The revisions to GDP published this morning have turned to disgustingly nasty one of my favorite charts.  Specifically, this one:

You’ve all seen this a dozen times.  Well, here’s what it looks like with the revised GDP numbers “corrected” in the Excel file:

“Holy Sheeit” doesn’t even begin to describe this.

These are not small changes, but they also mark the desperation of our government to avoid recognition of even a tiny, 2% annualized decrease in GDP!

That’s right folks – “as-reported”, the maximum y/o/y “depression” that garnered the title “Great Recession” was a minuscule 2% decrease in REPORTED nominal GDP.

But look at the policy response.  Oh, and that last dot – it’s estimated, based on the 2Q preliminary GDP numbers (which are almost-certainly too “hot” and the debt numbers (almost-certainly too “cold”.)

In addition the revisions make clear that there was in fact a zero real growth rate in 2006!  There was your warning…. and likely why we had the nice little dump in the market starting in the early part of 2007.

(Revisions only go back to the e/o/y 2006 numbers.)

If you look to the 2003-2007 period for a clue as to how our government will respond, you’re in for a stunner – there will be no material decrease in deficits while economic “recovery” on a nominal scale will be unlikely to go beyond 4% on a reported basis.

At this rate we’re gonna be Greece – and sooner than you think.

Ponzi Ponzi Ponzi!

The Market-Ticker

Ludwig the II of Bavaria is rarely discussed in history class but most would recognize many of his castles especially the one that is replicated in Disneyland (Neuschwanstein Castle).  Ludwig spent money he didn’t have to indulge in his eccentric desire to build opulent castles.  Even wealthy royalty can put their balance sheet into jeopardy if they indulge every whim and wish.  The banking sector for the last decade has allowed many Americans to satisfy nearly every consumer desire they had.  Boats, cars, vacations, clothing, recliners, Jacuzzis, or anything else you can imagine.  Some took this to the extreme and created a massive market that demanded bigger and more extravagant homes even though average Americans were not getting wealthier or earning more money.  How this was accomplished was by allowing massive amounts of debt to accumulate until a crisis imploded the economy.  The credit bubble bursting has forced many into a new life of austerity.  No more Sleeping Beauty castles.

On a GDP percent basis the U.S. isn’t the worst offender but we are up there on the list.  The above list spans out to 2003 (and it only got worse until 2007) and you can already see what big amounts of household debt will do.  Take for example Iceland or Portugal that are now facing major headwinds ahead.  A country cannot go into massive amounts of debt and expect to have a sustainable economy for years moving forward.  It is a short term indulgence that masks deeper rooted problems.  The middle class in America were allowed to think they were all dukes and countesses but when the crisis hit, the banks retreated to protecting only their kings on Wall Street.  This was an economy built on a fairytale.

Part of this naïve belief was pushed by Wall Street and D.C. propaganda.  For decades the idea was that you can spend more than you earn.  This came all the way from the top so it shouldn’t be a surprise that many in the middle class took their signal from their leaders.  What happened?

Source:  Lew Rockwell

The personal savings rate went so low that it went from the double digits in the early 1980s and actually hit a negative percentage not too long ago.  At the same time, the amount of household debt went off the charts.  It is hard to remember that there was a time in our history when debt was actually something to be handled with caution.  In the last decade, the careless risk taking banks did with debt created a massive housing bubble but also created bubbles in the auto industry, student loan market, and other areas that were financed induced.  Industries where banks are heavily involved have somehow turned out to harm the working and middle class of the country.

Many financed their lifestyles through credit cards:

We have dropped from the peak of nearly $1 trillion in credit card debt down to approximately $850 billion in credit card debt.  Yet this contraction didn’t happen because people started paying down debts.  This has occurred through bank write-downs and many of the bailed out banks constricting access to credit cards to the American public.  In a way, this is what should have been done decades ago.  But what is troubling is that banks used this as an excuse and reason for receiving trillions of dollars in U.S. taxpayer money.  The bailout funds were to keep lending going so people could use the funds to live in their debt fantasy.  Well that fantasy has ended for the middle class but banks can continue on pretending and living in their fairytale world where taxpayer money and bailouts are somehow congruent with a free market.  Retail spending has contracted because people no longer have access to the amount of debt that was available only a few years ago.

