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Title: Is The U.S. Economy Really Growing? (No)
Source:
realinvestmentadvice
URL Source: http://realinvestmentadvice.com/is-the-u-s-economy-really-growing/
Published: Mar 17, 2018
Author: Peter Cook
Post Date: 2018-03-17 21:49:33 by Hondo68
Keywords: John Maynard Keynes, debt/GDP ratio, will only get worse
Views: 7500
Comments: 58
Most people are aware that GDP growth has been lower than expected in the aftermath of the Global Financial Crisis of 2008 (GFC). For example, real GDP growth for the past decade has been closer to 1.5% than the 3% experienced in the 50 years prior to 2008. As a result of the combination of slow economic growth and deficit spending, most people are also aware that the debt/GDP ratio has been rising. However, what most people don’t know is that, over the past ten years, the dollar amount of cumulative government deficit spending exceeded the dollar amount of GDP growth. Put another way, in the absence of deficit spending, GDP growth would have been less than zero for the past decade. Could that be true? Let’s begin with a shocking chart that confirms the statements above, and begins to answer the question. The black line shows the difference between quarterly GDP growth and the quarterly increase in Treasury debt outstanding (TDO). When the black line is above zero (red dotted line), the dollar amount is GDP is growing faster than the increase in TDO. From 1971 to 2008, the amount of GDP typically grew at a faster rate than the increase in TDO, which is why the black line is generally above the red dotted line. Chart 1 During the 1971-2008 period, inflation, budget deficits, and trade deficits varied widely, meaning that the relationship between GDP growth and TDO was stable even in the face of changes in other economic variables. Regardless of those changing economic variables, the US economy tended to grow at a pace faster than TDO for four decades. The only interruptions to the pattern occurred during recessions of the early 1980s, early 1990s, and early 2000s when GDP fell while budget deficits did not. The pattern of GDP growth exceeding TDO changed after 2008, which is why the black line is consistently below the red dotted line after 2008. A change in a previously-stable relationship is known as a “regime change.” Focusing first on 2008-2012, the increase in TDO far exceeded GDP growth, due to an unprecedented amount of deficit spending compared to historical norms. Focusing next on 2013-2017, the blue line has been closer to the red dotted line, meaning that the dollar amount of GDP growth was roughly equal to TDO. If the pattern of the past was in effect, the black line should have been far above the red dotted line for most of the entire period of 2009-2017, because it would be expected that a recovering economy would have produced an excess of GDP growth over TDO. But that didn’t happen. This article will not speculate on why there was a regime change. Instead, this article is focused strictly on identifying that a regime change occurred, and that few people recognize the importance of the regime change, which is probably why it persists. Taking a quick detour into the simple math of GDP accounting, the level of GDP is calculated by adding up all forms of spending: GDP = C + I + G + X In the equation above, C is consumer spending; I is investment spending by corporations; G is government spending; and X is net exports (because the US has become such a heavy net importer, X has been a subtraction from GDP since 2000). For context, at the end of 2017, the level of US GDP was $19.74 trillion, per the Bureau of Economic Analysis (BEA). Of that $19.74 trillion, the Congressional Budget Office (CBO) calculated that the US government spent $3.98 trillion, all of which counts toward GDP. In 2017 the government borrowed $516 billion, meaning that the government spent more than it received via taxes and other sources. The main insight in understanding how the government calculates GDP is that all government spending counts as a positive for GDP, regardless of whether that spending is financed by tax collections or issuing debt. Because deficit spending is additive in the calculation of GDP, it makes sense to compare the amount of deficit spending to the amount of GDP growth produced each year. The first four columns in the table below show the annual GDP, the annual dollar change of GDP, the total amount of Treasury debt outstanding (TDO) and the annual dollar change of TDO. Comparing the second and fourth columns, it is easy to see that the annual increases in TDO regularly exceed the increases in GDP. Chart 2 The final column to the right shows the increase in TDO as a percentage of the annual change in GDP growth. When the ratio is greater than 100%, the increase in TDO is responsible for more than 100% of annual GDP growth. Reinforcing the message of Chart 1, the annual increase in TDO exceeded annual GDP growth in each of the years from 2008-2016. The only year in which annual GDP growth was greater than the increase in TDO was in 2017, possibly due to the debt ceiling caps, which have now been lifted. The cumulative figures are even more disturbing. From 2008-2017, GDP grew by $5.051 trillion, from $14.55 trillion to $19.74 trillion. During that same period, the increase in TDO totaled $11.26 trillion. In other words, for each dollar of deficit spending, the economy grew by less than 50 cents. Or, put another way, had