Friday, February 16, 2018

How Did America Go Bankrupt? Slowly, At First, Then All At Once!!!

The US federal debt has again been on the move, as of mid-week up to a fresh record of $20.7 trillion.  But, really, without some sort of reference point, what does that mean?

Typically, the metrics of total debt or federal debt divided by GDP (Gross Domestic Product or the total value of goods produced and services provided in the US annually) are used (chart below).  Still, that's a bit ethereal to most folks.
So, I thought I'd make this simpler.  The chart below shows federal debt (red line) versus total full time employees (blue line) since 1970.  Clearly, debt has surged since 2000 and particularly since 2008 versus decelerating net full time jobs growth.  The number of full time employees is economically critical as, generally speaking, only these jobs offer the means to be a home buyer or build savings and wealth in a consumer driven economy.  Part time employment generally offers only subsistence level earnings.
But if we look at the change over those periods highlighted in the chart above, we get a clear picture (chart below).  Full time jobs are being added at a rapidly declining rate while federal debt is surging in the absence of the growth of full time employees.
And if we look at the federal debt added per full time job added (chart below)...broken arrow...broken arrow!!!  That is $1.92 million dollars in new federal debt per net new full time employee since 2008.  Compare that to the $30 thousand per net new full time employee from '70 to '80...or $140 thousand from '80 to '90...and nearly quadruples the $460 thousand per from '00 to '08.  Despite a far larger total population and after ten years of "recovery" since '08, this is likely as good as it gets.  We are likely at or very near the top of this economic cycle.  This pattern is likely to carry forward over the next decade and economic cycle...likely with disastrous results.

The red line in the chart below shows federal debt divided by all those employed full time in America.   The green line shows the disposable personal income (what remains after taxation) divided by those same full time employees.  Federal debt is now growing at nearly twice the pace of the rise in personal income (or the growth in the tax base to service the faster growing debt).
If you are employed full time, as about 127 million Americans are, each of you owe $163 thousand dollars (above and beyond the taxes you are already paying) to square up America's accounts.  You can quadruple or quintuple that debt per employee if we are to account for America's massively unfunded liabilities.  And to gauge your capability to do so, I take total disposable personal income (what remains after taxation from all sources of personal income) and divide by the same 127 million full time employees...on average you each take home $115 thousand dollars (despite the fact that the median household income in America is about $60 thousand...yes, the top earners are skewing the average just a tad bit higher)?!?

The next chart shows how many months of disposable personal income it would take for those full time employees to pay off the debt.  If America were intent on settling its affairs, it would now take 18 months of collecting all income (every cent above and beyond all taxation already being collected) from America's full time employees!  You can up raise the bar to 70 to 90 months to include squaring up the unfunded liabilities.  But of course, that is impossible as is any hope of ever paying off the debt...or even any hope of eventually being capable of servicing the debt.
Curious how things got so out of hand?  Many start with the 3+ decades of Federal Reserve interest rate cuts since 1981 making debt ever cheaper and encouraging Congress (as well as corporations and individuals) to spend ever more absent the willingness to tax the populace for it (and minus the pain of higher interest costs...who doesn't like and who wouldn't take free money?). 

But more broadly, US population growth has been decelerating since 1790 and debt to GDP rising (chart below).  Originally, the combination of a relatively small population, high immigration, and high birth rates meant annual population growth in excess of 3% and relatively low debt to GDP.  Over time, as the population grew, immigration slowed, and birth rates collapsed; US population growth tumbled.  Since 1950 total annual population growth (black line in chart below) has decelerated almost 75% (from 2% to 0.6%) but more critically the annual population growth among the under 65 year old population has essentially ceased (as the yellow line in the chart shows) and more debt has been the resounding "solution".  Massive interest rate cuts to incent debt creation have been substituted for the decelerating organic growth.
As for what drove asset valuations wasn't income nor savings.  The chart below shows record household net worth as a percentage of disposable income (combined stocks, bonds, real estate growing well in advance of income to support those valuations).  Likewise, the savings rate is back at historic lows meaning American's are consuming far too much and setting aside next to nothing for investing or saving (or the next downturn).
So, if it wasn't population growth or jobs growth or income growth or savings that drove the economic rebound or record asset was leverage.  Cheaper debt and more debt.  And that form of wealth disappears in a blink of an eye as the inevitable deleveraging takes place.  So, it was the combination of "financialization", deficit spending, and monetization diluting the income and savings of working folks and simultaneously inflating the returns (and wealth) of asset holders.

Now this administration (like its predecessors) is intent on running large deficits, thanks to tax cuts coupled with fast increasing non-discretionary spending alongside large discretionary spending increases on infrastructure and the military.  Of course, America can technically avoid going "bankrupt" as it can, is, and will continue to digitally print however much "money" is necessary to pay the bills.  But this results in an ever shrinking minority with the spoils and an ever enlarging majority left to pay the price for this policy of ever increasing debt and dilution.

The minority asset owning class with the vast majority of stocks, bonds, and real estate will continue to be rewarded from the ongoing debt creation.  Those considered "blue collar" or "working class" will continue to find their rents are higher, their insurance premiums rising, their children's debt incurred to get an education going through the roof...and their incomes inadequate to pay their bills let alone acquire the fast inflating assets...sadly the vast majority will continue to fall further behind (detailed HERE) unless a very large change is made.

Whether the administrations of the Federal Government, Federal Reserve, and select benefactors on Wall Street (among others) are serially incompetent or (more likely) criminally culpable for abusing their positions and power to benefit a small minority at the expense of the vast majority is a question in need of asking.  If the answer is the latter, criminal action and/or massive claw-backs should be on the table.  At the very least, an entire overhaul is needed to end these centrally engineered boom-bust cycles that are causing ever greater damage.  All this is suggested in attempt to acknowledge economic reality, accept the acutely painful short term rebalancing, and focus on a sustainable long term common good.

For those who find this depressing, all things being relative, America is in better shape than the mess China is now facing (described HERE).  America still has choices; namely accept we are bankrupt (obligations beyond our means to pay them), stop deficit spending and diluting the currency, restructure the economy, and reorganize for the long haul...hard and painful as that may be.  Up to this point, America has come through each time.  I'd like to see that streak continue but it must begin with honesty.

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