March Towards Midnight

The march towards midnight is both stirring and foreboding.  Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom.  Thoughts of imminent mortality haunt each bite.

 

doomsday1Tic-toc, tic-toc…

 

As far as the economy’s concerned, there’s no stopping its march towards midnight.  The witching hour’s rapidly approaching.  We intend to savor each moment and make the best of it.

We also watch and listen for signs and clues of what will happen next.  One such inkling came recently from Bank of America-Merrill Lynch head of U.S. equity and quantitative strategy Savita Subramanian:

 

“We are seven years into a full-fledged, all out, central bankers doing everything they can to stimulate demand. We looked at all of these indicators that have been pretty good at forecasting recessions and we extrapolated that if they follow the current trends they’re on, we’re going to hit a recession sometime in the second half of next year.”

 

More Unpleasant than the Great Depression

Of course, by the time you actually know you’re in a recession the economy has already been in decline for six months.  Remember, the technical indicator of a recession is two consecutive quarters of negative economic growth as measured by gross domestic product (GDP).

If we hit a recession sometime in the second half of next year, as Subramanian forecasts, does that mean we enter the recession during the first quarter of 2017?

 

1-gdp-growthAnnualized quarterly real GDP growth has been trending down for decades, as government intervention in the economy has steadily increased and capital is consumed ever faster. Note this is based on official data that actually leave a lot to be desired – click to enlarge.

 

If this is indeed so, then the midnight bells will ring in the new President on January 20, 2017.  No doubt, this will be a dark day for the United States.  Moreover, whoever the next President is, they’ll be welcomed with the greatest economic and financial mess the country’s ever known.

What we mean is, we fear we’re approaching an episode of American history that will be far more unpleasant, and of much greater duration, than the Great Depression.  On top of that, there ain’t a thing the next President, the Fed, the Treasury, or anyone else can do to stop it.

Certainly, all the fiscal stimulus and monetary madness executed since 2008 was able to suspend the Great Recession.  But it did nothing to correct the economy’s fundamental imbalances.  To the contrary, these schemes provoked mass misallocation of capital and resources, and ridiculous asset price distortions.

These schemes also floated up the government debt berg and severely compromised the Fed’s ability to suspend the next financial crisis and economic shock.  Still that doesn’t mean the central planners won’t try something more…

 

Meet Your New Stimulus Allocation Czar

Earlier this week, for example, former Treasury Secretary and first-rate gas passer Larry Summers emitted an extended belch on CNBC.  According to Summers, interest rates typically come down 500 basis points to contain a recession.  Unfortunately, interest rates are already too low to fight off a recession.

 

National Economic Council Director Larry Summers talks about how progressive energy policies and economic recovery go hand-in-hand Insufferable armchair social engineer Larry Summers. There is no economic problem for which he doesn’t have a fix.

Photo credit: J. Scott Applewhite / AP

 

Said Summers:

 

“Probably sometime in the foreseeable future we’ll have a recession in some major part of the world.  And yet we don’t really have the fuel in the tank to respond. That’s got to be a matter of serious concern … in terms of monetary policy frameworks, a matter of serious concern requiring more use of fiscal policies than we’ve seen so far.”

 

Summers, unquestionably, is laying the groundwork for the next great fiscal debt binge.  Fiscal stimulus, via infrastructure spending, is his supposed panacea.  Perhaps Summers is also carving out his future niche as an appointed stimulus allocation czar.

 

“It’s demand in job creation in the short run.  It’s increased economic capacity in the medium run.  It’s more economic growth that can ultimately improve the budgetary picture and, crucially, it’s the removal of what is a huge differed maintenance liability from our national balance sheet.”

 

larry-1Bureaucrats wasting scarce resources on stuff the opportunity cost of which they cannot possibly determine is going to save the economy! That is essentially the theory of Summers and other Keynesian deficit spenders. It is highly unfortunate that functional economic illiterates of this sort actually do run the world at present. Allow us to point out that neither sound economic theory, nor empirical evidence offer even the tiniest shred of support for their notions (as far as the latter is concerned, just look at Japan). In the end it is always about redistributing wealth to political cronies.

 

In other words, Summers believes that borrowing money to build stuff will somehow allow the economy to grow its way out of debt.  He’s advocating going deeper into debt to reduce the debt.

Naturally, this is the sort of crackpot scheme politician’s love.  It gives them unconditional cover to spend money that doesn’t exist.

In this respect, when the economy slips into free-fall early next year, prepare yourself mentally for Washington to go big.  The last time around they eclipsed the $1 trillion deficit.  This time around the deficit will top $2 trillion – or more.

 

2-debt-to-gdp The US federal debt-to-GDP ratio (nominal GDP). No, the economy isn’t going to magically improve when this ratio rises even further –  and this assertion can actually be proved both theoretically and empirically – click to enlarge.

 

This sounds crazy, we know.  But given the scope and trajectory of things over the last eight years, a $2 trillion deficit is a given.  Remember where you read it first.

 

Charts by St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

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