The political class in America, either via misguided economic policies or a deliberate attempt to hide the true condition of the country, has put us here. They will continue to employ whatever policies they believe will keep things going for a while longer. The tragic ending has been cast. Economics cannot trump mathematics.
That according to this article at Monty Pelerin’s World.
The Federal Reserve Bank of St. Louis, otherwise known as FRED, produces a lot of interesting and useful graphs on a regular basis. One such graph shows the all of the private and public sector accumulated debt (Total Credit Market Debt Owed or TCMOD). Pelerin presents this graph under the heading “Apocalypse In One Picture”.
The blue line is TCMDO and the red line is GDP. Here is what Pelerin has to say about this graph:
The relationships in this graph are terrifying! Debt is shown relative to GDP. GDP growth has been one-third the growth in debt for the period. That is, the economy required $3 of debt to produce $1 more in real GDP. In recent years diminishing returns to debt required $6 of debt to increase GDP a $1. Whatever the benefits of debt, they have clearly diminished, almost to zero. Debt expansion has gone exponential in order to salvage the weak growth in GDP. (Color added)
Let those words sink in, my friends. We have reached the point where additional borrowing and/or printing has little discernible effect. So, you might say that all that is needed is government fiscal and monetary policies that will promote much higher GDP. Pelerin has another graph showing the trend in our GDP. Take a look. (Ckick on the graph to enlarge.)
So, as the private and public sectors continue to borrow more and more, they are realizing less and less bang for their borrowed buck. And, this declining GDP trend has been going on since about 1965.
Pelerin asks: “How much longer can these trends continue and what happens at the end? ” No one knows. But, Pelerin suggests that there are two things that are known:
- So long as borrowing increases faster than GDP, the ability to repay diminishes. That has been occurring for more than forty years and the differential growth rates have widened dramatically in recent years.
- Not borrowing at this pace would likely have decreased reported GDP dramatically. While that may have been a proper economic response, it is now politically impossible (or highly unlikely).
I believe Pelerin is right. We and the rest of the so-called developed world have passed the tipping point. We are all in a Catch-22 situation. Borrowing more only reduces and draws out the pain, while borrowing less increases the pain. (GDP would be even less.) Europe has been learning that lesson in spades. Although no one knows when the party will be over or what the consequences will be, it should be clear that the party will end and the consequences will be terrible.
For those of you in my age bracket, we can only hope our pensions and Social Security last as long as we do. (For those who can a friend recommends this “Survival” blog: http://www.survivalblog.com/) For our children and grandchildren, we need to encourage them to get the skill sets that will give them the bet shot at being in the upper 20% income bracket, because the bottom 80% are going to be sucking wind, in my opinion.
Well, that’s what I’m thinking. What are your thoughts?