP and see how far we are falling behind. It is total credit that will sink us.

    Further, as far as bankruptcy goes, understand that we have over $200 trillion in unfunded liabilities (present value, mostly Social Security, Medicare, Medicaid, and pensions both private and public). Defaulting on these obligations will cause more than a little disruption to the social fabric, but we have no way to pay.

    It is much worse than you depict.

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    1. Hi Anon - I agree. I did the charts w/ TCMDO as well but decided to go with the Federal debt version for the sake of simplicity. Also, Federal debt is not like private debt...it is the worst kind of debt. The kind taken out for political purposes and never with any intention of repayment.

      As far as your $200 trillion number...in my own research I came to a $100 trillion. But whether $50 trillion or $200 trillion, the impact on guiding present and future Federal Reserve and Federal Government policies is the same. Trying to sustain an unsustainable legacy of fundamentally flawed promises. Change isn't easy and nobody can say if we can do it without falling apart and turning to one another's throats (again)...but one way or another, we will change. For mine and your kids sake, I'd like to see us try our best to avoid worst case scenarios.

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  5. The day of reckoning is now visible on the horizon. What is left to loot by the predators?

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    1. Repatriating the overseas profits of US corporations is one of the last levers still to be pulled...my guess is Trump will pull that one quickly.

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  6. Thanks for the article Charles. Question:
    Are you expecting a stock market decline of some sort before the Fed starts to monetize debt again? if so how much of a decline would they allow before they panic? Thanks

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  7. Chris ... I have been working on a project that I think you could be find very interesting. This is the first time I ran across your work and I like your style. I also love to hear your input. The work is being edited as we speak since English is not my first language. Is there an email address I can contact you at? Thanks.

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    1. Hi Un - you can e-mail me at hamilchr@gmail.com

      BTW - what is your native language? I lived in Asia for 5 years and Europe for 2 yrs...but now call Portland, Or home.

      Cheers
      Chris

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    2. I will send you an email shortly. Thank you.

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  8. Thanks for the article Charles. Question:
    Are you expecting a stock market decline of some sort before the Fed starts to monetize debt again? if so how much of a decline would they allow before they panic? Thanks

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    1. Hey fdoarzola - my guess here is no better than yours. This is a political question and what motivates the Fed to act or defer action is way beyond my paygrade, particularly around a change in the Presidency. My guess is the real problems are in the bond markets and very likely also soon to come in the RE market. I've consistently held the position the equity market is the easiest to maintain and I don't expect any significant market crash or free market re-pricing...but that's just my opinion and you know what they say about opinions, everybody's got one.

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  9. Thanks! I really liked your article. I hope you are following OurFiniteWorld.com. I, too, am "Using the same publicly available government and private input data. . . yet finding an entirely different set of outputs reflecting an alternate and unvarnished reality." I am an actuary, so am aware of the population issue. The big thing I am writing about is limits of a finite world. We encounter diminishing returns in extracting any kind of resource. This makes us less and less efficient at extracting these resources and putting them to use. We end up with more and more overhead, and more debt, in order to produce anything. Wages do not rise at the same time costs do. The workers who get squeezed out are the ones at the bottom of the wage hierarchy.

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    1. Hi Gail - I do read OurFiniteWorld, thanks for your site. It has really helped advance my thoughts. There are so many cross currents all interacting that it really requires multiple perspectives to try and put together a cohesive narrative. Thanks for your thoughts.

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  10. I wonder what the effects of increasing automation will have on this issue. Automated burger machines already exist. Law programs that replace lawyers are coming on line (law lends itself to a yes/no or black/white interpretation, especially the contract law variety). Mass production of consumer goods is another example where robots could replace the missing due to demographics worker. This sustains the GDP metric but substitutes the issue: How is the swag distributed?

    A marketplace is where goods/services are exchanged for other goods/services. What does the unemployed burger flipper, lawyer, taxi driver or manufacturing worker have to exchange with zero income from their automated profession?

    In the past, in America, entrepreneurs would start small businesses that could take up the slack of idle hands. Government regulation (meddling) is killing the small business, the new ideas, the next big thing. Taking the automation idea to the logical extreme do we end up with stores stuffed with new items that no one can afford to buy? And exactly which corporations will still be in business (and paying taxes) if there is infinite demand for their product but no means for the consumer to pay for it?

    With the heaviest possible sarcasm I just can't wait to see what the folks in Washington come up with for a solution.

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    1. Hi Anon - you are describing the elephant in the room...how can we consistently do more with less (automation, robots, technology, computerization, innovation, outsourcing, etc.) while we simultaneously need ever greater consumption. These contradictory streams of lower quantity, quality, distribution of income vs. required greater consumer base is the issue of our times.

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    2. Great presentation. Chart 1 is clearly marked in Billions and mentions "Growth". It would be nice if Charts 2 and 3 mentioned "Billions" and "Change".

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    3. Anon - charts 2 and 3 updated with billions $'s...I think the change is covered by denotation that #'s are annual. Thanks for keeping me straight.

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  11. Hi Chris, I fully respect your work. Particularly your comment on multiple perspectives. One such perspective is viewing money / currency / debt as a complex / simple method of control.

    Holding multiple perspectives in your head, whilst trying to explain them is difficult. You are doing an excellent job of providing a coherent view of economics whilst understanding the stuff I struggle to relate. Thank you

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  12. Chris - As always, thank your for your effort in compiling and logically organizing this information. Your narrative is strong and somewhat frightening.

    I would appreciate a reading list. Both books and websites/blog frequently visited. Just finished "The Fourth Turning" by Strauss and Howe and it fits right in with your narrative. Winter is here and dues must be paid. What's your take on generational theory and the cyclical nature of generations?

    Thanks!

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    1. Hi Anon - thanks for reading. Unfortunately I don't have (or make) the time to read much anymore. So I'm probably pretty ill suited to answer your question. However, glad to hear your thoughts.

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