This US Economic Recovery is Fake


US stocks fell about 1% Monday (give or take). Let’s see, the total value of the stocks trading on the NYSE is about $17 trillion. So, Monday erased about $170 billion worth of ‘wealth’. By our reckoning, there’s about $7 trillion left to go.

It’s too early to call a top…but we wouldn’t want to be sitting on the uppermost branch of this tree. The higher up you go, the more dangerous your perch.

From where we stand – on the ground and in plenty of cash and gold – the whole thing looks scary. There are too many people in that tree already…all of them counting on calm, sunny weather…and a longer growing season for their money.

What a shame it would be if the tree fell over…or a big branch snapped!

Everybody invests in stocks hoping to ‘beat the market’. But everyone IS the market. Only a few outliers beat it – usually by accident.

Of course, last year US stock buyers were happy just to ride along with the market. Beating it wasn’t necessary. As we reported, the rich saw their wealth rise by $3.7 trillion last year. Much of that came from the stock market, which hit new records.

Investors are hoping for a repeat of this performance in 2014. Even if it does half as well, they tell themselves, it will still be an impressive gain.

But we have some questions: Against whom are they gaining ground? From whom are they taking the loot? Or, to put it another way, who’s on the other side of the trade?

The US economy expanded at a rate of 2% in 2013. There was a grand total of about $340 billion in extra wealth to divvy up. How was it possible for shareholders to get 10 times as much as the value of the wealth the economy created?

But wait! The mystery deepens.

Since the depths of the financial crisis, household wealth has gone up by $21 trillion. (Roughly, it went from $50 trillion to $71 trillion.) During that same time, real household earnings for the typical family have gone down. Wages have gone down.
And the net worth of the typical family also has gone down. Growth rates have declined. And, as a proportion of the population, the number of people with jobs has also declined.

Look at a chart of real GDP and you will see that it is only about 6% higher than it was in 2007. So, household wealth went up nearly 20 times faster than GDP since 2009.

How could that be?

Team Bernanke was trying to goose up asset prices. It succeeded. The ‘wealth effect’ brought an additional $21 trillion to the nation’s balance sheets. This was supposed to increase demand, which would lead to more spending and investing.

Say’s Law tells us that you have to produce before you consume (more or less). But here we have about $20 trillion of excess spending power that seemed to come from nowhere. How could that be?

Wealth is either physical – as in owning a big house or a Modigliani – or it is paper wealth. Now, we have new claims on $21 trillion of real output and real wealth. If there is no increase in real wealth, that money just competes for the same goods and services that were already priced at $50 trillion five years ago. We’re not a dime wealthier, in other words.

All paper assets are a claim against real goods and services. You can’t get more goods and services than the economy can produce. Since the economy of 2008-13 produced only a fraction as much real wealth as the claims against it, those claims will have to be applied to future output.

So, when will the economy produce $21 trillion of new wealth so that these new claims can be realised? Let’s see:

‘[T]he future looks sluggish,’ wrote Financial Times lead economist Martin Wolf. He joins Larry Summers, who argues that US growth is stuck in the mud…and may not get out any time soon.

Since the start of this century,‘ writes Summers, ‘annual US gross domestic product growth has averaged less than 1.8%.

Hmmm…that’s about $300 billion. Let’s see, how long do you have to wait – at $300 billion a year – to cover $21 trillion in claims? Answer: 70 years!

Well, that’s not going to happen, is it? Long before 2084 rolls around, those claims will be marked down and written off.

In other words, the additional wealth is mostly a mirage.


Bill Bonner
for The Daily Reckoning Australia

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Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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  1. The American economy is not recovering.

    This is like the saying ‘bears shit in the forest’ or ‘I I’m hit with a tidal wave I’ll get wet’.

    Seriously, If someone had been on Mars for 20 years, under a rock with ear plugs on and a blinfold they would see the American economy is not really recovering. Anyone who has just stepped off a starshipfrom far-far-awaycould see the American economy is not recovering. My pet cat can see the American economy is not recovering.

    So why is it that the Dachshunds of Parliament cannot see this? Peheaps it is hard to see anything when the snout is down while licking Beijing’s boots.

    What about the press? Why can they not see that the American economy is not recovering? Perhaps Rupert has not told them yet,or they can’t see anything because they are too busy sipping lattes and ‘networking’ lefty ideology in their parallel universe, or they’ve snorted too much coke.

    Economists cannot see it becuase they are simply stupid. Just like anyone who thinks oil production is ‘growing’ or ‘shale/fracking will save us’ or China will rule the world, or money can be printed without being backed up by real wealth and productivity.

    I will keep this simple for the media, the economists and the politicians:

    The American economy is up Shit Creek without a paddle because world oil production is peaking and the price of energy is expensive. No growth in cheap portable, dense energy equals no economic growth. Simple, even a little dashchund could under stand this, it is not as complecated as say, relativisitc physics.

