America's Sick E-Con: A Picture Worth Thousand Cries For the Optimists

By: Jas Jain | Mon, Jan 24, 2005
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I arrived at the observations and conclusions reported here by accident. I was doing independent research into debt-induced stimulus in the US economy, since 1929, and into real per capita compensation income from employment since 1950. I was struck by the fact that the US economy has become extremely dependent, and increasingly so, upon borrow-and-spend stimulus and bubbles. In the absence of the latter, the US economy would have remained in depression for the past 25 years! By using the hard facts, i.e., economic data, we hope to prove this assertion.

I am sure that most of you have seen a live presentation where a part of the picture, or a graph, is hidden to reveal only a part of the picture, to make a certain point, and then the flap covering the part of the picture is removed to see the whole picture. We will do the same with the help of two graphs, by hiding the part of the picture in the first graph and then showing the whole picture in the second graph.

Fig. 1 shows Per Capita Real Income Growth (PCRIG) in the US for 14 of the past 25 years (data available as of 2004Q3) with the remaining period left blank. As you can see, the graph present a very poor picture of the US economy if you believe that income, or production, is the lifeblood of the economy. As a matter of fact, the average PCRIG is negative (-0.49% per year) for these 14 years. If the US were to have these 14 years as a consecutive period, the US would be in a far worse depression than Japan for the past 14 years.

Figure 1

What is hidden in Fig. 1 are two periods of the largest debt-induced stimuli, excluding the WW II, for which we have data, and the largest stock market bubble in the US history. Let us review the periods of largest stimuli since 1929.

STIMULI AND THEIR AFTERMATH

The years in which the debt-induced stimuli, increase in debt by Federal Govt. and Households combined, exceeded 10% of the GDP are:

1934 10.8%
1935 11.4%
1936 11.1%

1943 36.2%
1944 21.8%
1945 19.8%

1984 10.1%
1985 12.8%
1986 10.4%

2003 11.2%
2004 11.6%

Stimulus During the Great Depression, 1933-1936

The primary form of the stimulus was jobs programs. We don't have the data to arrive at PCRIG, but cumulative real GDP growth during the 3 years of double-digit stimulus, 1934-36, was 36.3%, or 10.9% per year! There was hardly any population growth in the US during the 1930s. Hence, we can conclude that PCRIG was in excess of 10% a year during these three years. When the stimulus ended, so did the economic growth. The US was back in a depression in 1938.

Stimulus During the WW II, 1942-1945

Stimulus started at a lower level in 1939 to keep the economy afloat. Or, maybe, the USG was covertly preparing for the war. Pearl Harbor ended all that. And beginning in 1942, the largest stimulus in the US history took place (I don't have the data for the Civil War, but I doubt that anything like 1942-45 took place in terms of govt. spending as a percent of GDP). When the WW II stimulus ended, so did the growth in the US economy. Five worst years in terms of decline in the real GDP, except for the early 1930s, took place soon after the end of the WW II.

Thus, the worst periods of the Great Depression, 1930-1949, were the beginning and the end. And the best periods were the two periods of stimuli. The WW II DID NOT end the Great Depression. The economic activity during the Great Depression was like a bungee jumping!

Stimulus During the Reagan Era, 1983-1987

Armed with the Supply-Side dogma, the Reagan Tax Cuts, in the name of tax simplification and fairness, gave rise to the largest cumulative stimulus, excluding the WW II, at least in the past 75 years. What got the US economy out of the worst recession since the end of the Great Depression, during 1980-82, was this massive debt-induced stimulus and not the Supply-Side or other free market dogmas.

The Supply-Side dogma was proven to be false, although blamed on Democrats for not cutting spending, as the deficits, exceeding 5% of the GDP, kept mounting. This gave rise to 4 separate tax increases beginning in 1987 under Reagan himself. It is time to look at the whole picture, Fig. 2.

