Is the economy growing… or is it just more debt?
In the US, the airwaves and political channels are filled with self-congratulations on the 3.2% annualised growth achieved in the first quarter of 2019.
This is touted by Trump administration officials as ‘proof’ that the 2018 tax cuts worked and we have now returned to the days of 3%-plus self-sustaining growth.
Don’t believe it.
Growth in Trump’s first year (2017) was identical to the eight years of the Obama administration — about 2.3%. Growth was slightly better in 2018, but this appears to be a one-time Trump bump due to the tax cuts.
That’s fine, but it’s not self-sustaining.
The first-quarter 2019 figures were propped up by a number of temporary factors including inventory accumulation, government spending on highways, and improvement in trade.
The inventory accumulation and trade improvement were both related to the trade wars, and were an effort to beat the tariffs now being imposed. With that behind us, what’s the outlook for the rest of 2019?
No growth miracle — just trillions in debt
As of today, the best forecast for growth in the second quarter of 2019 from the Atlanta Fed is only 1.2%.
If that figure holds, first-half annualised growth would be 2.15% — about where it has been for the past 10 years.
In other words, there is no growth miracle — just more of the same.
Given adverse demographics, persistent disinflation and flat productivity, why do we have any growth at all? A simple answer to that question is ‘debt’.
Jeffrey Gundlach, the new ‘Bond King’, recently told Reuters:
‘Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased.
‘One thing everybody seems to miss when they look at these GDP numbers … they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt – government debt, also corporate debt and even now some growth in mortgage debt.’
If growth is unsustainable without debt, how sustainable is the increase in debt?
The answer is that any debt that grows faster than income will eventually result in default through inflation, restructuring or non-payment.
The timing is uncertain, but the outcome is not.
Investors can prepare for the inevitable by learning why gold belongs in your portfolio, and why the metal thrives in these conditions.
All the best,