  2. Even Bill O’Reilly is beginning to understand the lack of confidence in the dollar on his show today.
    Wonders never cease.

    Justin King
    January 15, 2014
  3. Simple and Brilliant reckoning ;) – Thanks Bill !

  4. Kirk: A wealth mirage?

    Spock: Yes, Captain…
    … most extraordinary, too…
    It has the ship in its Tractor Beam, now!
    We are trapped!

    Kirk: I have an uncontrollable urge to go shopping…

    Spock: Only because you are human.
    This is the design of the Klingon Fiat Wizards, Captain.
    We are in grave danger!

    Kirk: Scotty! Form up a Landing Party to go shopping!
    Prepare to beam us down to Andromeda Suzie’s Emporium!
    Set phasers to: Stun/Credit.

    Spock: Scotty and Zulu have already left without you, Captain.

    Kirk: No!
    Must. Go. Shopping!

    Spock: Bones! Sedate the Captain and place him in the Brig.

    Bones: What? And not go shopping?
    Have you lost your mind, Spock?

    […to be continued…]

    slewie the pi-rat
    January 16, 2014
  5. Hmmm

    Bill talks about being down on the ground with GOLD & CASH …

    Id love to know the real truth . your as invested in the bubble as any of us are come on tell the truth !
    The daily reckoning always right and always invested in the ‘right thing’
    Negging on stocks for 10 years until one day we get an i told you so moment and employing a slave to go back through the ten million email tips to find the line in small print to back it up !!!

    Im betting this reply wont be posted “)

    As for comment JASON-
    Sorry but i don’t think you know as much about this world as you would like to think.
    There are so many global factors outside this little island called australia, Politicians the media etc are not interested in the truth, the wheel does it circle and the fat cats around the world have worked out how to live well from it, if your lucky being a small man with a bit of excess cash as i am you will from time to time get lucky if your in the game at the right time.
    Dont ask why politicians cannot see it, it serves nothing, you cant see it eithar, first of all you dont know what ‘it’ is , neithar do i.
    enjoy the ride, please dont assume yourself smarter than governments or entire nations, Please dont assume you know anything about the USA,
    No one Does, Bill write great, He might have some idea, but you cant really define something thats in freewheel and has no logic to anyway nor was there ever ment to be…

  6. When we speak of a recovery we imply that theres was something much better and much bigger not long beforehand .

    What was better and bigger in the USA beforehand ?

    A bank crashed, so did an investment fund, the twin towers were blown up, em car makers stopped building in detroit,

    these are only man made things, and sort of normal turns of events,the show goes on,

    What exactly do we need to say we are ‘recovered’

    Im in Europe and the odd person still speaks of crisis, usally a non worker.

    So i say ‘well what would i have to give you so you could consider yourself not in crisis’ ?

    Its quite hilarious because in a consumer society where everyones lists of needs and wants is endless how on earth can you expect to have a nation declare, yep by in large 95% of us here reckon we have enough, thanks for asking but were grand here, nothing more needed.

    Until the next war or ice age or should i put it while we are in our proposed civilization here on earth we could consider that we are in a crisis for the forseeable future, as in forever, because everyone cannot have everything for sale, its what seperates the classes of people.
    so if someone cant have something they could consider it due to crisis ?

    I personally would not mind a porsche gt4 turbo, if i went all out and sold everything i have i could probably buy one, can i blame the fact that i cant have one without even pondering the purchase- on a crisis ?

    The caveman was happy to find a branch on the ground that was straight and long with a lump on the end that worked as an instant club to beat the head of his next dinner,

    We now want to keep everyone alive, the sick the weak, the old, everyone, and we will all pay, across the road from me i see an alocholic who gets 800 Free per month and pisses my taxes up the wall of the bar all day long, from time to time hes sick, and hes ferried to hospital in an amubulance for a few weeks to recover and repeat, hes being doing that 30 years now. and with my taxes, he will outlive me too as i will die from hard work and stress so my sons taxs will also sustain every inch of his miserable life out, and we all think its a great thing,

    Call me harsh, if i was in control- id turn off the tap, id cut that 800 a month to 50 a month, a loaf of bread per day and new cloths per month,
    More could be earned by picking rubbish, cutting public hedges or taking chewing gum off the pavements, i will provide hi viz vest – gloves and a start at 7 am tomorrow.

    Hes got no worries, im a freelance mechanic, i dont know when my next pay check is, he’s counting the days. cherche la logique ?

    my 2 cents is the worlds lost control,
    i keep a book where all famous quotes i see i write down, one of them springs to mind THE RIGHT TO LIVE IS ABUSED IF IT IS NOT CONSTANTLY CHALLENGED.

    Ahh but what if it was you they say, well if it was me, i think the movie ‘into the wild’ is a good example, go see if you can get through it without being a burden, if you do then you deserve to live, if not then its like the trees and the plants.


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