Thursday, January 25, 2018

US Economic "Growth"; Only as Strong as Interest Rate Cuts and Deficit Spending Allows

I have made the case that so goes housing starts (blue columns below), so goes jobs creation and more broadly the US economy.  And so goes interest rates (black line below) and deficit spending (on an annual % change basis of total debt (essentially as a % of GDP), red line below), so goes new housing.  Simply, when deficit spending accelerates and interest rates are declining, America builds new housing and the broader economy hums.  However, debt grows far faster than the resultant economic activity, and debt to GDP soars (yellow line).  Conversely, when deficit spending is decelerating and rates are rising (as they are now), new housing creation decelerates/declines and economic recession is imminent.*When showing the change in deficit spending, I'm showing the year over change in actual federal debt (as per the Treasury), not the White House deficit numbers which do not reflect actual increases to federal debt.

But many people rightly state that federal deficit spending is currently at a half trillion and likely to surge back above a trillion dollars in the near future.  So what am I talking about decelerating deficits???

To help clarify my point when I say deficits are decelerating, the chart below shows total debt (red shaded area), annual federal debt spending in dollars (black line, on a quarterly basis) and annual federal debt spending in % terms (yellow line, also on a quarterly basis).

So the current change in federal debt, on an annual basis, is currently a half trillion dollars and likely set to grow to a trillion plus relatively soon based on demographic changes (slowing SS receipts, larger outlays, Medicare/Medicaid spending, etc.) plus tax cuts reducing tax revenue.  However, it is the correlation of federal debt growth in % terms (yellow line in above chart, representing rate of growth) which seems to have greater impact. As the total debt grows (total debt now essentially equals GDP), the denominator is larger and the resultant debt spending must be that much larger to have the same impact. For example, to have the same impact as the '09 debt binge, a $4+ trillion increase (annually) would be necessary to have the same impact as the $0.2 trillion spent in '83 or the $2.1 trillion spent in '09.

However, in the next "crisis", we should expect a $4 trillion jolt (annual) and perhaps as much as $20 trillion in the next episode of this ongoing "crisis" to achieve an '83 or '09 like stimuli.  But this may not have nearly the impact as previous.  Typically, deficit spending and interest rate cuts have gone hand in hand but with rates having been at zero for nearly a decade before the recent, minor rise...a move to cut rates from anywhere near current levels back to zero will likely have little impact and not be capable of amplifying the deficit spending.  Perhaps significantly greater debt creation will be necessary to have a like impact as that of '83 or '09.  But, of course, the impact on the debt to GDP ratio will be an irrevocable moon shot into Japan style debt to GDP levels.

Perhaps the sanity of an economy built on building new homes for a core population that is now shrinking is highly questionable (chart below)?

And to round it out, the annual growth of the 15-64yr/old US core population versus the Wilshire 5000 (representing the value of all publicly traded US stocks). 

What should already be clear will be obvious for everyone...the federal "debt" being created isn't actually "debt" at all.  It is being created and spent with no intention of ever repaying it and the move back to zero % interest rates (or more likely NIRP) on that "debt" will make clear that it is simply centrally created and centrally directed monetization.  And the resultant wealth is being centrally directed to a shrinking minority of asset holders at the expense of the vast majority.  The founding fathers worst nightmare come true.