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Archive for the ‘GDP’ Category

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.

Heh, Someone Gets It (Buiter)

Posted by Karl Denninger

Hattip Zerohedge:  (The original article is here)

Note the structural deficit number.  This is what happens when you allow this to go on for a decade:

Which in turn leads to this:

That red line is actual private demand expressed as the delta (or change) in GDP.

I don’t have accurate debt and GDP numbers on a contemporary basis for the rest of the nations that Buiter cites, and besides, I focus on the United States anyway.

Buiter posits that The Fed could eventually be “forced” to monetize – that is, try to inflate it away.

This is where Buiter and I part company, because it is impossible to inflate out of a mess like this when you have social spending indexed to inflation – and our entitlement programs all are in one form or another, with the most-ridiculous, Medicare, rising at much higher rates than general inflation.

As such attempting to “inflate out” won’t work – it will instead result in Weimar-style hyperinflation which, as it did in Weimer, will inevitably result in political and economic collapse.

Note that Bernanke has said “we cannot grow out of this“; he has (belatedly, but surprisingly) finally “gotten it.”

It would have been nice if he “got it” three years ago, of course.  It might have altered his view on bailing out people and providing artificial support instead of demanding ab-initio not only the legal ability but the legislative mandate to close all of the so-called “too big to fails” and use the funds we have blown to pay off depositors instead.

Yes, that would have resulted in a Depression being “recognized.” 

But we’re in one now, as the above chart shows conclusively, and we have in fact been in one for two years.  There is no evidence we’re going to get out of it either – the only way that can happen is if private final demand replaces the government borrow-and-spend, and for that to happen deficit spending must decline while GDP continues to advance.

When you’re borrowing from $115 to $333 billion a month and pumping it into the economy – that is, from roughly 9% to 30% of GDP – there’s zero evidence that this can or will occur, and in fact despite all the market and media crooners claiming “it’s getting better” the mathematical facts say exactly the opposite – it is in fact getting worse, as government replacement of private final demand with borrowed money is going up, not down.

That recognition of the math is starting to seep into the consciousness of economic analysts at major international banks is an important signpost. 

The next one will be when recognition of the same math starts to poke through the mainstream media – despite strident claims otherwise from Geithner and others. 

Once that second signpost is reached there will no longer be time or opportunity for government to proactively respond.  The market will, at that point, take final and irrevocable control.

If Obama has any intelligence at all he will fire Summers and Geithner immediately and in doing so stick them with responsibility for refusal to deal with the truth, close or break up the too-big-to-fails (via executive order if he can’t get a bill passed immediately – yes, I know that will raise howls of protest but this truly is a national emergency!) and demand reimposition of Glass-Steagall and mark-to-market – right here, right now, forevermore.

The tough choices are never popular, but mathematics doesn’t care about popularity, and as recognition is now seeping into the “mainstream economists” employed by major multinational financial institutions it is simply a matter of time before they ENFORCE austerity and withdraw their support for the markets if it is not forthcoming.

All I can say is “see, I told you so!”

The Wheels On The Bus Go Flying Down The Street

Posted by Karl Denninger

We’re told, of course, that the economy is improving.

The “strongest indicator” that is incessantly pointed to (and which is a part of the “leading economic indicators”) is, of course, stock prices.

But who’s buying stocks and driving their prices higher?

The outperformance of risk assets over the past year suggests investors appear to believe that all credit problems have been solved – but nothing could be further from the truth, says Leigh Skene at Lombard Street Research.

…

Surprisingly, says Mr Skene, surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers.

That’s a problem folks.

In fact, it’s a serious problem.

There are only two possible explanations for this in terms of “theme” – first, that they believe that the authorities will be able to spur people to “lever up” again (exactly how we get into this mess in the first place, and which will inevitably create a bigger bust) or that they are “too big to fail’ and thus can continue to borrow at zero from The Fed and pass these shares back and forth between one another until they can goad those traditional investors to come back in and buy from them at ever higher prices – at which point, of course, the average American is again the bagholder.

Mr. Skene posits (and I agree) that one of these possibilities ultimately means prices “revert to the mean” (ex-leverage), which is very bad, the second, if they succeed, will destroy the average American and their pension and insurance funds.