If you want to see the new royalty in America, just look at the below:

Source:  Institute for Policy Studies

I’ve talked about the distribution of wealth in the U.S. in many articles but the above shows a solid plutocracy is already here.  Wealth is the key issue.  As many people are now finding out simply having a massive home with a jumbo mortgage and a leased foreign car is no sign of wealth.  In fact, that can be taken from you quickly (and it is by the number of foreclosures and repossessions we are witnessing).  But true wealth is actually owning the stock, or share of ownership in companies in the U.S.

“The above chart shows that half of all stock wealth is concentrated with the top 1 percent.  In fact, over 90 percent of Americans in the lower rungs own roughly 9 percent of all the stock wealth.  This is why the stock market is largely a game for the rich and jobs are largely a game for the rest of us.”

We are at a major crossroads for the U.S.  If action isn’t taken soon this massive inequality will dig deeper and the middle class will lose more and more people as the economy knocks people off the treadmill.  If we follow the money, our government, Democrat or Republican is largely bought out by the Wall Street cause.  Money is shifted to the least productive sector of finance at the expense of building real tangible assets that help the majority.  The real fairytale going on today is believing that our government and Wall Street are looking out for the economic good of the entire country.  Ask the 40 million people on food assistance how things are going.  Ask the over 15 million Americans with no job how the economy is progressing.  Let us ask the millions that are being foreclosed on how solid growth is.  For big banks, all is well and this is reflected by their billion dollar profits since they are stealing from taxpayers and gambling on Wall Street.  Not even a Disney fantasy is this outlandish.

My Budget360

By Karl Denninger

Keep up the lying, legislators, about how it’s all “those other guys” fault…..

Yesterday gave me the opportunity to update this chart with an extrapolated forward number for this year through the first six months.

Yeah, tell me it’s all the Republicans’ fault.  Or all the Democrats’.

Nonsense.

Our government refuses to deal with the facts – there is no recovery in the private economy, there has been no recovery, private final demand collapsed in 2008 and has not come back one iota and the Feral Government is LYING – on both sides of the aisle.

You want a stock market crash and economic collapse Mr. Grayson?  Mr. Reid?  Ms. Pelosi?  Mr. McCain?  Mr. Hoyer?  Mr. Issa?  Mr/Ms (Pick a name)?

You’re going to get one and the longer you keep this crap up the worse it’s going to be.

Want to argue with me?  Go ahead and try – argue with the math.  I double-dog-dare you.  Tell me how we can keep doing what we’re doing, and for how long.  How long we can borrow and spend 10, 11, 12% of GDP on an annual basis before those who fund our national credit card say this:

Are you in Congress and the White House so damned arrogant as to think that this can’t or won’t happen?  What are you going to threaten people with?  6,000 nuclear weapons?  For what?  Refusing to fund an ever-spiraling higher Ponzi Scheme?  For how long will that game work?  Can such a threat be effective beyond the mathematical limits of capacity, even if the leaders of said nations want to continue doing so? 

No.

Here’s reality folks: We’ve written checks for 30 years with our political mouths we cannot cash with our producing fingers.  We’ve papered over this with fraud in virtually every nook and cranny of public and private life.  We have allowed producers to depart for lands where effective slavery exists for labor, refusing to enact parity tariffs to put a stop to it.  We have allowed blatant and outrageous theft of our producers’ intellectual property and conferred upon these nations “most-favored nation” trading status.  We have blown serial bubbles in the stock and housing markets and would love to blow another one in “carbon trading”, but all three were and are frauds without foundation in reality – or sustainability. 

Jeff Immelt, GE’s Chief Executive, came out today against the Chinese – and Obama:

He warned that the world’s largest manufacturing company was exploring better prospects elsewhere in resource-rich countries, which did not want to be “colonised” by Chinese investors. “I really worry about China,” Mr Immelt told an audience of top Italian executives in Rome, accusing the Chinese government of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful.”

