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David Stockman: More Reasons to Be Pessimistic About the US Economy

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What follows here, initially, is my synopsis, simplification and interpretation of some remarks by David Stockman.   Following that is my interpretation of some remarks by market analyst Charles Biderman, as reported by economist Mike Whitney.

Stockman says the reason he is so down on the U.S. economy is that it's become super-saturated with debt.     He explains:

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth.   It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression.  

However, by the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth.   And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt in order to grind out $1 of new GDP.

People were taking $25,000 - $50,000 out of their home for the fourth refinancing.   And that's what was keeping the economy going -- it created jobs in restaurants, retail, garden care, and Pilates instruction, all of which jobs were not supportable by way of income from the production of essential goods and services.   Why not?   Because there was a grave shortage of such work!   In other words, people were paying for luxuries with money they had borrowed, which was money that was readily available to them because of the expanding bubble in the ever-inflating prices of real estate -- which of course couldn't last.   (But few people wanted to (or did) think about that at the time.)

In any case, this is what is known as a bubble  

It was simply spending borrowed money to pay others to service you in one way or another.   Problem was, the vast majority of the people who were spending this money did not produce anything of fundamental value for others to purchase.   Instead most of them simply borrowed much if not all of the money they needed.   And the Fed created money out of thin air at an unprecedented pace.

Therefore, even the alleged GDP growth of 1.6% (annual GDP growth over the past decade) is overstating what was really going on in our economy, and encouraged blindness as to what is about to happen.   How so?    Because, when a country's citizens are finally forced to stop borrowing at this tremendous frequency (and amount) of borrowing, the rate of GDP "expansion" inevitably stops as well.

Some point out that the unemployment rate is falling and companies in the Standard & Poor's 500 are making more money than ever.   But that's going to be a very short-term phenomenon.   Why?   Look at the data that really counts:   The 130 +/- thousand jobs created each month over the last 12 years -- which are nowhere near enough to get the real unemployment rate back down to an acceptable 5%.   That's barely enough jobs to provide work for all the new members that join the labor force each month.

Another real measure of the health of our economy is the rate of investment in new plant and equipment.   Yet today there is zero sustained net investment of this kind (in our economy).   The rate of growth since 2000 (in what the Commerce Department calls non-residential fixed investment) has been 0.8% -- hardly measurable.   (Non-residential fixed investment is the money put into office buildings, factories, software and other equipment.)

In other words, this economy is stalled out and stuck

Our 10-year Treasury bonds are yielding about 2% interest, but that's a totally artificial return on investment.   It's purely and simply the result of massive purchases by not only the Fed but all the other central banks of the world.  

What's wrong with that, you might ask.   The answer is that the earnings on a treasury bond don't come out of savings.   It's made-up money.   It's printing press money.   It's money created out of thin air by the Fed.   Understand that when the Fed bought $5 billion worth of US treasury bonds this morning, which it does periodically, it simply creates the $5 billion out of thin air and deposits it in the bank accounts of the several dealers it buy the bonds from.

What are the consequences of that?

The consequences will eventually be horrendous.     Clue:   If you could make the world rich by having all the central banks print unlimited amounts of money, then we would have been making a big mistake for the last several hundred years by expending so much human toil and work.  

How will it all end?

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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What follows next is a clarified and edited exce... by Richard Clark on Friday, Mar 9, 2012 at 2:34:24 PM
Entire article This paragraph... by Richard Clark on Friday, Mar 9, 2012 at 7:14:45 PM
Several years after the Wall Street-ignited crisis... by Richard Clark on Friday, Mar 9, 2012 at 7:18:25 PM
Since 2008 every year has seen net outflow from al... by lila york on Saturday, Mar 10, 2012 at 6:43:40 AM
This report was published on 29 December 2010 .... by Richard Clark on Saturday, Mar 10, 2012 at 8:35:08 AM
u sd ck out Morris Berman's latest called, "Why Am... by Lester Shepherd on Sunday, Mar 11, 2012 at 12:48:44 PM
Thank you Lila York, Richard Clark, David Stockman... by Jerry Ryberg on Saturday, Mar 10, 2012 at 8:12:12 AM
If the political will demanded it, the US governme... by Vernon Huffman on Saturday, Mar 10, 2012 at 8:13:27 PM