Stockman and the Imploding US Economy

Reagans’ budget director David Stockman whose book, the Great Deformation I reviewed here,  has produced a constant stream of material which is highly pessimistic about US economic prospects in the light of the deficit spending, crony capitalism and regulatory overlays which were a feature of the Bush Administration and have risen to new heights under Obama.  

While Stockman tends to understate some positive features of the US (its ability in the face of the Administration’s obstacles to have brought massive energy supply increases through shale oil and gas, and the continued productivity enhancing growth from IT) his underlying analysis is correct.  A summary of his latest pessimistic review US review is below.

In September 2008, the Fed had outstanding loans of $900 billion it had accumulated over the course of its first 94 years. Bernanke added the next $900 billion in 7 weeks of mad money printing designed to keep Wall Street afloat. And by the time the “taper” is over later this year (?) the Fed’s balance sheet will exceed $4.7 trillion.

So $4 trillion in new central bank liabilities in six years that had originally financed the consumption of real labor, material and capital resources.

Added to this public debt was $9 trillion and will be $18 trillion by next March.

And even though the economy has been in recovery for four years the Congressional Budget Office assumes this will become 3.5 percent average GDP growth until it reaches “full employment” around 2017, and then will remain in that  state forever!  Yet even then it projects a cumulative deficit of nearly $10 trillion.

The 3.5 per cent growth is a delusions given the vast acceleration of retirees has dropped employment by 27 million and real investment in business fixed assets has averaged less than 1% annually for the past 14 years. 

In other words, Washington has built a fiscal future right now is a Big Fat Greek debt ratio of 140%.

And yet Professor Krugman proposing to “do something”:

 …. we should aggressively reverse the fiscal austerity of the last few years, getting government at all levels spending several points of GDP more to boost demand…. let’s say for the sake of argument that the right policy is two years of fiscal expansion amounting to 3 percent of GDP each year, plus a permanent rise in the inflation target to 4 percent. These wouldn’t be radical moves in terms of Econ 101 — they are in fact pretty much what textbook models would suggest make sense given what we have learned about macroeconomic vulnerabilities…

In short, Krugman wants to double-down on the lunacy we have already accomplished. His 4% inflation target is just code for re-accelerating the Fed’s money printing machine, thereby keeping real interest in deeply negative terrain for even more years.  Ordinary consumers not “indexed” to Krugman’s 4% inflation target pay the cost.  That reduces median household income of $51,000 to $33,000 in constant dollars a decade hence

The strategy rests on maintaining some “aggregate demand” that is assumed to grow inevitably and not be dependent on improved skills and increased investment. In fact, spending or GDP cannot be conjured by the fiscal and monetary tricks of the state. Spending can only come from current income, which is the reward for current production; or it can come from borrowing, which is a claim on future income that will reduce borrowing capacity tomorrow in order to have more spending today.

But since 1980 the US economy’s total credit market debt to GDP has risen from 1.5 to 3.5.

That’s evident even in the specious GDP numbers from Washington’s statistical mills. If you set the aside short-run stocking and destocking of inventories in the quarterly GDP figures, the year-over-year gain in final real sales for Q4 2013 was 1.9%; and that’s also close enough for government work to the 2.5% gain ending in Q4 2012; the 1.8% rate in Q4 2011; and the 2.0% gain in Q4 2010.

In short, there is no “escape velocity” because the Fed’s credit channel is broken and done. Going forward, the American people will once again be required to live within their means, spending no more than they produce.

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6 Responses to Stockman and the Imploding US Economy

  1. blogstrop

    We were heading the same way thanks to six years of the “let’s give Labor another go” arts/media/union putsch.

  2. Krugman got his Nobel for telling us what every cab driver and bar fly was telling us. That’s bound to make you a bit facile.

  3. Squirrel

    Sadly, much of the world has become addicted to debt, and the US is the chief supplier.

    The looks of dismay, bewilderment and disbelief on the faces of finance sector types at any talk of “tapering” is a reminder of how bad the problem has become – spivs, speculators and gamblers (rather than true investors and entrepreneurs) are in the ascendant, and we will all pay the price.

  4. stackja

    Going forward, the American people will once again be required to live within their means, spending no more than they produce.

    Or as

    U.S. President John F. Kennedy delivered in his inaugural address “ask not what your country can do for you, ask what you can do for your country.”

  5. Myrddin Seren

    So

    “Krugman wants to double-down on the lunacy we have already accomplished. His 4% inflation target is just code for re-accelerating the Fed’s money printing machine, thereby keeping real interest in deeply negative terrain for even more years. Ordinary consumers not “indexed” to Krugman’s 4% inflation target pay the cost. That reduces median household income of $51,000 to $33,000 in constant dollars a decade hence”

    Not sure what textbook models The Krug and Mrs Krug refer to, but their plan seems to have the effect of impoverishing and hollowing out ever-more of the middle class. Which will create a growing disaffected polity ever-more open to radical, redistributive policies.

    Plus the permanent money printing will keep the so-called market economy destabilised and wobbling like a top in the ensuing credit bubble. It may even fall over big time, which of course opens up the prospect of a Rahm Emanuel “You Never Want A Serious Crisis To Go To Waste” moment, where the government seizes control of the mechanisms of the world’s largest economy and introduces a technocratically controlled, centrally planned system. See above re radical, redistributive policies.

    What’s not to like about the Krugmans’ policy prescriptions – if your objective is to radically reshape America ?! Simples.

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