the federal government not borrowed and spent the $11.263 trillion, GDP today would be significantly smaller than it is. It is possible to transform Chart 1, which shows annual changes in TDO and GDP from 1970-2017, into Chart 3 below, which shows the cumulative difference between the growth of TDO and GDP over the entire period from 1970-2017. The graph below clearly shows the abrupt regime change that occurred in the aftermath of the GFC. A period in which growth in GDP growth exceeded increases in TDO has been replaced by a period in which increases in TDO exceeded GDP growth. Chart 3 Unfortunately, extending the analysis forward tells us the problem will only get worse. Chart 4 Over the entire period from 2008 to 2021, the increase in TDO will exceed GDP growth by $7.531 trillion ($15.843 trillion of TDO compared to $8.312 trillion of GDP growth). While most people would accept that deficit spending is required for short periods to offset economic disturbances, even John Maynard Keynes wouldn’t expect it to become the norm. Nor would he expect that a dollar of deficit spending would produce less than a dollar of GDP growth. The purpose of this article is to clarify the changing relationship between the dollar amounts of GDP growth and budget deficits, which are funded by TDO. If indeed GDP growth has become reliant on budget deficits post-2008, there are many implications for investment policies across all asset classes. For example, might poor organic growth in the private sector explain the unexpectedly-low inflation environment and historically-low capital investment? If so, what are the implications for stocks and bonds? Also, government policy should acknowledge the regime change and adapt policies accordingly. If massive deficit spending is required to produce a “positive” sign for GDP growth, is it possible that the private sector of the economy is not growing but shrinking? Is the private sector’s health now completely reliant on continued government deficits? If so, is there a limit to the government’s ability to run deficits by issuing bonds? If a dollar of increase in debt leads to less than a dollar of GDP growth, should the US continue to borrow? Should the Fed raise rates because of increased fiscal stimulus if the link between deficit spending, GDP growth, and inflation has experienced a regime change? Can any economic theory explain what is going on? These questions will be addressed in upcoming articles. 
Investment and Policy Implications
Conclusions
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Begin Trace Mode for Comment # 40.
#1. To: hondo68 (#0)
And in other news, the chocolate ration has been increased from 45 to 28 grams per week. Citizens take note.
Lol Sky is falling! It’s funny how people bitch when someone is actually trying to fix the economy with out breaking the economy, it’s okay to keep pushing progressive programs but the moment someone starts cutting it’s either not enough or to much!
Hillary in jail yet? Nyuck, Nyuck. https://www.google.com/search? q=trump+trillion+dollar+infrastructure
Session refuses to deal with her. It’s one of the reasons Trump is irritated at session. Deep state has deep roots. Have you know any one person do as much damage as trump to the deep state? This is just his first year! I’m more impressed with trump everyday.
Roots that were supposed to be... "Gone in the first hour" https://youtu.be/zb6-xz-geH4? t=10m27s His entire campaign was dramatic talking point buzzwords and bullshyte the pink haired poodles at Cambridge Analicktics pulled out of the arse of Social Media - and crafted into an image corresponding to what that data told him how to look cool for the demographic he was targeting. Took 8 years of BS from BuSh to figure out the same thing.
You nuts? BTW Trump has done more in 1 year than all the good both bush's did in 12 years. You are being grifted by the powers that be to dump Trump so they can have a pure socialist in there. Watch what you ask for because you may just get it. This crap of all my way politics or nothing is getting old. Buck up! This is the best we could begin to ask for and get. MSM has been revealed to show who they really are. "We" always knew there were fractions in the MSM that got to promote what they wanted but Trump has shown the whole America who they really are. Trump has even outed his own party members. Now its up to everyone to do their part of knocking out the bad plays one by one. BTW You have to stop the train before you can turn it around. One election will not stop the train but at least we have someone applying the breaks since President Reagan and before him was President Eisenhower. So in my whole life time we have had only 2 none socialist running the show!
yada yada. And the chocolate ration has been raised from 45 to 28. Ask his FORMER economic adviser what he thinks of (D)onnys super duper tariff plan. FAIL.
Ask his FORMER economic adviser what he thinks of (D)onnys super duper tariff plan. FAIL. The same idiots that would rather crash the ecomny to save the rich? Please for the average person he has been a blessing!!!!!!!!!!! I have more work than I can deal with. Last year I started turning down work for the first time in 20 years! Yes Im freaking happy and so are those in the middle class with me. BTW Tariffs are probably what he is using to renegotiate crappy one-side trade deals the rich put forth to kill the middle class.
Whose going to end up paying the tariff, super genius?
