Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

  As shown in the chart on the next page, since 1971 total public and private debt outstanding soared from $1.6 trillion to $64 trillion or by 40X. By contrast, nominal GDP expanded by only 16X. The very visage of the chart tells you that the former is crushing the latter.

  Accordingly, the nation’s leverage ratio soared from its historical groove around 1.5X to 3.5X GDP. That’s massive; it’s two extra turns of debt on national income. At the old pre-1971 ratio, which had been proved by a century of prosperity, total debt outstanding today would be only $29 trillion.

  This means the American economy is now lugging around about $35 trillion of extra debt. Yet the consequences of this epic debt binge are unequivocal, and they refute entirely the reigning Keynesian presumption that debt is the magic tonic of prosperity.

  To the contrary, as documented below the trend rate of real GDP growth has been heading steadily and dramatically lower since the 1960s. More debt ultimately means less growth, not more.

  In this context, the period between 1953 and 1971 was the modern golden age. During that span the nation’s leverage ratio hugged closed to the 1.5X historic constant and real GDP growth averaged 3.8% per annum.

  Moreover, there was no acceleration of the leverage ratio in that interval, meaning there was no temporary boost to spending derived from higher credit extensions rather than current production and income. Accordingly, living standards rose strongly. Real median family income increased from $33,000 to $54,000 (2014 $) or by 2.8% annually.

  On the eve of Nixon’s Camp David follies in Q2 1971, and after this long interval of debt-free growth, total debt outstanding amounted to just $1.7 trillion. This compared to GDP of $1.16 trillion, meaning that the national leverage ratio stood at 1.47X—right in the heart of its historical channel.

  During the next three decades there occurred the inflationary money-printing era of the 1970s and the rise of the Greenspan easy-money and wealth-effects policies after 1987. Consequently, debt grew explosively and the national leverage ratio climbed to unprecedented heights. By Q4 2000, total debt outstanding had soared to $28.6 trillion or to 2.73X the $10.5 trillion annual rate of GDP generated during that quarter.

  Yet even as the nation’s debt ratio was soaring, the rate of real GDP growth slowed only modestly to 3.2% per annum. That’s because the sharp, one-time upward ratchet of the nation’s leverage ratio—the first stage of its LBO—did goose the growth rate by fueling household consumption by means of a massive gain in mortgage debt.

  Greenspan proudly called this MEW or “mortgage equity withdrawal.” He argued that by extracting cash from their castles and using the proceeds for trips to the auto-dealer lots, home-improvement centers and Disney-world, households were elevating their consumption levels and trigging a virtuous cycle of higher production, employment, output and wealth.

  Not exactly. Having evolved from a gold bug to an ersatz Keynesian during his years in Washington, Greenspan was dead wrong about the allegedly virtuous cycle of debt. Some meaningful share of the 3.2% GDP growth during that three-decade period was simply stolen from the future, and it’s not hard to see that the latter has already arrived.

  The nation’s self-LBO was completed during the next 7 years. Total debt outstanding rose by a staggering $25 trillion to $53.6 trillion during that brief interval, but the expansion of nominal GDP was far more subdued. The latter rose by just $4.4 trillion to $14.8 trillion.

  That meant the Keynesian parlor trick was rapidly losing its potency. The national leverage ratio did get boosted from 2.73X to 3.61X during the final seven-year Greenspan/Bernanke credit party, but self-evidently it generated far less incremental GDP.

  To wit, during the 1971 to 2000 period about $27 trillion of debt growth generated $9 trillion of nominal GDP growth, representing a 3:1 ratio. By contrast, during the final 7 years of the Fed’s debt bubble, the ratio of new debt to GDP soared to just under 6:1.

  But that wasn’t all. Even as it was taking more and more debt to generate a dollar of nominal income, the growth rate of real GDP was slowing further.

  On a peak-to-peak basis between Q4 2000 and Q4 2007, real GDP growth averaged only 2.4% per year. The inevitable distortions, inefficiencies, misallocations and malinvestments generated by credit-fueled growth were already catching up.

  For all practical purposes, Peak Debt arrived during the final credit blowoff in 2007–2008. Since then, total debt outstanding has grown by another $10 trillion to $64 trillion, but the nation’s leverage ratio has stabilized in the nosebleed section of history at 3.5X national income.

  Here’s the thing. The U.S. economy is now deep in the payback phase of the great central bank credit bubble. Nominal growth of household spending now depends on current production and income; the Keynesian parlor trick of goosing consumption today by borrowing from the future is over and done.

  And since Keynesians believe that household consumption is the driving force of the economy, they are at an especially acute dead end. As we saw in Chapter 2, households not only reached Peak Debt in 2007–2008; they have been slowly ratcheting downward their leverage ratios of debt-to-wage and -salary income ever since.

