Economic Stagnation

October 28, 2016

So we have once again seen official reports about sub-par economic growth. Some are constantly perplexed as to why growth is so weak. I believe it will eventually become more obvious to everyone that debt is one of the major problems causing our current stagnation.

Looking at the above chart, we see GDP growth rates have been getting weaker each decade. The economy used to grow at 7 or 8 %...then 5 or 6%...then 4%...then 3%. Currently. There is only 2% growth. Moreover, after the next recession we will be lucky to see 1% growth as the norm. Follow the trend and we see that the US economy will probably be at 0% economic growth after 2030. To be sure after 2040 we will probably see negative growth as the norm. By the way, the chart of retail sales growth looks the same. This trend has continued regardless of which political party controls the White House or Congress.

Yes, there are lots of things that effect economic growth (i.e. taxes, regulation, debt, trade policy, etc.). But there is one very big factor that no one can easily address. That brings us to our second chart (see below).

Debt has been growing faster the GDP for many decades. Furthermore, debt levels are at record levels. This chart represents total credit market debt. That means my debt plus your debt. It also encompasses Tucson's debt plus Detroit's debt plus company debts, and yes, our U.S National debt. In effect everyone's debt.

To be sure when debt levels are too high, then it is very hard for folks to ramp up their spending (especially with very small pay raises). This is why many bonds in developed countries are paying close to ZERO interest. The bond markets are telling us that there will be NO economic growth for the next couple decades.

Economic growth will NOT get back to the nice healthy levels of 50 or 60 years ago…until all this debt gets purged from the system. That was one of the good things about the 1950s Great Depression. The Great Depression purged all the unproductive debt from society. That is why we had nice growth during the middle of the 20th century.

The Federal Reserve cannot solve this problem. All they do is push more debt into the system. (And we have a tax code that rewards debt and punishes savings). At some point we will figure out that the Fed is part of the problem…not part of the solution. Effectively, the Fed has outlived its usefulness.

No politician in Washington will solve this problem. No politician wants to see this debt collapse while they are at the helm. Every politician we have elected over the last several decades has added to this problem. And in my opinion NONE of the candidates in this election cycle will solve this problem.

We need a leader who will shred the current tax code, eliminate the Fed, slash spending and stop the bailouts. Democrats tax and spend. Republicans borrow and spend. So they won't help us.

This no growth forecast also is ominous for all those pension plans out there that are assuming a 6 or 7% return on funds. Think of what happens if we have 15 years of a flat stock market…while long bonds are returning only 1 or 2%. Sadly, most pension funds will go broke.

I believe after two or three decades of no growth, the Fed and Washington will get more aggressive in creating inflation. The end result will see our once great country look more and more like Argentina. By the year 2080 we may have 40% inflation and 40% unemployment (maybe sooner).

Every empire declines because of: Too much debt...Debasing the currency...Military over-expansion...and too much government intrusion into the economy. It may not happen over-night, but it is a bit depressing to think our grandkids will have a tougher time getting a job or building a business.

(Charts from Federal Reserve)


Gerald Peters teaches logic and philosophy at Pima Community College in Tucson, Arizona. He is also a bookeeper and entrepreneur. 

Peru became the world’s largest producer of silver in 2012.

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