'Serious Recession Coming, Possibly Even a Depression'

So says Roger Nightingale, quoted here:

"We have done everything to monetary policy that we could do and this slowdown is going to be uncontrollable," Roger Nightingale, RDN Associates, told CNBC.

"We have a serious recession coming, possibly even a depression."


Excuse me, but negative GDP back to back in 2008 and 2009 shows that we were indeed in a depression. One might even be tempted to argue that the regime's gymnastics merely bought us a subsequent recession in 2010. But it was very expensive.

With GDP now running at less than half the rate in 2011 than in 2010, it is clear that monetary easing combined with extravagant government spending has failed to address the real problem dragging down the economy, which is bad debt.

Until we accept the cure for this prescribed by capitalism, we're going to drag this out indefinitely.

Orderly bankruptcy is the pressing need of the day. 

Forget GDP: 'Real GPP in 1944 was a quarter below its 1932 nadir.'

So says Martin Hutchinson, here, for The Asia Times.

He thinks the present is a Bond Bubble akin to the Tulip Bubble, and is about to go Pow!

Let's see. A $35 trillion bond market taking a 30 percent haircut wipes out $10.5 trillion vs. a $16 trillion equity market taking a 50 percent haircut wipes out $8 trillion.

Isn't this why cash is so attractive? Especially cash of the Swiss Franc variety backed by relatively enormous gold reserves compared to every other currency?

Mish's Whopper of the Week

"Bank closings remain elevated. We have had 106 bank failures so far in 2011."

-- Mike Shedlock, here on Friday

The rate of failure this year so far has fallen to 2 per week from 3 per week last year.

Failures year to date number 64, not 106.

Figures reported here in May put costs of failures to the FDIC's Deposit Insurance Fund through 2010 at $24.18 billion. That estimate is 9 percent more than previously estimated.

Mish thinks this is one among many indicators showing continuing deflation in the economy.

Don't bailouts of this kind get counted as government expenditures accruing to GDP? Counting them as such would make GDP less reliable as an indicator of growth in the economy, but you must admit the number is tiny in a $15 trillion economy, not even 2/10ths of 1 percent.

China Lectures America While Failing To Comply With The Rules

From Ambrose Evans-Pritchard, here, who points out there is a dwindling supply of growth to steal from the future:

China has already pushed credit to 200pc of GDP. It cannot repeat the trick. ...

As for China's bluster, it is chutzpah and self-delusion. We all agree that the US needs to "cure its addiction to debts", but so will China soon.

China buys US debt in order to recycle $200bn a quarter in foreign reserves, hold down the yuan, and continue its mercantilist export strategy. If China had not distorted world trade in this fashion, the US would not be in such a mess.

Obama's Defeated 2012 Budget Would Have Taken Public Debt to $24 Trillion in 10 Years

TheHill.com reported the CBO projection in March here:

CBO estimates Obama's plan would produce 10 years of deficits totaling $9.5 trillion. By 2021, it would increase the debt held by the public to 87 percent of gross domestic product.

On March 18, 2011 public debt stood at $14.225 trillion, to which add $9.5 trillion over ten years, and you get nearly $24 trillion, nearly 122 percent higher than the debt at the end of 2008.

Was that "a balanced approach"?

Was Standard and Poor's wrong at $22.1 trillion? It would be more accurate to call it generous, in Obama's favor. Brow-beaten by criticism from the regime, S and P dropped the number to $20.1 trillion.

I predict that if Obama is still in office in 2015, we'll have already hit that $20.1 trillion mark by then and won't have to wait for 2021. 

Standard and Poor's Estimate of GDP is Way Too Optimistic

From their downgrade report:

Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3 percent and consumer price inflation near 2 percent annually over the decade. ... our downside case scenario assumes relatively modest real trend GDP growth of 2.5 percent and inflation of near 1.5 percent annually going forward.

Real GDP in the first decade of the 21st century was a pathetic, anemic 1.67 percent.

