SEMI-MONTHLY FISCAL/MONETARY UPDATE – TRULY SHOCKING!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TRULY SHOCKING !

THE CONTEXT

Senate leader, Everett Dirksen, who died in 1969, has been quoted as saying: “A billion here, a billion there, pretty soon you’re talking about real money.” While a 1969 dollar is worth something like $0.15 today, the trillions (1,000x a billion) that are thrown around today dwarf the relatively modest 85% loss of purchasing power over the last fifty years, and are “really big money”.

It’s hard to relate to the order of magnitude of a trillion but here’s one way. Lebron James makes $40M per year, a great deal of money, but a number we can understand. The question is: “How many years will it take Lebron to earn $1 trillion.” – The answer is……TWENTY  FIVE THOUSAND YEARS. That’s a long time😊 because a trillion dollars is a great deal of money.

Looking at the $26 trillion of US accumulated debt, without considering unfunded entitlements: If we somehow should start generating $500B per year of surplus, it would take 52 years to pay off the debt. The problem is: since 1981, with all the economic ups and downs, there have been only four out of forty that were surplus years, the last three under Bill Clinton and the first under GW Bush (before 9/11 and the two wars) and the total surplus was $762B. You can judge for yourself, especially in these days and times, the likelihood of paying off any material portion of the debt.

I know, I know: we don’t have to pay off the debt, we just have to grow the debt slower than the economy, and keep interest rates low enough to afford the annual interest expense. When you hear Steve Mnuchin and Larry Kudlow and Fed Chairman Powell and regional Fed Presidents and politicians talking about “growing” out of the debt, the discussion below puts that possibility to rest.

THE DEBT DRAGS ON THE GROWTH

The accumulated debt is a big deal, and we show (again) the decline in annual GDP as the debt piles up. Judge for yourself how fast the economy (worldwide) will grow, considering the shocking buildup of debt. If you don’t consider a $864 BILLION DEFICIT in the MONTH OF JUNE shocking, then we have nothing to talk about. The operating deficit for the fiscal year ending 9/30, projected before the pandemic to be something like $1.2T, is $2.7 trillion through June, no doubt on the way to something like $4T.

WHERE IS THE DEBT?

The world is living on the edge, at the personal level (with hardly any savings), corporate and governmental levels. The following charts provide a vivid picture. Corporate debt is more than 300 basis points higher than during the financial crisis of ’08-’09. The total nonfinancial debt surged to a record of 259.7% of GDP in Q1’20 and undoubtedly higher today, was already 11.4 points higher than in 2009.

Another way to look at the effect of debt on GDP is to look at the marginal revenue growth, or incremental GDP in the quarter following the reported debt. The diminishing returns are clear, as shown in the following chart which shows GDP Per Dollar of Total domestic Nonfinancial Debt (which excludes off balance sheet liabilities such as leases and unfunded pension liabilities).

THE MARGINAL RETURN, CLEARLY DIMINISHING !

The marginal return, shown at about .38x in Q1’20, is now about $0.13 in the trailing four quarters ending June.  This is less than half of the $0.26 generated in the four quarters preceding the recession that started in late 2008. Any addict will tell you that It takes a continuously higher “hit” to maintain the (financial) “high”.

WHERE’S THE TIPPING POINT ?

The higher debt inevitably ushers in a period of higher current economic growth, but at the expense of future growth. Research, as brilliantly documented by Reinhart and Rogoff in This Time is Different, indicate that adverse consequences start to surface at Gross Debt equal to 67% of GDP. The US, comfortably over 100%, as well as most of the world’s major economies, are already well into the danger zone.

THE BOTTOM LINE

We will be succinct: Sequential growth, to be sure. Organic sustainable growth, not on your life !

Roger Lipton