Sunday, February 4, 2018

America "Needs" More Deficit Spending to Continue "Growing"...But Debt to GDP Needs Austerity to Avoid Disaster

The organic basis of growth has slowed in the US (and the world at large).  The chart below shows the decelerating growth of annual household creation in the US alongside decelerating annual growth of the US population.  The rationale for interest rate cuts and accelerating deficit spending to offset decelerating organic growth and maintain abnormally elevated levels of synthetic "growth" should be plain.

And globally, the chart below details the decelerating annual growth of the under 65yr/old population of the nations that consume 70% of the worlds oil and consume 80% of all exports (OECD, China, Russia, Brazil...also noted is when each nation / groupings under 65yr/old population began declining).  Of note, this groping begins outright shrinking indefinitely beginning in 2019.

Ok, to maintain economic growth with decelerating household and population growth, increasing quantities of deficit spending have been undertaken.  The yellow line in the chart below represents the annual deficit spending as a % of GDP (on a YoY quarterly basis) peaking at nearly 14% in the most recent crisis.  Equally as noteworthy is the relative dearth of deficit spending currently at "only" 3% of GDP.  Also included is the deficit in dollars (black line), the total US gross federal debt (red columns), and the blue line is debt to GDP.  So, short term growth is dependent on ramping federal deficit spending...but this would result in a blow-out for the mid and long term health of the nation with ballooning debt to GDP levels.

But the chart below shows that the year over year change in housing starts (1-unit) has been a very reliable precursor for subsequent change in full time employment.

Housing starts are driven by the combination of deficit spending and direction of interest rates.  In the chart below, when the red line (deficit spending as a % of GDP) is rising and the black line (interest rates) is declining; housing starts boom.  When deficits are decelerating and rates rising; housing starts go bust.  Currently, we are decidedly entering bust mode.

*Deficits represent annual growth in federal debt (as per Treasury), not the CBO or Whitehouse stated deficit.
But the stock market is at record highs...so what gives?  The chart below shows the Wilshire 5000 (representing all US equities actively traded) versus US total disposable personal income (the sum of all sources of income after taxation).  Never has the equity market been more detached from the nations total income... particularly with the savings rate at all time lows.

And how did we get here...interest rate cuts, deficit spending, rising debt to GDP...but there is more.  Monetization.  The yellow line in the chart below is the quantity of digitally conjured "money" that directly entered the "economy".  All $1.6 trillion subsequently leveraged anywhere from 2x's to 10x's...resulting in somewhere between $3.2 to $16 trillion in new "money" chasing the remaining assets.

The chart below shows the Federal Reserves plan (HERE) to unwind QE and assumes banks maintain their current reserves held at the Fed.  However, if the banks determine to increase reserves as the Fed raises rates, the impact on monetization could be far more dramatic, significantly further declining the outstanding quantity of "monetization".

The impact of rising interest rates, decelerating deficits as a % of GDP, and unwinding of QE resulting in the removal of much (or all?) of the outstanding monetization (yellow line)...and best guess is the stock market is heading down over 50%.

So, where is this going???  Best guess in the chart below, putting the next leg down in perspective.

Of course, this will be followed (or pre-empted?) by NIRP enabling the greatest debt creation and monetization in the nations history that will send debt to GDP to Japanese levels.  America is already beyond ever effectively repaying its debt and is just realizing the magnitude of attempting to service the rising interest payments on the massive debt stock.  A further jump in debt threatens what remains of the dollars place as global reserve currency.   Whether the weakened system and currency can absorb another bust and subsequent centrally directed boom is a very good question likely to be tested relatively soon.