Of course they don’t.  You slept with Satan and you woke up with a sore butt.  Who’s fault is this, exactly?  A government that’s communist, a workforce that operates under effective slave conditions, a population that has license to steal anything intellectual from anyone without recourse or the rule of law, indeed, a government that has stolen military secrets and warhead designs – when they couldn’t just buy them (as they did during Clinton’s term.)  Suddenly Mr. Immelt shows outrage and shock when the snake does what a snake does – and it was very visibly a snake before he got involved over there? 

Who’s responsible for intentionally sticking one’s hand on a lit BBQ?

There is no “lack of clarity” in the economy.  What has been done is transparent to anyone who cares to look.  The Federal Debt picture is published each and every day and it is clear, convincing, and irrefutable.  The same bluff was run in both Iceland and Greece, and got called twice by the market.  Europe has recognized this and has pledged to stop playing Ponzi (whether they’ll actually do it until cities burn at the hand of angry mobs is another matter, but at least they’re claiming intent.)  We, on the other hand, keep pressing for more and more Ponzi.

I don’t care if people want to talk about austerity – and implement it – or not.  I don’t care if people want cradle-to-grave medical care with the “best” we can offer.  I don’t care if people want to be able to have $100/month cell phones while unemployed, or 99 weeks of unemployment so they don’t have to save for their own tough times, or $40,000 annual tuition and fee costs at universities to learn about “woman’s studies” or “primary education.”

None of what I want, you want, or the government wants has a thing to do with the mathematics of the situation we have before us today and the instabilities we built into the economy over the last 30 years.

In 2000 we had to accept a 10% contraction in GDP, along with a reduction in debt levels in the system to 150-175% of GDP, to get back to some reasonable resemblance of parity.

In 2007 the contraction we had to accept was 20%.

Today, it’s approaching forty percent, and the commensurate reduction in debt in the system – in total - is about 60%.

This means the federal government must shrink in size by that same 60%.

As I said a couple of weeks ago, get the BBQ sauce and pick several sacred cows, because we must size the Federal Government to roughly 15% of a $10 trillion economy, or $1.5 trillion in total.  Here’s the pie chart you need to reduce by sixty percent:

Go ahead and tell me how you’re going to do it.  Or tell me, if you wish, that you’re NOT going to do it, and then extrapolate to how long our creditors will permit that situation to persist, because it is not under our control – it is under theirs.

We are in the beginning stages of a global asset market collapse.

When did the stock market take off?  At the same time the debt Ponzi took off.  The debt Ponzi is now collapsing.  What’s going to keep the stock market from losing all of the “gains” it put on during those years?  Yes, all the way back to early 1980s levels.

Go ahead – make the case that it won’t happen when the leverage capacity disappears – and it is disappearing.  The “establishment” folks know damn well this is in the cards, which is why they’re scrambling to lie, lie and lie some more lest you figure it out and hold them to account.  They’re well-aware that while most of the time the “elites” manage to do just fine there are historical exceptions when extreme imbalances are cranked too far and the arrogance of the elites continues beyond all reason.  Hold a seance and ask Marie Antionette’s ghost about the consequences of such actions and how quickly they can appear.

What you saw in 2008 was the opening act.  2009 and early 2010 was the intermission – the eye of the hurricane when everyone came outside and marveled at the pretty blue sky.

The back half of this Cat 5 storm is far worse as instead of an offshore wind this time we’ll get the onshore wind and a 30′ high storm surge. The wind is starting to pick up.

We either act right now or our choices will be made for us.

Now go watch the pretty Fireworks over the 4th of July weekend – and consider what it’s going to feel like when those start going off in your face in the coming weeks and months.

“Here it comes”

The Market-Ticker

By Karl Denninger

Barring an economic bailout of mammoth proportions, the economy of Spain is completely and totally doomed.  The socialist government of Spain is drowning in debt, unemployment is running rampant and everywhere you turn there are major economic problems.  So will Spain be the next Greece?  No.  When the economy of Spain implodes it is going to be a whole lot worse for the world economy.  The economy of Spain is more than four times the size of the economy of Greece.  Spain accounts for 11.5 percent of eurozone GDP while Greece only accounts for approximately 2.5 percent.  Spain is the 4th largest economy in the 16 nation eurozone and it is the 10th largest economy in the world.  If the economy of Spain fails it will cause a shockwave that will be felt in every corner of the globe.  In fact, there are quite a few analysts that believe if Spain defaults it would ultimately lead to the breakup of the eurozone.