  What had been stolen from the future is now being given back. Consumers could not shop the nation to prosperity—even if they wanted to.

  Accordingly, real GDP has grown at only a 1.2% rate per annum since Q4 2007. That’s just 31% of the 3.8% annual growth rate generated during 1953–1971 by a U.S. economy that had adhered to the historic leverage mean of 1.5X.

  THE GREENSPAN ERA DEBT BINGE—WRONG ROAD TAKEN

  Needless to say, policymakers of the golden era—most especially Fed Chairman William McChesney Martin, President Eisenhower, and even John Kennedy’s Treasury Department—–did not believe that rising debt was the keystone to prosperity. They feared it, and looked to the enterprise of business and labor on the free market to generate growth and prosperity.

  As is clear from the above, the real debt surge began when Greenspan took office in August 1987, and that’s also when Bubble Finance got stood up as national policy.

  Indeed, in response to the infamous 25% stock market crash of October 1987, shortly after his arrival at the Eccles Building, the purported financial Maestro launched the nation’s central bank down the road of chronic easy money and massive monetary intrusion in the financial markets.

  The fruit of that wrong-headed monetary path is straightforward. There was just $11 trillion of total credit market debt—government, household, business and finance—outstanding at the time Greenspan discovered the printing presses in the basement of the Eccles Building. That small mountain of debt has grown by a staggering $53 trillion during the years since then.

  That five-fold debt gain in less than a generation represents a radical discontinuity from the past history of American capitalism.

  In fact, for more than a century after U.S. industrialization really took-off during the 1870s, in fact, the ratio of total public and private debt to national income held steady at about 150%. And that was true with only slight variations during periods of boom and bust, as well as war and peace.

  That modest amount of economy-wide leverage might well be considered the golden mean. During the century ending in 1970, the US standard of living rose 20-fold and the nation’s economy grew like nothing before it in the history of the planet.

  No longer. As shown in the chart on the next page, the trend rate of real GDP growth has dropped by a stunning 70%.

  During the rising phase of this debt eruption, of course, the U.S. economy had quite a party. During the 1990s and for a time prior to 2007 these massive borrowings goosed consumption spending in the household sector and fixed asset investment in business.

  But then the due bill arrived at the time of the great financial crisis. Since the last peak in December 2007, real national output has crawled forward at just 1.2% per annum based on Washington’s faulty inflation gauges, and hardly at all based on the true rate of inflation as measured by our Fly
over CPI.

  Needless to say, the mainstream narrative amounts to a studied attempt to obfuscate the dramatic seven-decade-long southward journey depicted in the gray bars of the chart below. That’s because the political, financial and media elites who shape the news and public dialogue are essentially anti-historical incrementalists.

  They operate from headlines and short-term deltas. They boast about the gains from last month and last quarter but never explain or take accountability for the periodic financial and economic collapses that have sharply lowered average or trend rates of economic growth and living-standard gains since 1987.

  Worse still, the elite narrative bamboozles the public with recency bias. You would never know that the startling uphill climb depicted in the red line of the chart even happened.

  Nor do the talking heads of Wall Street or the spokesmen and apologists for the Fed ever acknowledge that the current 3.5X ratio of debt to income is an unprecedented and dangerous departure from the 1.5X historic norm. Yet the latter stalwart feature of the financial system was still firmly in place as recently as 1971.

  Even as the chart captures the sweeping deterioration that has beset the nation’s economic fundamentals, that outcome is not due to some inherent flaw of capitalism. The above baleful development is the modern state at work; it’s the product of the elite consensus about money printing, financialization, perpetual Washington stimulus and bailouts and the cult of the stock market.

  Not surprisingly, the same media and groupthink commentariat that was utterly surprised and shocked by the rise of Trump and Bernie has no clue either about the nation’s debilitating LBO and the reverse Robin Hood redistribution that it has foisted upon the American economy.

  Much of the elites actually think that Obama’s ballyhooed 78 straight months of jobs growth and high stock markets is evidence that the U.S. economy has been fixed, and that the chilling financial crisis of 2008 was just some aberrational bump in the road.

  No it wasn’t. The meltdown of 2008 was just spring training for what comes next.

  As we indicated previously, the purpose of this book is to debunk these establishment fairy-tales, and to thereby explain the deep economic predicate for the rise of Donald Trump in particular and the growing anti-establishment sentiments of the American public generally.

  Equally importantly, it aims to document the extent and the causes of the financial and economic rot that has descended on the US economy, and to provide a fundamental roadmap for its amelioration.