If that continues (we're at 1.3 percent right now), the gap between spending and revenues will continue to widen, increasing the size of annual deficits and adding to the total debt.

Post-War Doubling Times For Federal Spending: Every 9 Years at 8 Percent per Year

US government spending on World War Two reached a crescendo in 1945 at $107 billion, after which spending reset to a post-war low of $36 billion in 1948.

Within 4 years, spending had doubled to $72 billion, in 1952.

It took more than 14 years for federal spending to double again, sometime between 1966 and 1967, when spending shot up on the Vietnam War and the Great Society programs under President Johnson. Spending in 1966 was $135 billion.

By 1974, just 8 years later, spending had nearly doubled again to $269 billion.

Under Jimmy Carter it took just over 5 years for spending to double again, sometime between 1979 and 1980. Federal spending reached $504 billion in 1979.

By 1987, 8 years later, federal spending had doubled again to $1 trillion under Ronald Reagan.

Federal spending did not double again until sometime between 2001 and 2002. It took more than 14 years to do so going through the Bush 41 and Bill Clinton presidencies to the presidency of Bush 43. Federal outlays reached $1.9 trillion in 2001.

Which brings us down the pike to today, when spending is projected to finish the fiscal year at $3.8 trillion, doubling in the 10 years since 2001.

That's 7 doublings in 63 years, or a doubling of US government spending every 9 years since World War Two.

According to the Rule of 72, a doubling every 9 years implies an interest rate of 8 percent per year.

In other words, federal spending has an effective rate of built-in spending increases at 8 percent per year every year since 1948.

When you consider that real GDP growth from 1930-2000 has been 3.5 percent and only slightly better than half that in the decade just past, our spending is completely out of step with reality.

(data from usgovernmentspending.com)

Stabilizing Debt to GDP Ratio Requires $1 Trillion in Cuts Per Year, Not $400 Billion

So says John Chambers of Standard and Poor's Sovereign Ratings Committee here. The ratio stabilized at the current level of 75 percent would remain consistent with a AAA debt rating going forward.

The $1 trillion per year represents about 7.5 percent of GDP. With the latest report of current dollar GDP running at $15 trillion, 7.5 percent is $1.13 trillion.

Viewed another way, if we simply threw out baseline budgeting, which builds in increases to the budget each year at a rate near 7 percent, we'd be nearly home free without having to do anything.

And another way to put that is, just freeze the damn budget at current levels for a decade.

Sort of like what the average working Joe has experienced since 2000: no real wage progress. If he can do it, government certainly should.

GDP Revisions Beg The Question: Did Obama Really Avert a Depression?

I don't see how anyone can believe that nonsense.

GDP 2008: - 0.3 percent

GDP 2009: - 3.5 percent

GDP 2010: +3.0 percent

There's a nice summary here.

Despite the unprecedented way in which George Bush and then Barack Obama jettisoned capitalism, unleashing torrents of bailouts, credit and federal manipulation during the market meltdown in 2008 and 2009, GDP ended up posting back to back years of negative growth anyway.

When you have back to back quarters of negative growth, they call it a recession.

When you have back to back years of negative growth, they call it a depression.

We had a depression.

One can plausibly argue that 2010's + 3.0 percent GDP imprint is evidence that the federal deluge got us out of the depression, but it didn't avert it. We had a depression. We spent gobs to get out of it. And now for the first half of 2011 GDP is stalled at 0.4 and now 1.3, jobs aren't coming back, housing continues to sink, prices of essentials are rising, kai ta loipa.

Krugman and company thought we didn't spend anywhere near enough to get out. Well, we did, just not enough to get Obama out to 2012, that's all!

A quick, dirty depression arguably would have been better. Instead, we've got this, including a nasty argument about paying for all the borrowing to finance it.

Q2 2011 GDP at 1.3 Percent, Q1 Revised Down Into the Tank to 0.4 Percent

Just how does Q1 go from 1.8, to 1.9, to 0.4? That's an error of only 79 percent.

Q4 2010 also was revised down, to 2.3 percent from 3.1 percent. That's an error of 26 percent.