When you have an income tax and one sided free trade the work gets screwed. So the real question is why would you have an income base system with no tariffs?
"work" that all out with (D)rumpf's fanbase of union thugs did ya? Please tell the class(es) how collectivized "labor" was responsible for off shoring much of manufacturing in the first place?
Not a union man and never have been but they are Americans who pay taxes. Why not address the problem with one sided trade and income tax based system?
Trade is one sided today because manufacturing in the USA became too expensive. Organized, Marxist, "workers" - were significantly responsible for that. "FROM EACH ACCORDING TO THEIR ABILITY - TO EACH ACCORDING TO THEIR NEED" Tariffs are just another feeble mechanism for "achieving" that under the collectivized authority of the tyrannical, foam finger waving, majority.
No one side trade is because a bunch of rich fat cats figured out they could make a killing using cheap slave labor from foreign lands. Then when American workers took the financial hit and adapted to this the rich fat cats brought in cheap labor from foreign lands to work as slaves here to kill the American workers. Tariffs are the only means one has to deal with one side so called free trade agreements while having an income tax based system. Do you even grasp why you can not have income tax base system and free trade??? Get rid of the income tax base system or live with tariffs!
Haven't heard of any auto "worker" union strikes lately. Gee wonder why.
DOn't care. Like I said not a union guy and never have been. What I am is an American. What I do know is one sided free trade with an income tax base system will only destroy America. This is evident. Is you blind hate for Unions(which I despise too) so great you are willing to destroy America all together? I hate communist/Socialist. Its not fair in anyway to the American worker to be hammered by high taxes both local, state and federal then have foreign products shipped in and sold who pay zero tax while everything the American work produces is taxed at nearly 50%. Its a receipt for disaster that we cannot recover from. How about address this the real issue?
Uhuh. That would the "Low Information" feature of the Poodle Herd at work. Good luck with that bait and switch thing. Oops!
Why do you run from the question? If you think tariffs are bad(which they really are for long term use) then why have double whammy of income tax based system and so called free trade at the same time? All it will do is make foreign products much cheaper to the point where it puts American business out of business. So American workers are supporting foreign products by paying their tax burden too! Why is this a hard subject to grasp?
This may come as a shock to you - but we had an income tax before organized labor and the leftist EPA drove manufacturing off shore. Tell me about your "double whammy" when a $500 cell phone costs $2000 - or isn't available at all.
#41. To: VxH (#40)
We had tariffs the first 230 years and were able to buy Alaska! Income tax the last 100 years and free trade about 30plus years. We have to borrow money just to pay the interest on the loans of our national debt. Let see we just about ruined every good job in America in the last 30 years. Yes things are cheaper but half the country can not afford them. We are turning into a two group society. Rich and poor. We are turning into a socialist/communist state of a small group ruling the rest. As for the dow it will have to readjust as it did when free one side trade was enacted with no protection for the American middle class. Big deal the DOW dropped some. We were due for a good drop. BTW only half the country is in the stock market. Again you can not have a income tax based system and one sided free trade. We see what happens when it decimated the middle class. If you want real free trade then get rid of the income tax system and go with a sales tax based system on final product. Maybe if we keep debating it will sink in the damage done and why it did not work unless decimating the middle class was the whole reason for one sided free trade?
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#2. To: VxH (#1)
#11. To: Justified (#2)
It’s funny
#25. To: VxH (#11)
#26. To: Justified (#25)
Deep state has deep roots.
I hate to be the messenger - but folks are going to have to wake up to the fact we got grifted.
Burn us once shame on them, burn us twice shame on who?
#27. To: VxH (#26)
#28. To: Justified (#27)
BTW Trump has done more in 1 year than all the good both bush's did in 12 years.
#29. To: VxH (#28)
yada yada. And the chocolate ration has been raised from 45 to 28.
#30. To: Justified (#29)
#31. To: VxH (#30)
#32. To: Justified (#31)
the work gets screwed.
#33. To: VxH (#32)
#34. To: Justified (#33)
#35. To: VxH (#34)
Trade is one sided today because manufacturing in the USA became too expensive.
#36. To: Justified (#35)
#37. To: VxH (#36)
Haven't heard of any auto "worker" union strikes lately. Gee wonder why.
#38. To: Justified (#37)
DOn't care
#39. To: VxH (#38)
#40. To: Justified (#39)
"Dow closes at 2018 low as trade worries rise"
https://www.marketwatch.com/story/dow-set-for-triple-digit-drop-as-trade-war- fears-trigger-global-rout-2018-03-23
{ golf clap }
Replies to Comment # 40.
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