The actual result of the policies that we’ve seen by nations has not been to “fix” anything.  Indeed, all we’ve done is shift the problem from private parties (who deserve to fail when they screw up) to governments – where failures are far more serious, even catastrophic.  PIMCO’s El-Erian has suggested that:

The Greek debt crisis is now morphing into something much broader. …… The heads of the European Central Bank and IMF have made the trip to Germany that is reminiscent of the Ben Bernanke-Hank Paulson trip to Congress in the midst of the US financial crisis.

Markets are now catching up to the reality of over-burdened public finances in the aftermath of the global financial crisis.

Yeah, like ours (America’s) – shall we once again post this chart?

Again, the reality is this: We have shifted the burden of economic expansion – and maintenance of final demand – from private actors to government.  This is exactly the mistake made in Greece, Portugal, Spain, Ireland and elsewhere. 

The problem with trying to paper over a solvency crisis is that you can’t accomplish it.  Illiquidity and insolvency are two different things; one can be fixed with temporary sources of funds and time, the other has to be absorbed somewhere. 

By shifting these liabilities to governments, the absorption is forced onto the taxpayer.  This means that the taxpayer – and recipient of government services must absorb much higher taxation, much lower service provision (including government salaries, pensions, handouts such as welfare, social programs and similar) or both.

If that adjustment is not immediately made then you get a graph that looks like the above.  Effectively, the nation shifts to attempting to pay for today’s expenses with its credit card, instead of with its tax receipts.

This can go on for some period of time but it cannot go on forever. 

But all of the western governments who got involved in “bailout world” failed to immediately transmit the costs of these bailouts to taxpayers through higher taxes and lower service provision, most likely because they (correctly) deduced that the people would not sit for it, and if they tried to do so there was a very material risk that the people would rise and lynch someone – and it would require luck for those lynchings to be confined to the banksters who had compelled governments to bail them out through their acts of extortion.

Trichet is caught in a nasty box:

Bonds and stocks plunged across Europe in the past week as Chancellor Angela Merkel delayed approving a rescue plan for Greece and Standard & Poor’s downgraded Greece, Portugal and Spain. European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, according to economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.

“Loans are not transfers and loans come at a cost” Trichet said today. Strict conditionality “needs to be given to assure lenders, not only that they will be repaid but also that the borrower will be able to stand on its own feet over a multi- year horizon,” he said.

Remember, Greece was supposed to be a €30 billion problem! 

Suddenly it has transmuted into €600 billion, or twenty times as large?

See what happens when you lie to people folks?  When you try to conceal what’s really going on?

What’s worse is that just as in the US the problem over in Europe is too much debt – and the so-called “solution” is even more loans – that is, more debt!

As I have said for more than three years now you cannot fix a drinking problem with a case of whiskey, nor can you fix a debt problem with more credit – that is, more debt.

To put this all in perspective – despite the claims of Treasury and others in our government – in the 29 days thus far this month Treasury has added $113 billion to the Federal Debt.

Annualized (assuming no additions for the next two days) this is $1.36 trillion “run rate”, or approximately 10% of GDP – still.

Where’s the “private economy” pick-up for final demand we keep being told about?  We’ve had two full years now where approximately 10% of final demand has been filled by government deficit spending, and there is zero evidence that this has fallen off.  For April to post a $113 billion debt addition is outrageous – remember, April is income tax month and is a month that frequently shows surplus for this reason!

In 2008 April ran a $60 billion surplus; in 2007, $9 billion, in 2006 $6 billion, in 2005 $12 billion.  In 2004 there was a $2 billion deficit; 2003 recorded a $395 million surplus; 2002 $21 billion and 2001 $112 billion. 

Point made?  I think so.

Oh, in 2009?  $111 billion of net deficit was recorded in April.

These numbers, unlike the so-called “budget” numbers, are not subject to being gamed.  The Treasury’s actual “debt to the penny” is reported to the public every day.

But for today, it’s “risk on”, at least for the “too big to fails” who can (and have) sucked off the Federal Reserve’s ZIRP and used it to drive “confidence” by pumping stock prices – even if it hasn’t created a single job and government has utterly failed to put the economy in a position where it can support the level of GDP being produced on its own.