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 become 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.


fischersAs Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went downhill quickly” (his other grandfather drowned in a bowl of cheerios). A similar fate may await the larded up US economy.


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.


Debt Subsistence

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.


1-corporate-debtUS non-financial corporate debt – up and away! The problem is, when it does decline, it usually feels like the world is about to end. This is the result of the unholy trinity of fiat money, central banking and a fractionally reserved banking system – click to enlarge.


With today’s elastic funny money, economic growth is dependent upon greater and greater issuance of debt to subsist.  Still, central bankers and their cohorts at the treasury haven’t eradicated the business cycle.  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 counter-intuitive way, even greater issuance of debt – in the form of fiscal stimulus – is needed to keep the debt from piling up even more.

For in a twisted way, backing off on new debt issuance, and the resulting subsequent economic drop off, actually causes debt ratios to increase.  This, of course, is the Keynesian argument against austerity.


Doomed to 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 to 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.


2-debt-to-gdp-ratioUS public debt to GDP ratio; it currently stands at about 105%. Why not higher? The calculation is based on nominal GDP, since the debt is reckoned in nominal terms as well. Still, this is the above the level that has historically been associated with economic stagnation (and eventually, worse) – click to enlarge.


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.


Charts by: St. Louis Federal Raserve Research


Chart and image captions by PT




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2 Responses to “Doomed to Failure”

  • “With today’s elastic funny money, economic growth is dependent upon greater and greater issuance of debt to subsist.”

    That “elastic funny money” is the United States Legal Tender Money. It is what the U.S.G. owes in final payment of its debts and it is what the U.S. Banking System legally owes to all of the deposit account holders, either upon demand or over time. And the U.S.G. owns the legal tender money.

    What is not U.S. Legal Tender Money, is the asset backed, debt based, PRIVATE credit generated be the Fed and the U.S. Banking System.

    What we’re currently suffering is a lack of debt free legal tender money in the economic system to drive economic growth. In its stead, we have the Fed and bankster’s debt based private credit, which only exists as someone else’s debt and requires going into debt in order for it to come into existence.

    Legal Tender Status

    MONEY (or the lack thereof)

  • Kreditanstalt:

    I remain curious as to how The Fed – or anyone else – can calculate “growth” statistics and rates WITHOUT taking into account, and deducting, the totality of the ongoing money & credit expansion…

    Can REAL growth occur at all in such an environment? It’s a hall of mirrors…

    I rather suspect that, when that expansion is netted out, many or most people’s “jobs”, most corporate expansion and many business ventures will be found to be mere “misallocations of capital”.

    There hasn’t been any “growth” in REAL terms or in terms of PRODUCTIVITY for many, many years.

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