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April 24, 2015

Recession Watch: QE Stimulated Nothing But Debt

By Bill Bonner, Bonner & Partners

Too Many Geezers
So far, we’ve proposed two reasons why the 21st century has been such a dud …
First … the developed nations are cursed with too many geezers. We have nothing against old people (especially as we hope to be one ourselves all too soon). But old people do not build a new economy; young people do. And today, there are not enough young people to power the kind of economic growth we’ve gotten used to.
Second… rules, regulations, subsidies, laws and orders now protect established financial interests against upstart competitors. Businesses get older along with the population, as government creeps over more and more of the economy.
The feds use monopoly force to prevent competition and reward today’s voters and capital owners. The baby born in 2015 finds himself subject to debts, obligations and restrictions that were meant to benefit his grandparents. Today, we give you another reason for the flop that is the 21st century. As you will see, they are all related…

Pages in the Federal Register. There was a brief reprieve from over-regulation in the Reagan era, but shortly thereafter the regulatory State went into action again at full blast. Capitalism is slowly but surely asphyxiated, and with it any chance to escape the debt trap is dying with it (chart source: the George Washington University regulatory studies center) – click to enlarge.
Caveat Creditor
We begin with this report from Fox Business:
Mortgage finance giant Fannie Mae just debuted its new “Home Path Ready Buyer Program,” which lets first-time home buyers get up to a 3% rebate of a home’s purchase price if they buy a Fannie Mae property, so long as they complete an online home buyer education course which costs $75.
The new Home Path Ready Buyer Program, as described by Fannie Mae, could create $4,500 in savings on a $150,000 home for first-time buyers (defined as borrowers who have not owned a home in the prior three years). In addition to the 3% rebate, Fannie Mae will refund the cost of the home buyer education course. […]
This new program comes after Melvin Watt, director of the Federal Housing Finance Agency, announced last December that Fannie Mae and Freddie Mac would soon start buying mortgage securities backed by 30-year loans with just 3% down payments, which banks largely halted delivering two years ago, instead demanding 20% down.”
That’s right: We’re back to 3% down payments, rebated. And we’re back to the feds (Fannie Mae is a government entity) encouraging people to load themselves down with mortgage debt. “Stimulus,” is what they call it. “A debt trap” is what it really is.
Housing is essentially a form of consumption – of lifestyle enhancement – instead of capital enhancement. And consumption debt has become so weighty that it drags the entire world economy down. Even the International Monetary Fund says so. Here’s Ambrose Evans-Pritchard in British newspaper The Telegraph:
“The International Monetary Fund has sounded the alarm on the exorbitant levels of debt across the world, this time literally. The IMF’s World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China’s workforce is shrinking by three million a year.
The report warned of a “persistent reduction” in the global growth rate since the Great Recession of 2008-2009, with no sign yet of a return to normal. “Lower potential growth will make it more difficult to reduce high public and private debt ratios,” it said.
Christine Lagarde, the Fund’s managing director, calls it the “New Mediocre.” […]
The world has been drawn deeper into a Faustian Pact.
Total public and private debt levels have reached a record 275% of GDP in rich countries, and 175% in emerging markets. Both are up 30 points since the Lehman crisis.
Nobody knows for sure whether this is benign, or how it will end. The haunting fear for the lords of global finance at IMF headquarters this year is that it may never be repaid. Caveat Creditor.”


Gross public debt ratios with a likely overoptimistic estimate. So far nothing indicates that public debt will grow at a slower pace than GDP, especially not in the developed world. When the current bubble bursts, we will see another giant lurch higher in debt ratios. Quite possibly the final one prior to the death of the current monetary system (chart source: IMF World Economic Outlook)  – click to enlarge.
The Root Cause of the Global Slump
Mediocre? Not at all: Mediocrity would be a big improvement. What we’ve got here is awfulness. Debt doesn’t only slow GDP growth. It pushes it into reverse. That is what we’ve seen so far in the 21st century. The typical American has less money to spend today than he had in 1999. The century has set him back.
Here is Lacy Hunt and Van Hoisington of Hoisington Investment Management: 
“Over the more than two thousand years of economic history, a clear record emerges regarding the relationship between the level of indebtedness of a nation and its resultant pace of economic activity.
The once flourishing and powerful Mesopotamian, Roman and Bourbon dynasties, as well as the British Empire, ultimately lost their great economic vigor due to the inability to prosper under crushing debt levels.
In his famous paper “Of Public Finance” (1752) David Hume, the man some consider to have been the intellectual leader of the Enlightenment, wrote about the debt problems of Mesopotamia and Rome. The contemporary scholar Niall Ferguson of Harvard University also described the over-indebted conditions in all four countries mentioned above.”
Since 1940, real per capita GDP in the US grew by 2.5% a year. That’s mediocre. But since the 21st century began, real per capita growth has averaged only 1% a year. That’s downright awful. Hunt and Hoisington explain why: 
“The reason for the remarkably slow expansion over the past decade and a half has to do with the accumulation of too much debt. Numerous studies indicate that when total indebtedness in the economy reaches certain critical levels there is a deleterious impact on real per capita growth.
Those important over-indebtedness levels (roughly 275% of GDP) were crossed in the late 1990s, which is the root cause for the underperformance of the economy in this latest expansion.”

Nominal GDP since 1948. Once debt levels began to explode in the wake of Nixon’s gold default, economic growth rates almost immediately faltered. This should surprise no-one, but looking at the arguments forwarded by modern-day policy markers and their claque of statist advisors, they are either completely clueless or they are lying to cover their behinds (chart source: Hoisington Q1 2015 report) – click to enlarge.
Non-farm business productivity is rising at the slowest rate in 50 years. And the velocity of money – the speed at which each unit of currency changes hands and a key component of inflation – has fallen to the lowest level in half a century. Why?
Because of the declining marginal utility of debt. When there is little debt, you can add cash and credit to a system and get a boost. The money circulates. The economy revs up. But the more you add, the greater the burden of debt becomes… and the less of a boost you get from it.
Finally, you’ve ballooned the Fed’s balance sheet to $4.5 trillion and you’re getting a measly 1% per capita GDP growth in return. And then… as in the first quarter of this year… the growth falls to near zero. All the “stimulus” since 2000 was a scam. It stimulated nothing but more debt – which slows the rate of real growth.

Total credit market debt vs. GDP. It is often said that “additional debt buys less and less growth”, but that is actually the wrong way to look at it. In reality, credit expansion from thin air actively destroys capital. As long as there is a market economy, there will still be some wealth-generating activities that allow growth to continue, but at a much lower level than would otherwise be the case. The manipulation of the money stock and interest rates distorts relative prices and thereby falsifies economic calculation. Capital malinvestment and ultimately capital consumption are the inevitable result – click to enlarge. 
Charts by: St. Louis Federal Reserve Research, George Washington University Regulatory Studies Center, Hoisington report, IMF; Image captions by PT 
Courtesy Bill Bonner, Bonner & Partners via Acting-Man
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