So will the EU step up and bail out Spain?  Well, there are rumors that EU officials have begun work on a bailout package for Spain which is likely to run into the hundreds of billions of dollars, but on Monday the European Commission, the Spanish government and the German government all denied that the European Union was preparing a bailout for the Spanish economy.

Of course we all know that politicians don’t always tell us the truth.

So who knows what is going on over there right now.

But the reality is that the economy of Spain is not going to make it much longer without serious help, and some EU officials are already using apocalyptic language to describe what an economic collapse in Spain would mean.

For example, EU Commission President Jose Manuel Barroso recently warned that democracy could completely collapse in Greece, Spain and Portugal unless urgent action is taken to tackle the burgeoning European debt crisis.

So could democracy actually fail in those nations?

Well, considering the fact that Greece, Spain and Portugal only became democracies in the 1970s, and that all three of those countries have a history of military coups, such a scenario is not that far-fetched.

Without a doubt there would be serious public unrest in those nations if public services collapsed because their governments ran out of money.

So are there signs that the economy of Spain is about to collapse?

Well, yes, there are quite a few of them.

The following are 9 reasons why Spain is a dead economy walking….

#1) Even before this most recent crisis, unemployment in Spain was approaching Great Depression levels.  Spain now has the highest unemployment rate in the entire European Union. More than 20 percent of working age Spaniards were unemployed during the first quarter of 2010.  If people aren’t working they can’t pay taxes and they can’t provide for their families.

#2) In an effort to stimulate the economy, Spain’s socialist government has been spending unprecedented amounts of money and that skyrocketed the government budget deficit to a stunning 11.4 percent of GDP in 2009.  That is completely unsustainable by any definition.   

#3) The total of all public and private debt in Spain has now reached 270 percent of GDP.

#4) The Spanish government has accumulated way more debt than it can possibly handle, and this has forced two international ratings agencies, Fitch and Standard & Poor’s, to lower Spain’s long-term sovereign credit rating.  These downgrades are making it much more expensive for Spain to finance its debt at a time when they simply can’t afford to pay more interest on their debt.

#5) There are 1.6 million unsold properties in Spain.  That is six times the level per capita in the United States.  Considering how bad the U.S. real estate market is, that statistic is incredibly alarming.

#6) The new “green economy” in Spain has been a total flop.  Socialist leaders promised that implementing hardcore restrictions on carbon emissions and forcing the nation over to a “green economy” would result in a flood of “green jobs”.  But that simply did not happen.  In fact, a leaked internal assessment produced by the government of Spain reveals that the “green economy” has been an absolute economic nightmare for that nation.  Energy prices have skyrocketed in Spain and the new “green economy” in that nation has actually lost more than two jobs for every job that it has created.  But Spain so far seems unwilling to undo all of the crazy regulations that they have implemented.

#7) Spain’s national debt is so onerous that they are now caught in a debt spiral where anything they do will harm the economy.  If they cut government expenditures in an effort to get debt under control it will devastate economic growth and crush badly needed tax revenues.  But if the Spanish government keeps borrowing money their credit rating will continue to decline and they will almost certainly default.  The truth is that the Spanish government is caught in a “no win” situation.

#8) But even now the IMF is projecting that the Spanish economy is going nowhere fast.  The International Monetary Fund says there will be no positive GDP growth in Spain until 2011, at which point it will still be below one percent.  As bleak as that forecast is, many analysts believe that it is way too optimistic considering the fact that Spain’s economy declined by about 3.6 percent in 2009 and things are rapidly getting worse.

