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

By   Follow Me on Twitter     Message Richard Clark     Permalink
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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.

 

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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.  

 

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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.

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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.

 

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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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