Some very interesting thoughts on the economy

Four articles have caught my eye over the past few days.  Each contains a worthwhile insight into our present economic situation.

The first, from Reuters, points out that US economic growth over the past few years has relied almost exclusively on expanding the national debt.

U.S. growth appears to be based “exclusively” on government, corporate and mortgage debt and the economy would have contracted if the United States had not added trillions in debt, Jeffrey Gundlach, chief executive of DoubleLine Capital, said in an investor webcast on Tuesday.

“Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased,” said Gundlach. “One thing everybody seems to miss when they look at these GDP numbers ... they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt - government debt, also corporate debt and even now some growth in mortgage debt.”

If the U.S. Treasury had avoided increasing its debt then nominal GDP would have been negative in three of the last five years...

. . .

Against this debt backdrop and financial markets “addicted to Federal Reserve stimulus,” these are “very, very dangerous times” for the next U.S. recession, Gundlach, who oversees more than $130 billion in assets at DoubleLine Capital, said.

There's more at the link.

I've written often enough about debt in these pages to make the point clear:  economic expansion based on debt is a fool's paradise, and must inevitably collapse sooner or later.  I suspect we're on the "sooner" end of that equation right now.

The other three articles come from the always interesting Charles Hugh Smith.  In the first, he points out that fraud is becoming normalized and institutionalized in our economy.

I am indebted to Manoj Samanta for the insightful concept the commoditization of fraud. The first step in the commoditization of fraud is to normalize fraud as Business as Usual (BAU) to the point that it's no longer viewed as "wrong," destructive or an aberration of evil-doers but as an accepted way to maximize gain and offload risk onto others.

The last step in the process is to institutionalize fraud within central banking and government policies.

How is selling shares in a money-losing corporation at outlandish valuations not the commoditization of fraud?

. . .

How is private equity loading companies up with debt as a means of paying outlandish dividends to themselves not commoditized fraud? How is paying dividends with debt rather than earnings not fraud? The net result of this fraud is the debt-burdened company eventually defaults on its debt, defrauding the investors who were suckered into the scam.

. . .

How is understating inflation so Social Security retirees get near-zero cost of living adjustments as real-world inflation pushes 7% not normalized, institutionalized fraud? We all understand the motivation for this institutionalized fraud: to limit the increasing cost of Social Security and mask the erosion of household income's purchasing power.

Again, more at the link.

Those are very good questions:  and I entirely agree with Mr. Smith - those are excellent examples of institutionalized fraud.  I've watched leveraged buyouts of companies by companies such as Bain Capital, etc. for years.  In almost every case, once they've stripped the companies of assets and burdened them with debt - all paid to themselves as the investors, of course - they cut them loose and allow them to sink.  In my book, that's not even fraud so much as legalized daylight robbery!  (It also makes me question the sanctimonious political discourse of Mitt Romney, founding partner of Bain Capital, who's currently a US Senator.  If he could be that ruthless and money-grabbing in business, what's he doing behind the scenes as a Senator?  I'd love to know!)

Next, Mr. Smith talks about technology and financialization transforming the economy.

... the speed with which technology is transforming the economy is increasing: there is no golden era to return to. The economy they long for (strong unions, full employment, rising wages, declining inequality, political bipartisanship, financial stability and security, etc.) has already slid into the dustbin of history.

They are equally blind to the reality that the central state they revere as the "solution" to financialization is itself the source of wealth/power asymmetry and the enforcer of Big Tech and Big Finance domination.

Proponents of technology implicitly assume that financialization's skims and scams have no impact on technology's golden promise of glorious advances which both enrich the few who own the technology and free the many to enjoy robots doing their work and endless entertainment (for a modest monthly fee, of course).

They are largely blind to the inconvenient reality that replacing tens of millions of workers with robots and software means there is no longer a mass-consumption economy for all the technological wonders, as the supposed solution--Universal Basic Income (UBI)--can't provide either paid work or enough income for the millions who will be receiving UBI subsistence to borrow or spend enough to keep the consumer economy afloat.

Financialization's solution--creating more credit / debt-- simply insures that the UBI recipients will be devoting much of their subsistence income to debt service rather than tech toys.

More at the link.

What this means, of course, is that since the broad mass of the population - including you and I - is shut out of both the technological giants and the financialization of markets, we're the ones who are going to be left in the dust.

Finally, Mr. Smith points out that "Technology Is Not Just Disruptive, It's Disastrously Deflationary".

While AI (artificial intelligence) garners the headlines, the next wave of disruptive technologies extend far beyond AI: as the chart of technologies rapidly being adopted shows, this wave includes new materials and processes as well as the "usual suspects" of machine learning, natural language processing, data mining and so on.

While many voices seek to assure us these technologies won't displace human workers, the reality is cutting labor inputs is the core driver. What few pundits seem to understand (perhaps because they've never experienced a truly competitive market?) is that the rush to incorporate these technologies into existing enterprises is deflationary not just to prices but to profits.

Reducing labor inputs and improving productivity of capital and the remaining labor force is not going to generate profits if competitors can access the same tools and processes. The race isn't to maximize profits, it's to survive the inevitable deflationary spiral in prices as competitors are forced to pass along cost savings to customers to retain market share.

. . .

Everyone counting on trillions in tech profits is overlooking the inconvenient reality of the S-Curve for cheap credit, cheap energy and cheap labor--the three drivers of global expansion. Once credit dries up or becomes more expensive, once cheap energy is only a memory (or future fantasy) and once employment sags under the pressure to reduce labor inputs, the ranks of those with the earnings or credit to buy, buy, buy will be thinned.

Stagnant wages can only be supplemented with borrowed money until the costs of servicing the debt (interest) eats the borrower's budget. At that point, lenders will have to face the unpalatable truth that any additional loan will end in default, a process that will also collapse the entire unsustainable mountain of debt the household is struggling to service.

More at the link.

I strongly urge you to read all four articles, and ask yourself very sincerely:  where am I on this economic continuum?  Am I on top of the heap, or struggling in the middle, or left in the dust at the bottom?  Very few of us are at the top . . . and the rest of us are going to find all these factors combining against us in the very near future.

I believe the only solution is what I've suggested before:  exercise financial discipline, get out of debt as far as possible, and live within our means.  Anything less is setting ourselves up for failure.

Peter