Figure 2

AS you can see, the only period of good PCRIG during the 1980s was the period of the stimulus and as soon as the stimulus was removed, slowly over an 8-year period, we had negative to very weak PCRIG. Even though the recession of 1990-91 lasted only for 8 months, we had 8 years of very poor PCRIG in the absence of large stimulus despite very accommodative Fed policy during 1992-93. The average PCRIG during 1989-1996 was a meager 0.19% a year. For the purpose of comparison, during 1950-1974 it was above 3% a year.

Stimulus During the Stock Market Bubble, 1997-2000

What got the US economy, and the PCRIG, out of the rut was the largest stock market bubble in history. Working for Cisco during the bubble years, I can personally attest to the ridiculous inflation in compensation via the abuse of Scam Options. Most of the income gain during the bubble years, 3.75% a year, went to a very small percent of the population. Majority of the population got sucked into speculation and lost money.

The aftermath of the stock market bubble driven growth - loss of jobs and employment income - is known to most of you and I don't need to recount.

Stimulus During the past Two Years, 2003-04

The Supply-Side dogma was resurrected during Bush II. The level of stimulus during the past two years exceeded that during 1935-36! The one difference was that the monetary stimulus, facilitating increase in private debt, was the dominant factor and one of its side effects has been the Housing Bubble. Indications are that the US Housing Bubble is in the process of bursting, but we wouldn't know for sure for another six months. When the Housing Bubble bursts is when the current stimulus would come to an end in all likelihood.

If you look at the graph of PCRIG during 2003Q2-2004Q3, the result - 1.2% a year - is pathetic if you compare it against the amount of stimulus. Chronically sick body does not respond to treatment very well. Right doc? If we look at history for which we have data, it is by far the worst recovery that the money has bought. In mid-1930s, the same amount of stimulus bought more than 10% a year PCRIG.

A Factoid for My Republican Friends

I used to be a Republican myself. If we total all the deficits during Reagan, 1981-88, Bush I, 1989-92, and Bush II, 2001-04, and all the interest payments on that debt, to-date, it would come pretty close to all the Federal Debt outstanding! The last budget surplus was during Clinton and one before that was under Johnson, known for his Great Society programs. Bush II has proven to be the most financially irresponsible President that we know about. Propaganda that Republicans are good for the economy persists. Herbert Hoover was a Republican! (I believe that Herbert Hoover was ten times a better man than Bush II and a far more competent man; he was a good man but at the wrong time on the Longwave calendar). If my prognostication comes true, Bush II couldn't have picked the worst time to get re-elected.

What Does the Sick Economy Say About Americans?

It is not the American ingenuity but rather the American propensity to borrow-and-spend and to get easily sucked into bubbles that have kept America's economic growth better than that of Germany and Japan during the past 15 years. The saving instincts of the Germans, the Japanese and the Swiss are well founded and they will do far better than the Americans during the coming Greater Depression.

Regrettably, "voluntary" economics and politics reflect on the underlying population - the leaders and the led. Borrow-and-spend, as opposed to the age-old formula of save-and-invest, as a road to future prosperity, takes place only in a sick mind born of desperation. Americans have been led by a corrupt economic elite that has misled them into a self-destructive behavior for their own short-term gain.

Conclusion

Two largest stimuli since the WW II, comparable to the New Deal during the Great Depression, and the biggest stock market bubble in history have been the ONLY periods during the past 25 years during which there has been any growth in real per capita income. Also, the growth in income during the past two years, despite a humongous stimulus, has been pathetic. This clearly suggests that the underlying condition of the US economy to generate employment and income is extremely weak. This is a refection of a sick economy propped up by over stimulation too often. In the absence of the stimulus it will collapse like a paper tiger would collapse from a one big blow. 9:11 was no economic blow; it was more like a feather flying in light wind hitting the paper tiger.

PS: "As we all know, compound interest is a virtue to a saver, but a vice to a debtor!"

http://www.sprott.com/pdf/marketsataglance/01-17-2005.pdf

The vice will take its toll for a very long time.


 

Author: Jas Jain

Jas Jain, Ph.D.
the Prophet of Doom and Gloom

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