Dream on. That should be the admonition to both Wall Street and Washington—neither of which has a remote grasp of the on-going economic deterioration besetting the American economy.
Even as they were explaining away the negative GDP print posted for Q1, these curve-balls did not negate the fact that an alternative growth measure—real final sales of domestic product—embodies the same message. To wit, it came in a -0.6% in Q1, while on a trend basis it signaled that the economic growth rate is getting ever more anemic, posting at just 0.76% per annum since the pre-Covid peak in Q4 2019.
That’s right. Notwithstanding the most massive dose of fiscal and monetary “stimulus” ever imagined, the economic growth rate has slowed to a crawl
In fact, looked at in historic perspective, the trend is downright abysmal. The figures below remove short-term distortions owing to inventory swings, and measure growth trends on a peak-to-peak basis.
Per Annum Growth of Real Final Sales of Domestic Product:
- Q1 1954-Q1 2001: +3.83%;
- Q1 2001-Q4 2007: +2.58%;
- Q4 2007-Q4 2019: +1.66%;
- Q4 2019-Q1 2022: +0.76%
Of course, to hear the mainstream financial press report it, you would never guess at the stagnation embedded in the above figures for recent periods. That’s because Wall Street has become expert at selling a used car twice—explaining away all the setbacks and, instead, opportunistically latching on to short-term deltas that imply strong growth.
Yet the question recurs. If the trend rate of real growth has slipped to the vanishing point during the nine quarters since Q4 2019, then what happened to all those ballyhooed “record” growth rate figures from 2020 and early 2021?
In a word, they did not represent “growth” at all. It was just born-gain GDP, recapturing the giant economic hole ordered by the Virus Patrol during Q2 2020.
Real Final Sales Of Domestic Product, 1954-2022
Meanwhile, the successive rounds of ever greater fiscal and monetary stimulus designed to kindle born-again GDP to fill the recessionary holes and scooch the aggregate economy forward have left an immense (and ever-growing) repository of debt. Currently, total public and private debt in the US economy totals $88 trillion and a record 367% of GDP.
Again, the historic trend is unmistakable. The implicit leverage ratio of the US economy has climbed progressively higher, thereby imposing more and more drag on the rate of economic growth.
Total Public And Private Debt As % Of GDP:
- 1954 Q1: 137%;
- 1971 Q2: 147%;
- 1987 Q2: 222%;
- Q1 2001: 278%;
- Q4 2007: 3.59%;
- Q1 2022: 367%.
Needless to say, the leverage ratio does make a difference when it comes to potential growth. And one way to visualize that is to compute the implied “excess debt” being carried by the macro-economy relative to a historic benchmark consistent with robust and sustained capitalist prosperity.
We believe the 147% ratio recorded on the eve of Nixon’s infamous deed at Camp David in August 1971 is about as close to that kind of benchmark as exists. During the previous century of gold standard money, the nation’s leverage ratio had oscillated closely around the 150% mark through good times and bad, war and peace—even as living standards rose at 2-3% per year on a long-term trend basis.
Accordingly, because the national leverage ratio didn’t remain at the gold standard median after 1971, the amount of “excess debt” being lugged around by the US economy exploded ever higher.
Excess US Debt Relative To The Q2 1971 Leverage Ratio:
- Q2 1971: $0.0 trillion;
- Q2 1987 : $3.5 trillion;
- Q1 2001: $13.3 trillion:
- Q4 2007: $30.9 trillion;
- Q4 2019: $42.5 trillion;
- Q1 2022: $52.3 trillion.
That’s right. Just since the turn of the century, the amount of excess debt being carried by the US economy has risen four-fold—from $13.3 trillion to the current staggering total of $52.3 trillion.
Is there any wonder, therefore, that the trend economic growth rate has deteriorated to a snail’s pace? Or that the apparent prosperity of recent decades was actually just pulled forward in time by mortgaging the future?
Total Leverage Ratio Of The US Economy, 1954-2022
The trick fostering this massive rise of growth-retarding leverage is shown in the chart below. To wit, even as the debt-to-income ratio climbed steadily higher, progressively deeper central bank repression of interest rates caused the interest-to-debt ratio to steadily fall.
In the case of the household sector, for example, the interest carry cost peaked at 11.7% of total debt outstanding in 1984 and then fell steadily for the next 36 years, reaching a low of 4.2% in 2020.
It goes without saying, therefore, that plunging interest rates were the lubricant that permitted the household borrowing spree to reach it current apogee at $18.0 trillion. That is, the Fed gave households false signals about the carry cost of debt, causing them to borrow at far more aggressive rates than would have occurred under a regime of honest money.
Household Interest Paid As % Of Household Debt, 1971-2020
For want of doubt, the chart below compares household interest expense to wage and salary income. Again, although debt levels were rising robustly, the interest burden on incomes fell steadily after the 2008 financial crisis.
Not surprisingly, household’s did not materially de-lever during the long recovery from 2009 to 2019. But that leaves them high and dry as the Fed and other central banks are finally forced to normalize interest rates to combat the current inflationary outbreak.
Household Interest As % Of Wage And Salary Income
Needless to say, the Fed has been taken hostage by its own foolish money-printing spree. It has no choice except to drastically and persistently increase interest rates over the next several years in order to bring real interest rates back into some semblance of rationality and sustainability.
Yet the chart below underscores that it has a long way to go. Since the turn of the century the real Federal funds rate has been negative during the preponderant share of time, and now stands at -5.8%. And this chart is based on the 16% trimmed mean CPI which takes the present outliers—soaring energy and food costs—out of the calculation.
In fact, based on the 16% trimmed mean CPI, the Fed funds rate would currently need to be in the 8.5% range in order to reflect even a 2.0% real rate of interest—a level will below its historic norm.
To be sure, rates at that level are not remotely on the radar screen at the Fed or on Wall Street. But if the Fed is to choke off the roaring inflation it has ignited it will eventually have to get there. The alternative would be a start-stop economy in which inflation could become dangerously embedded and self-fueling.
Inflation-Adjusted Federal Funds Rate,1995-2022
The latter is no mere academic possibility. Total labor costs are now escalating rapidly (black bars), having risen from 2.8% versus prior year in Q4 2020 to 5.0% Y/Y in Q1 2022.
At the same time, productivity growth has weakened and remains well below 2.0%, including a likely negative figure for Q1 2022 (not yet published) based on the fact that labor hours grew during the quarter even as real GDP shrunk.
This means, of course, that unit labor costs are heading skyward. And at the end of the day that’s what causes “transitory” inflation to become embedded in a wage-price spiral.
The latter, in turn, requires Volcker-style resolve in the Eccles Building to break.
Alas, there are no Volcker’s anywhere on the scene.
So the Fed will likely stumble around with half measures until it triggers the next recession. And then it will take a bow for generating still another round of “born-again” GDP.
Y/Y Change In Employment Cost Index And Nonfarm Productivity, Q4 2020-Q1 2022
