"More Debt Won’t Make America Great Again"
by Bill Bonner
POITOU, FRANCE – "Yesterday’s headline news, from Reuters: "U.S. economic growth was a bit stronger than initially thought in the second quarter, notching its best performance in nearly four years, as businesses boosted spending on software and imports declined. Gross domestic product increased at a 4.2 percent annualized rate, the Commerce Department said on Wednesday in its second estimate of GDP growth for the April-June quarter. That was slightly up from the 4.1 percent pace of expansion it reported in July and was the fastest rate since the third quarter of 2014.
But the robust growth in the second quarter is unlikely to be sustained given the one-off drivers such as a $1.5 trillion tax cut package, which provided a jolt to consumer spending after a lackluster first quarter, and a front-loading of soybean exports to China to beat retaliatory trade tariffs."
We stop… and hold our breath. Is the tax cut really working? Is the economy really strong? Should we stop doubting… put on a MAGA hat… and buy the Nasdaq? Then… after a moment… we come to our senses.
Schemes and Hustles: Most of the news/opinions on economics is fraudulent, shallow, or dumb. The “facts” are often made-up nonsense… and the analysis is no deeper than a tweet. In the GDP numbers, for example, what truth do we find? The feds “print” dollars… lend them out at less than the rate of consumer price inflation… and then measure how fast they change hands. What does that tell us?
But the feds don’t stop there. They come up with schemes and hustles… encouraging people to do dumb things. Most of GDP is based on consumer spending. Give consumers more cheap dollars, and GDP will go up. But where does that leave them? Consumer spending measures wealth that is used up… depleted… run-down… and written off – not wealth that is saved and accumulated.
Reducing the returns to savers, the feds encouraged spending and speculation. Savings rates fell to record lows, leaving households with less real wealth. Not content with throwing households down a well, the feds jumped in themselves, too. They spent about 17% of GDP. If they were to take an extra 1% from taxpayers – say, to buy some drones or hire some more TSA agents – at least it would be an honest flimflam. But it would have no immediate effect on GDP. Out of one spender’s pocket and into another’s.
Worse Off: If the feds borrow the money, on the other hand, GDP goes up. (If economies could get richer from government borrowing, there would be a lot more rich economies on the planet. Instead, the biggest borrowers – whose GDPs have been goosed up by deficit spending – are the biggest disasters.) Then, if the feds really want to boost GDP, they cut taxes, too. This increases not only their own spending, but consumer spending as well – both by borrowing more. Consumers – happy to be reunited with their money – spend it… thereby producing more churn.
And now, we have more or less the whole picture: more drones (Pentagon spending went up), more consumer spending (from the tax cut), and 4% GDP growth. Whoopee! “I’ve already made America great again,” tweets POTUS.
But wait… Who will pay back the money the feds borrowed? The same taxpayers who just got a tax cut?The same consumers who just spent the feds’ cheap credit? By the way, these are the same people who now earn the same wages, more or less, as they did when the U.S. president was wearing a sweater and a WIN button.
The average American worker has gotten no increase in real earnings over the last 44 years, and now – as inflation rises – he is actually losing real income. But, lured by the Fed’s low teaser rates, consumers have gone on a borrowing/spending spree. Households owed about $5 trillion in 1998. Now, it’s about $15 trillion. And household debt now sits at 80% of GDP. With the exception of the heady years before the financial crisis, this is the highest level in American history. Adjusted for inflation, debt rose about twice as fast as income. Is that supposed to make Americans richer?
Flying Dollars: And what about government debt? While wages went nowhere, federal debt soared from $1.7 trillion in 1998 to $21 trillion today. Again, compared to economic output, we see that government debt is 105% of GDP. The only time that ratio has been higher was during the 1940s, when the government was borrowing to fight a World War. Even adjusted for inflation, Americans collectively owe about eight times as much today as they did 20 years ago.
So, let’s see… We have some new drones somewhere… and more TSA agents poking through our underwear. Our economy is said to be growing (spinning dollars) at a decent rate. And there are plenty of low-paying, part-time, pick-up jobs available for those who want them. But we (consumers) owe, individually, more money than ever. Thanks to government borrowing, we also owe more jointly than ever before. And our wages are slipping… The dollars fly around… but is anyone better off?"