#9) The Spanish population has gotten used to socialist handouts and they are not going to accept public sector pay cuts, budget cuts to social programs and hefty tax increases easily.  In fact, there is likely to be some very serious social unrest before all of this is said and done.  On May 21st, thousands of public sector workers took to the streets of Spain to protest the government’s austerity plan.  But that was only an appetizer.  Spain’s two main unions are calling for a major one day general strike to protest the government’s planned reforms of the country’s labor market.  The truth is that financial shock therapy does not go down very well in highly socialized nations such as Greece and Spain.  In fact, the austerity measures that Spain has been pressured to implement by the IMF have proven so unpopular that many are now projecting that Spain’s socialist government will be forced to call early elections. 

So what is going to happen in Spain?

The truth is that nobody can predict for sure how things are going to play out over the coming weeks and months.

But what everyone can agree on is that the stakes are incredibly high.

Speaking at the World Economic Forum in Davos, Switzerland, world famous economist Nouriel Roubini put it this way: “If Greece goes under, that’s a problem for the eurozone. If Spain goes under, it’s a disaster.”

But right now the entire population of Spain (along with much of the rest of the world) is completely distracted by the World Cup.  As long as the Spanish team does well, that is likely to keep the Spanish population sedated.  But if the Spanish team gets knocked out of the tournament early that will put the entire Spanish population in a really, really bad mood and that could mean a really chaotic summer for the nation of Spain.

The Economic Collapse

By Karl Denninger

So said Bernanke this morning – more than once.

Oh really Ben?

Bernanke also said:

“Achieving long-term fiscal sustainability will be difficult,” Bernanke said today. “But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.”

And…

Responding to a question, Bernanke said the recovery appears to have made an “important transition” from relying on government support and inventory rebuilding to private demand.

Uh, where?

Note that the fiscal deficit spending never decreased after 2001 – and that it was simply “stepped up” to more than double the 2003-2007 level when this last crisis hit.

Bernanke says that the primary deficit needs to be reduced to ~2%.  Ok, again, how?  We never got there from 2002 onward, so what sort of “credible” plan do you think will be presented to do it now?

To get the deficit down to that figure we would have to increase tax collections (not rates) or cut spending in a combined $1.1 trillion.

It’ll never happen until the “someones” who are loaning us money shred Treasury’s credit card, and when that happens the result will be an instantaneous cut-off of the entitlement tit to which a full 30% of the government has become habituated.

Good luck.

The Market-Ticker

U.S.’s $13 Trillion Debt Poised to Overtake GDP: Chart of Day

June 4 (Bloomberg) — President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.”

The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades.

“Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”

Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.”

Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s.

“The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury,” Boston-based Fuss said. “Do you really want to buy the debt of the biggest issuer?”

To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

Chart Courtesy of ZeroHedge

But, You Sputtered, I’m Just A Hack….

By Karl Denninger

That is, with all my pesky math and charts like this:

Remember that I’ve been preaching for a while that we embedded a roughly $500-600 billion structural deficit into the economy post-2000?  And that now, in response to this recession (and in a refusal to admit that we have been playing credit drunk) we’ve now embedded a roughly 10% structural deficit – three times the former?

Before you consider me a chucklehead for having the temerity to look at the math you might take it up with the BIS - the Bank of International Settlements, or the “bankers’ bank” – which agrees with me:

According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010.

Gee, you mean they looked at the same chart I’ve been preaching from? 

This stuff isn’t hard folks!

Now Einhorn of Greenlight Capital, a rather-well-known hedge fund manager, is sounding off.  He said:

A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs.

Yep.

This is exactly what I’ve been saying now since this mess began and the “response” became clear: Government didn’t “stimulate”, it instead built in structural deficits – just as it did in 2003.

But you can read David’s missive any time you’d like, or the BIS’.

The key question is why would the government take such a step?

Some would claim that it was about trying to exert more control over the economy, as of there is some sort of grand conspiracy extant to take every piece of control you have over your life and transfer it to government.

I’m a bit more realistic in my assessment – and less conspiratorial.

Government did this because it was the only way to avoid having to admit that we have too much debt in the system and thus that the economy must undergo the adjustment necessary to bring private final demand and production into balance.

That’s fancy economic-speak for “you can’t spend more than you make forever, and when you stop, paying down the debt you accumulated will make it hurt more than if you never did the bad things in the first place.”

