Saturday, April 13, 2019

The Signs Of Economic Stagnation Are On The Rise

The main drivers of the economy remain as they have for several years, massive government spending and the expansion of credit to marginal consumers and big business. While small business loans are often hard to get, even small businesses have been able to partake in the flow of easy money by simply leasing equipment rather than taking a loan for a direct purchase. At the end of last year an article titled; "A False Economy Of Fraud Will Usher In A Hard Landing" explored how such actions always lead to problems. A false economy of fraud is created by seizing on a few positive numbers that can be spun and hyped to convince people all is well. In such a situation perception trumps substance.

A New Hospital On Every Corner A Sign Of Fraud
This can be seen in healthcare where we have seen the construction of huge facilities across the country. We may be wowed by these huge expensive new building but on the flip side, it has resulted in the shuttering of many smaller local and rural hospitals and clinic that were adequate to care for patients at a much lower cost. These massive new hospitals that stand as monuments to Obamacare often run far below capacity. Another example is in the oil industry where fracking and drilling for oil reserves with a very short life has created jobs and temporarily lowered energy prices. Both these industries have massively added to America's GDP quarter after quarter.  

On a daily bases, a series of what would have at one time been considered outlandish ideas, such as a war on cash, forgiving debt through a debt jubilee, giving everyone a guaranteed income, and even injecting money into the economic system by dropping it from a helicopter have all found their way into conversations. Such talk generally reserved for times of economic woe and considered as ways to jump-start an economy would not be so up front and center if real concern that at any time a rapid decline in the economy might take place.

Closings Are Having A Huge Economic Impact
 Across America retail stores closings have become so common they often go unnoticed. This has been described as "America's retail apocalypse" or the collapse of brick and mortar. It extends past what many people see as retail but has begun to take a toll on small business in general. Today small business is having its clock cleaned as they are forced to pay higher wages, comply with new government regulations and forced to compete with big businesses backed by Wall Street money. A sea of empty and under-leased buildings that once housed thriving businesses that provided Americans with good paying jobs stand as a monument to how we are hollowing out the economy. 

All this confirms that planners, with little skin in the game, love to overspend the money of others. The truth is, this extends well past healthcare and into housing, the auto sector, Wall Street, and most sectors of our economy. Over the years we have witnessed those in control of the purse strings rotating through the various sectors of our economy. Generally, their dabbling results in doing far more harm than good. for instance, in higher education, we have seen costs soar resulting in a student debt crisis that is crushing the ability of many young people to move forward with their lives. The poison leaking through our economy can also be seen in auto sales where roughly a third of those buying cars are taking out sub-prime loans stretched out far longer than ever before.

While government spending has proven able to stimulate the economy and supplement growth, history shows that over the long run government spending is a poor substitute for the free market in allocating capital to where it is most effective. A large part our perception of a booming economy flows from the low unemployment rate issued by the Bureau of Labor statistics which is based on employees "who did any work for pay or profit" during the week being surveyed, this includes part-time workers who are employed for just one hour a week and those working for low wages. It is important to remember these statistics do not include the large number of Americans who have given up looking or simply chosen not to work in recent years.

Stock Buybacks Drive Markets Higher (click to enlarge)
Low interest rates coupled with easy money pouring into the economy through the expansion of credit tend to create a false economy and the illusion of prosperity that can rapidly vanish. While conservatives and his supporters may try to deny it, much of the Trump economy is an extension of the policies ushered in during the Obama - Bernanke era. Trumponomics may include selective tax-cuts, that go largely unpaid for which add to the deficit, and some deregulation but overall is based on the same easy money policies exercised since 2008.

Proof of just how much this economy relies on the continued flow of cheap money was highlighted when the stock market started to wobble two months ago and President Trump ratcheted up his attacks on Fed Chairman Jerome Powell for"ruining the party. Trump constantly points to the soaring stock market and its oversized influence as a confidence builder as confirmation of his skill in growing the economy and leading us forward. In truth, a flawed tax reform package that benefited the rich by fostering massive stock buybacks coupled with massive deficit spending has allowed the false illusion of prosperity to continue far longer than usual. 

This does not mean the bull market which is long in the truth will not die a sudden death. The speed at which companies such as GM and GE have suddenly pulled back should act as a warning and a reminder of how rapidly "Now Hiring" signs can be pulled from a window. Recent economic numbers show signs that economic stagnation is on the rise and we may be hitting a wall. At some point, the lift from credit expansion based on low-interest rates that has brought future consumption forward and increased speculation will have run its course. When that happens even massive government spending will become ineffective at creating economic momentum.

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  1. I can't say when but one day this Empire will come crumbling down and it will takedown this fraudulent global eCONomy. The signs are disturbing and they are all there for everyone to see. How many will be caught by surprise. I can unequivocally say, not me.

  2. Thanks for the comment! If oyu get a chance please take a look at an article I wrote a few days ago that explores "Trumponomics" in all its glory and finds it to be flawed.

  3. Yes sir, I actually read it when you posted it and it was excellent. However I would like to say that my comment wasn't directed soley at the United States. What you right is not a predicament that affects just the US but every eCONomy on the planet. Our troubles stem from the fact that our Banking, Fiscal and Monetary policies are all based on exponential growth. It's the reason why our debt continues to exponentially balloon. This problem is global as when the inevitable collapse happens, it will take down every economy in the world. Since 2008 we have tried to fix the problem with what got us into the problem in the first place. So our problem is now 8-10x worse than 2008. Hank Paulson in 2008 said if the TBTF were not bailed out the world's economy would come to a grinding halt and Martial Law would have been in place in the US with tanks roaming every major city.

    Without that debt our economy would go into reverse and freefall into a collapse. However because of that exponential debt you also need an exponential population growth to service the current and future debt. It's what's called "infinite growth on a finite planet". The world only has so many resources available but we are operating on the premise that we will never run out of resources. That is the problem.

    Saudi Arabia has admitted that their largest most profitable oil field for decades, The Ghawar field is in decline from 5.8 mb/d to 3.8 mb/d and some oil experts are saying the 3.8 mb/d are actually much lower.

    We are also blowing up this planet with plastics in the ocean, we have ocean dead zones, coral reef die offs, insect and bird die offs, just to name a few. So in other words our money problems are just the tip of the iceberg.

    I hope in the future you might focus on our global conundrum where we are all heading. Besides that I have followed your work for years and you seem to understand what a mess we are all in.

  4. I don't think retail accounts for stagnation, many buy through computer now. Health care is in it's own meritocracy, dressed up nice to make it look good, it's more of a poison pill, where the patients are seen like commodity, or widgets on an assembly or disasembly line. But, that's 20% of GDP. Economy is starting to drift and plane out some. It's big economy it doesn't slow down so quick, ripe with fraught and fraud, years of world reserve currency dominance just makes it easier to hit the reset button every time the foundation crumbles (again).

    1. The MSM spins the "positive" online shopping story, but it's only the cost cutting all businesses do when they're in trouble. People are squeezed by high living costs, and have very little disposable income. So the retail sector has to adapt and try to suvive with diminishing sales.

  5. "A large part our perception of a booming economy flows from the low unemployment rate issued by the Bureau of Labor statistics which is based on employees "who did any work for pay or profit" during the week being surveyed,..."

    And these statistics are utter frauds by the way. I am a skilled IT professional and one in four of my colleagues
    is unemployed at any one time. Real statistics can be found

    Based on what I am seeing "on the street" here in the pacific
    northwest the shadowstats finding are terrifyingly accurate..