And revisions going back to 2007 when the Dems took over the Congress under George Bush are even worse, saved for the end of July while everyone's on vacation and not paying attention. And of course it's Friday.

Which reminds me. I neglected to do Bank Failure Friday last week. There were some, but sometimes reporting on it feels like writing an obituary, and last Friday was filled with too much death already.

The GDP story is here.

Another Voice Wrongly Claiming 'The Money is in the Middle'

Brian Wesbury at The DC, here:

What most people don’t realize is that the U.S. has gorged so much (boosting spending from roughly 18% of GDP in 2000 to 24% of GDP today), that the only way to pay for it is to tax the middle class. ...

The money is in the middle. And the only way our politicians can get it is to follow Europe’s lead and institute a national sales tax or Value-Added Tax (VAT). This is the elephant in the room that is never talked about. Those who are using the debt ceiling in an attempt to cut spending are actually saving the middle class from tax hikes — not the millionaires and billionaires.


It's a frequently repeated claim that the money is in the middle, but it's just not true, no matter how often  it is said.

If all the (reported) income in America were poured into a giant hour glass, you'd have to start it and wait about twenty minutes to begin to visualize how all the money is actually distributed.

A snapshot taken at that moment would show $5.7 trillion in adjusted gross income still in the top, and $2.8 trillion in AGI in the bottom. The kicker is that 35 million tax returns split what's on top, while the remaining 105 million tax returns, 75 percent of the total, divvy up what's on the bottom.

The money's definitely not "in the middle."

It's hard to get agreement on what's middle class in America, especially since it is a conceit of our society that everyone is middle class. The rich aspire down to it to escape notice, the poor up to it to escape the indignities of dependence.

But no matter what smoke anyone tries to blow up your bottom, the biggest single pile of money remains with the top 25 percent:

Top 10 percent = 14 million tax returns (10 percent of the total) = $3.9 trillion in AGI
The next 25-10 percent = 21 million tax returns (15 percent of the total) = $1.8 trillion in AGI

The next 50-25 percent = 35 million tax returns (25 percent of the total) = $1.7 trillion in AGI
The bottom 50 percent = 70 million tax returns (50 percent of the total) = $1.1 trillion in AGI.

It's ridiculous to think that a VAT tax will somehow generate huge piles of new tax revenue on the backs of the middle class.  The VAT will hurt them just like Social Security and Medicare taxes hurt them because it's regressive, not because they have a lot of untapped money they're going to be parting with.

Considering how much tax evasion there already is in America of the unreported income variety, variously estimated (here at $2 trillion, resulting in a tax gap of $500 billion), a VAT will fail simply because it will drive more and more of the economy underground where cash is king and credit cards, checks, invoices and receipts are anathema. Think of it as the inverse of how the rich escape high rates of taxation, for example by shifting to capital gains away from ordinary income. A quicker way to become Greece I cannot think of.

Setting money free to move around openly is the key to an effective tax policy. But bringing it out into the open where it can be captured and taxed depends on perceptions of fairness.

As long as too many people think some people should pay taxes at a higher rate just because they have more, we're not going to get there. 

Democrat Intransigence: To Go On Spending As If There Were No Problem

Jack Kelly notes here that revenues have never been enough to match spending, going all the way back to WWII:

The problem is spending. Outlays rose from $1.863 trillion in FY 2001 to an estimated $3.819 trillion in this fiscal year, 105 percent in 10 years. The federal government now consumes 24 percent of the gross domestic product. (Since 1903, federal spending has averaged a hair over 20 percent of GDP). ...

Since World War II, federal tax revenues have averaged 18 percent of GDP. Income tax rates varied widely during this period, and there were both booms and busts. But tax revenues never exceeded 20.6 percent of GDP. That seems to be a ceiling -- no matter what economic conditions are or how high rates are raised -- and it suggests the budget cannot be balanced unless spending is held below 20 percent of GDP.

So tax hikes can't close the budget gap. But they could clobber the moribund recovery, making the deficit worse.