But government was the one that encouraged all the “bad things.”  Claims of “home ownership for all” and willful blindness while builders, lenders and Real Estate “professionals” all pumped housing prices to the moon – irrespective of whether the only way you could “buy” such a thing was with a fraudulent mortgage. 

In the previous cycle, the marketing and sale of stock in hundreds of companies that never had a chance of turning a profit, being in fact nothing more than a sophisticated and outrageous “pump and dump” scheme with you as the bagholder.

In both cycles people were promised “the best medical science can produce” without concern over ability to pay – either individually or collectively.  We can’t actually provide $1 million in medical care to every person in the nation (such an attempt would generate 3.3 x 10¹⁴ in cost at our current population; that’s 3 followed by 14 zeros, or 330,000,000,000,000 in expense over a lifetime, which is roughly 30% of the entire nation’s GDP on an annualized basis), but in point of fact you can easily run up that sort of bill in the last year of your life – and if you don’t have to demonstrate ability to pay, many people will do exactly that.   We currently spend about 16% of GDP on health care; the “unrestrained demand” level is about twice that, while the actual amount we can afford is roughly 10% of GDP. 

Our expectations and demands with regard to health care are three times sustainable consumption – just as is in housing, where we believe we “deserve” a 3,000 square foot house for a married couple, where the actual level of sustainable demand and consumption is about 1/3rd of that.

In a couple of weeks we’ll be able to reprise one of my other favorite charts, the total debt load in the system, as the new Fed Z1 will be released.  Here’s the previous chart:

All we’ve done is pulled forward future demand with more and more debt, and having reached the endpoint of this game where rates start to ramp precipitously (and having seen it happen in both Iceland and Greece) we can no longer play “a dollop of debt and a smile” with our own fiscal profligacy.

Obama and the rest of the merry band of clowns in Washington DC believe that if they can just prop up the stock market “consumer confidence” will return and people will “feel rich.”  But feeling wealthy and being wealthy are two different things.  You may feel wealthy if you have a nice house, a nice car and a nice boat but you aren’t in fact wealthy unless you have all of those things, plus enough capital to live off for the rest of your life, without any responsibility to pay anyone else on a continual compound forward basis – that is, unless you are without debt.

If we deal with the facts the stock market will decline precipitously, as profits are very sensitive to revenues, which will decline as production comes in line with actual final private demand.  Standards of living will decline too – significantly so.  The 3,000 square foot house for the “middle class” and the idea that one can consume $1 million or more of health care without the ability to pay for it will both disappear.

If we don’t deal with the facts then the stock market will crash, and the austerity we will face will be far worse.  Instead of housing prices reflecting 2-3x annual incomes and the average family of four living in a 1,500 square foot house they will be lucky to live under an overpass.  Half the S&P 500 will be rendered bankrupt by ever-increasing demands for more taxation, which they will try to pass on to consumers – who have no money.  Medical care will be available – with a one year waiting list for critical procedures, rationing by the most-obvious method – you’ll die before your turn comes up.  In the extreme case there could even be a breakdown of critical transportation and food infrastructure in the United States.

I want to be bullish on the future of the nation, but until and unless we get the spending under control, which means telling people what the truth is – not necessarily what they want to hear, along with taking the medicine we have avoided for the last two decades - it simply isn’t in the cards.

GDP Deflator at a Five Decades Low While Income Inequality Is at Record Highs

From this chart sent out this morning by David Rosenberg, we can see that the GDP deflator is at a five decades low.

I tend to believe that the modifications to the inflation measures, including the deflator, that have accumulated by the federal bureaucracy over the past ten years are greatly understating the actual inflation in the economy.

There are very positive benefits for the government to do this. The lower the deflator, the better and higher the real GDP figures will appear. And a low measure of official inflation reduces increases in payments in Social Security and other programs with Cost of Living Adjustments (COLA), including official debt payments on the bonds and the TIPS.

Gold gives the lie to this, which is why it is so hated by financial engineers and statists.

On the other hand, the inequality of income distribution in the US is at level not seen since the 1920′s.

