Debt And Deficits Killing U.S. Economic Prosperity
Lance Roberts | Oct 31, 2012 02:36AM ET
What is really causing the economic malaise that the U.S. faces today? Most economists believe that it is the lack of aggregate demand that is causing the problem which can be rectified by continued deficit spending. The current Administration believes that it is simply the lack of the "rich" not paying their "fair share" and that a redistribution of wealth will solve the issue. Romney believes that his 5-point plan will create 12 million jobs in the near future. All are wrong.
Raising Taxes Ain't Gonna Do It
First of all, as we have discussed in the past, raising taxes and redistributing wealth will impede economic growth. “The Fed And Goldilocks Economic Forecasting” we wrote: “When it comes to the economy the Fed has consistently overstated economic strength. In January of 2011 the Fed was predicting GDP growth for 2011 at 3.7%. Actual real GDP (inflation adjusted) was 1.6% or a negative 56% difference. The estimate at that time for 2012 was almost 4% versus 2.0% currently.
We have been stating repeatedly over the last 2 years that we are in for a low growth economy due to the debt deleveraging, deficits and continued fiscal and monetary policies that are retardants for economic prosperity. The simple fact is that when an economy requires nearly $5 of debt to provide $1 of economic growth the engine of prosperity is broken.
The chart below shows current real GDP as reported by the Bureau of Economic analysis versus that from the Congressional Budget Office which is used by the Administration for budgetary planning.
As you will see, while the CBO expects there to be a strong economic recovery in 2013, which is VERY unlikely to occur given the current recession in Europe and slowdown in China, growth then tapers back off to 2% through 2018. In other words, even the CBO is saying that the economy cannot achieve escape velocity as the drag from debt and deficits continue to retard growth.
The problem that is yet not recognized by the current Administration and mainstream economists is that the excessive deficits and exponential credit creation can no longer be sustained. The process of a “credit contraction” which will continue to occur in fits and starts over a long period of time as consumers, and the government, are ultimately forced to deal with the leverage and deficits.
The good news is that process of "clearing" the market will eventually allow resources to be reallocated back towards more efficient uses and the economy will begin to grow again at more sustainable and organic rates.
Get The News You Want
Today, however, expectations of a return to economic growth rates of the past are most likely just a fairy tale. The past 3 years of stock market returns have been fueled by trillions of dollars of support and direct injections into the financial system - that support is not sustainable in the long run. While the injections have kept the economy from falling into a depression in the short term - the unwinding of that support will suppress economic growth for many years to come.
There is no way to achieve the necessary goals "pain-free." The time to implement austerity measures is when the economy is running a budget surplus and is close to full employment. That time was two Administrations ago when the economy would have slowed but could have absorbed and adjusted to the restrictive measures. However, when things are good, no one wants to "fix what isn't broken". The problem today is that with a high dependency on government support, high unemployment and near record budget deficits implementing austerity measures will only deter future economic growth, which is dependent on the very things that need to be "fixed".
Furthermore, the impact on the psyche of the consumer will continue to be impaired much to the same degree as those that survived the depression era. The mantras for frugality and conservatism are very hard to reverse and have economic consequences. With the economy mired at lower growth rates likewise the stock market, which is ultimately a reflection of the economy and not vice versa, will remain mired at lower rates of growth.
The processes that fueled the economic growth over the last 30 years are now beginning to run in reverse, and when combined with the demographic shifts in the U.S., the impact could be far more immediate and prolonged than the media, economists and analysts are currently expecting. Sacrifices will have to be made, the economic will drag an subpar rates of growth, individuals will be working far into their retirement years and the next generation of Americans will lead a far different life that what the currently retiring generation enjoyed. It is simply a function of the math.
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