Democrats want Republicans to accept real tax hikes in exchange for mostly phantom spending cuts. Because they are unwilling to do so, many journalists describe Republicans as "intransigent." But the truly intransigent, it seems to me, are those who want to go on spending as if there were no problem.

Social Security Tax Cut For 2011 Adds To Stress In A Government Shutdown

The revenue lost to Social Security, about $120 billion in 2011 due to the temporary tax cut, will be reimbursed to the Trust Fund from income tax withholding, over two years, not one. That means that with annual deficit spending already at $1.5 trillion, in a shut down there's even less cash flow to count on if $5 billion in funds are being siphoned off for this purpose monthly.

TheHill.com explains here:

The tax cut will put roughly $120 billion into workers’ pockets. Perhaps $90 billion of this, or three quarters, will be spent. This could provide enough of a boost to GDP to create more than 300,000 jobs. 

Also, the Social Security trust fund will be reimbursed for the lost revenue. Under the deal that President Obama worked out with the Republican leadership, funds from general revenue will replace the lost tax revenue for the next two years. This means that the tax break will have no effect on the long-term solvency of Social Security.

Doh!

Down With The Establishment!

"The Establishment is in a panic. It has been jolted awake to the realization that the GOP House, if it can summon the courage to use it, is holding a weapon that could enable it to bridle forever the federal monster that consumes 25 percent of gross domestic product."

-- Patrick J. Buchanan, here

Defining a Depression

"Some point to the success of Latvia in managing its so-called internal devaluation. But its GDP is 23 percent below its pre-crisis peak. That is a depression."

-- Martin Wolf, here

More Than Half of Real GDP Through 2010 Came from Government Spending

From deficit spending, that is, measured in the hundreds of billions per year under George Bush, and now in the trillions in just two and a half years under Barack Obama.

It ain't worth it! And the country needs a growth strategy.

Seen here at The Department of Numbers:

The Great Stagnation

"[M]ore than half of our economic growth in the past ten years has come from government spending."

Q1 2011 GDP Final Revision: 1.9 Percent

Discussed here.

Government Interest Payments as a Percentage of GDP

As reported here:

Greece            6.7 percent

Italy                4.8 percent

Portugal          4.2 percent

United States  2.9 percent.

Growing Schmoeing: Each Dollar of GDP Cost Almost $9.00

Charles Hugh Smith takes a tour of recent public debt and annual GDP and delivers the bad news:

Here are the numbers . . .

Total public debt in 2007 (pre-recession) was $8.95 trillion.

Total public debt in 2010 was $13.53 trillion.

This is an increase of $4.58 trillion.

Add in the 2011 deficit of $1.6 trillion and the total is $6.1 trillion in additional debt in the four years from 2008 to 2011.

GDP in 2007 (pre-recession): $14.08 trillion

GDP in 2008 (recession starts): $14.44 trillion ($364 billion gain)

GDP in 2009 (recession officially ends in mid-2009): $14.12 trillion ($322 billion decline)

GDP in 2010: $14.51 trillion ($390 billion gain)

Let's be generous and assume the U.S. economy continues "growing" at the first-quarter pace of 1.8% for all of 2011: GDP advanced 1.8% in Q1 2011 (BEA). That would add $260 billion to the 2010 GDP, so the GDP at the end of fiscal year 2011 would total $14.77 trillion in nominal dollars. In constant dollars, it might reach back up to 2007 levels, but only if the economy doesn't roll over.

Total up the gains and declines in annual GDP for the four years from 2008 through 2011, and you get $690 billion. That's the total sum of each year's gains for the four years.

That means we as a nation borrowed and spent $6.1 trillion to get $700 billion in GDP "growth."That means we borrowed and spent $8.70 for each $1 of nominal GDP "growth."

America is obviously in this and every other way completely insane.

Read the whole entry here.

Statement of Q1 2011 GDP Unchanged at 1.8 Percent

Story here.

The expectation for the second statement of Q1 growth had been a revision up to 2.1 percent.