Larded Up and Larded Over
We’ve been waiting for the U.S. economy to reach escape velocity for the last six years. What we mean is we’ve been waiting for the economy to finally becomes self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out. Unfortunately, this may not be possible the way things are going.
In short, the U.S. economy may never reach escape velocity unless it is first allowed to crash. It has been too larded up and larded over with debt for any real sustainable growth to take root. More evidence, to this effect, was revealed this week.
For example, the International Monetary Fund (IMF) anticipates the U.S. economy will expand by just 1.6 percent this year. That’s about one percent less than last year’s estimated growth. In other words, the rate of economic growth in the United States isn’t increasing; rather, it’s decreasing.
According to the IMF, “the slower-than-expected activity comes out of the ongoing oil industry slump, depressed business investment and a persistent surplus in business inventories.” Could this be the twilight of the weakest economic recovery in the post-World War II era? Only time will tell, for sure.
But anyone with an ear to the ground and a nose to the grindstone knows the answer to that question. Business ain’t booming. Moreover, it has become near impossible for corporations to grow their earnings.
Specifically, corporate earnings for S&P 500 companies have declined for five consecutive quarters. That’s quite a slump, indeed. What’s more, over the next several weeks, we’ll discover if third quarter earnings decline for six consecutive quarters.
We suppose if earnings decline for long enough they’ll eventually have to go back up. Still, we seem to think a bigger adjustment will occur before corporations rediscover their footing. In fact, we expect this adjustment to be accompanied by increases in layoffs, company reorganizations, and corporate bankruptcies.
With today’s elastic funny money, economic growth is dependent upon greater and greater issuances of debt to subsist. Still, central bankers and their cohorts at the treasury haven’t eradicated the business cycles. Episodes of economic recession invariably happen, including massive debt pileups and bankruptcies.
Where government finances are concerned, it only takes a moderate growth stall out for budgets to get blown to pieces. The money, remember, has already been allocated. So when tax receipts slide deficits explode.
Then, in a seemingly counterintuitive way, even greater issuances of debt – in the form of fiscal stimulus – are needed to keep the debt from piling up even more. For in a twisted way, backing off on new debt issuances, and the resulting subsequent economic drop off, actually causes the overall debt to increase. This, of course, is the Keynesian argument against austerity.
Doomed for Failure
We don’t like it. We don’t agree with it. We’d prefer an honest and stable money supply, and the impartial discipline it exacts on an economy. But, unfortunately, the world, as it presently exists, is based on a system of dishonest money that robs savers and rewards borrowers.
Obviously, such a devious system is doomed for failure. Once the economy has become so dependent upon stimulus to persist, new stimulus fails to prop up further growth. Like the Ouroboros, the mythical serpent eating its own tail, eventually it consumes itself.
From a pure financial standpoint, the United States is going to hell in a hand bucket. The national debt is clocked at $19.5 trillion. But GDP is just $16.5 trillion.
As noted above, per the IMF, estimated growth for 2016 is 1.6 percent. Yet the estimated budget deficit is 3.3 percent of GDP. In short, debt is increasing. Growth is stagnating. What to make of it?
We like to keep things real simple around here at the Economic Prism. From what we gather, increasing debt and decreasing growth is something that’s called a divergence. Either the economy must rebound or it is slipping and sliding its way back into recession.
By the looks of things, it appears the economy must go backward before it can go forward. Plan accordingly.
[MN Gordon (send him email) is the editor of the Economic Prism. Visit Economic Prism. The Economic Prism is published by Direct Expressions LLC. Subscribe Today to the Economic Prism E-Newsletter at http://www.economicprismletter.com]