There Is No Escape! Economics Can Not Trump Mathematics!

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”.

debt-and-gdp1Quinn

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.)

GDP Long-Term Real GDP Growth

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?

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19 thoughts on “There Is No Escape! Economics Can Not Trump Mathematics!

  1. All those people who reliably voted Democrat because the Democrats guaranteed their public sector pensions will be in for a rude shock. But not to worry. As always, the Republicans will be blamed.

  2. Here is the really scary part…

    Come this Wednesday the BEA is changing the way that GDP is calculated and it will have a dramatic impact.

    According to reports, GDP will -in one fell swoop – be increased by about +3%!! The economy will suddenly look a lot better than it is. Or, depending on your viewpoint, it will look closer to “reality”.

    Not only that, GDP will be recalculated all the way back to when the government started keeping records in 1929 using the new formula!

    I strongly suspected that some of the recessions since WWII will be wiped off the books with just a change in math.

  3. Ok, they have been lying to us for years and we are just now finding this out? Well, guess if you are one of the people that only care about what the score is or have their head up their butt, it would come as a shock. However, to the rest of us, we saw it coming. We will all suffer the same, but at least we knew it was going to happen. Doesn’t make us feel any better, but at least we know we were not wrong, like we were being told.
    As for the kids starting into the “adult world”, they would be better off learning a skill than just getting a piece of paper from a college, a technical degree might be their best bet. As for the rest of us, might want to do what we really want to do, before we cannot afford it. So much for the golden years and an easy retirement. It was not just this Administration that has done us in, but they sure have put us on a fast track to hell, haven’t they?

  4. But the O says the economy is just great…don’t ya know! The graphs are interesting because the second one originating from 1965 = LBJ…. and the other one shows what Carter did to start the trend in the 70’s. Not going to end well no matter how you view this, but we could have told them that when they created the destructive policies. Now they are sucking in the private sector to pay for their socialism…PPP’s. How long til that well runs dry…..

      1. I believe if we survive this administration- historically- this period of time in American history will be known as the dark days.

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