There is some good reason to think that government tax and fiscal policies, as well as the monopolistic makeup and subsidized growth of the Banking sector facilitates this wealth transfer and concentration, which has a highly negative impact on real economic growth.

There will be a change, and the trends will be reversed. How they are reversed and what changes will accompany those reversals are very much open to debate, and divergent historical examples. But these changes almost invariably involve a shift from individualism to statism.

“Those who make peaceful evolution impossible make violent revolution inevitable.”

John F. Kennedy

Change will come if the system remains as unsustainable as it is now. And what gives me a somewhat pessimistic view is that people never seem to learn the lessons of history.

First Quarter 2010 GDP Advance

Posted by Karl Denninger

So the data is out….

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 5.6 percent.

Well, that’s not what the previous quarter was, but it’s also no surprise.

The deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in PCE and a deceleration in imports.

The inventory cycle is about done, residential fixed investment hasn’t turned around at all and in fact is still declining, and state and local government spending is down – they’re out of money!

There are some interesting data points inside the release.  Of note:

• Durables were up big – 11.3%.  Most of this is probably improvement in vehicles, if the reports from the first quarter automakers are to be believed.  Considering that they were in all-on crash mode last year and into the end of 2009, this is good for them – not so good for anything else.

• In domestic private investment the only place we saw gains was in “equipment and software.”  Residential and non-residential structures were both down big, seasonally adjusted (10.9% and 14%, respectively.)  But the CapEx cycle that everyone is counting on for continued expansion is slowing q/o/q; it was up 19% last quarter, and is now up 13.4%.  While that’s a significant positive print if this was a short spurt and is now tapering off we got trouble in the back half of the year.  The jury remains out on this one.

• Net exports were up nicely.  Hint-hint: Policies that strengthen or stabilize the dollar will help this continue – like, for example, abandoning ZIRP!
• Government spending is very interesting.  The Federal government, of course, continues to spend.  But most of the government’s deficit spending isn’t going into direct expenditures – it is instead going into transfer payments and handouts of various sorts, as the total federal spending was up only 1.4%.  State and local spending were down big, as they’re simply out of money.

• Finally, disposable personal income was up just 1.5%.  Where is all the federal borrowing going? 

I’m concerned with these numbers – quite concerned in fact.  The Federal Government borrowed (and presumably spent) $462 billion in excess of tax receipts over the first three months of 2010. 

But PCE – personal consumption expenditures – was up $83 billion and federal spending was up only 3.5 billion. 

Where did the other $375 billion go?

Into a black hole of covering existing obligations, it appears, and the final private demand GDP deficit covered by this is almost exactly 10% (GDP for the quarter is ~3.650 trillion, so $375 billion is roughly 10% of that.)

What does this mean?  It means we’ve not turned the corner on this graph, which was current as of 12/31/2009 (and which I can’t get an accurate read on until the end of this year):

I don’t like it folks.  All the claims of “economic recovery” are in fact claims of “government is propping up 10% of final demand, and that propping up is disappearing into a black hole.”

There’s no evidence in this report that the economy is recovering – that is, that the artificial “borrowed and spent” support the government has been providing for the last two years is being replaced with actual final demand.

The positives in the GDP report are automobiles (strong this quarter) and a positive, but weakening CapEx cycle in business spending. 

But the key item for me in this series, which is evidence that the federal government’s replacement of final private demand is moderating and being picked up by private economic activity, is utterly absent. In fact the influence of those dollars, as shown by the final print compared to last quarter, is waning.

One-sentence summary: The rocket is running out of fuel.

We need this to continue – if it reverses, we’re cooked and fast.  Bernanke needs to raise rates to above that of the ECB.  He may get some help if a few European nations collapse, of course – but if they wind up at zero, we need to be at 1%, and that divergence needs to be established right now.  We do NOT want a skyrocketing dollar, but because we import too much of our raw materials and it is the “value added” that we get to keep, we want cheaper imports of those materials – and we get that by being able to buy them with a stronger buck.  The specific issue here is energy (oil prices); we can’t have oil going back over $100, and the best way to prevent it is to get rid of ZIRP.