  Whether Donald Trump has any affinity for some or all of these measures remains to be seen, as he alternates between statist curveballs and capitalist pronunciations from one day to the next. But if he does reach the White House, at least the architects of America’s ruinous policy-inflicted LBO will find themselves pounding the pavement in search of a new line of work.

  NO REAL JOB GAINS SINCE THE TURN OF THE CENTURY

  Exhibit number one in the indictment of Washington and Wall Street policy consensus is the fact that there has not been a single additional breadwinner job created in America since the turn of the century.

  Not one!

  In fact, one-and-one-half million of these jobs has been lost on a net basis. There were 71.2 million full-time, full-pay breadwinner jobs reported by the BLS for June 2016 compared to 72.7 million back when Bill Clinton was packing his bags to vacate the White House.

  The jobs we are referring to here generate about $50,000 per year in cash compensation and for the most part are year-around 40-hour-per-week jobs. They extend from the manufacturing, construction, energy and mining sectors to a wide expanse of the so-called service economy. The latter encompasses finance, insurance and real estate, technology and communications, warehousing and distribution, transportation, the white-collar professions, business management and support services and the core government sector outside of education.

  All that, and no net new job gains in 16 years.

  And that’s not the half of it. This wipeout also comes after a mind-boggling full-court press of “stimulus” by the nation’s economic rulers. The nation’s public debt soared from $5.5 trillion to nearly $20 trillion during that period, while the Federal Reserve’s balance sheet exploded by 9X.

  That’s right. Every dollar of growth in the Fed’s balance sheet is another dollar of fiat credit conjured from thin air and injected into the financial system. But not withstanding $4 trillion of such “stimulus” since the turn of the century, there is not one new breadwinner job.

  The establishment’s excuses for that stunning failure are intellectually bogus, even farcical. The hard-core Keynesian academics like Professor Paul Krugman say that these empty results are for want of not doing more.

  Apparently, if Uncle Sam had increased the public debt to $40 trillion, and had the Fed printed $8 trillion of new money, America would be rolling in real breadwinner jobs. And if that didn’t do the trick, why, just go for a tripling or quadrupling. After all, when you have the revealed truth from J.M. Keynes himself, you can never dispense enough of it.

  The more pragmatic apologists for the Wall Street and Washington debt and money-printing extravaganza of the last 16 years are even more ludicrous. They claim it’s all a matter of patience and more time. The “headwinds” are supposedly now finally abating and “escape velocity” is just around the corner.

  Let’s see. This is the third-longest business recovery in American history, and before the next president is sworn in, it will be 92 months old compared to a postwar average of 61 months. So the truth of the matter is that time is the enemy, not the excuse. The business cycle clock is about ready to run-out of gas again, and still no breadwinner job gains.

  Actually, it’s worse. In a healthy economy, breadwinner jobs would have been growing at 2% per year since the turn of the century. There would be 100 million of them today—a gain of 29 million relative to the flat line shown in the chart below.

  Needless to say, the policy elite’s pettifoggery that suffices on the New York Times op-ed pages and bubblevision has fooled no one on Main Street. Working folks know that the establishment’s debt-and-money-printing bacchanalia has been an absolute failure because there are no good jobs.

  They also know that the triple-digit gains reported by the BLS nearly every month and celebrated in the financial media are essentially a propaganda hoax.

  These “jobs” consist entirely of transient low-pay jobs in the part-time economy and low-productivity jobs in the HES Complex (health, education and social services). Main Street knows that these gigs are all that’s available and that you can’t earn a real living or support a family on most of the 72 million positions that comprise these categories.

  Even then, there is less to the reported monthly gains than meets the eye. That’s because the serial booms and busts triggered by the Federal Reserve have badly yo-yo’d the employment cycle and sharply diminished the level of permanent job growth.

  To wit, since January 2000, the BLS has reported gross monthly job gains of 20.6 million, but 7.4 million or 36% of these were “born-again” jobs. That is, they were put on the BLS monthly scoreboard, lost during the two recessions since the turn of the century, and then counted again during the subsequent recoveries.

  As we will demonstrate more fully later on, the quality of these born-again jobs has also deteriorated badly. But even giving full credit to busboy, bellhop, bartender and other limited-hours-per-week gigs, the net jobs gain amounts to just 13.2 million or 66,000 per month since the year 2000.

  That’s just 36% of the 180,000 per month growth of the nonretired adult population during the period. Tens of millions of potential workers have simply slipped into the shadows of welfare, dependency and hand-to-mouth subsistence.

  So let it be said clearly. Even as the Wall Street and Washington elites were prospering mightily from soaring government borrowing and a radically inflated stock and bond market, this policy has been a jobs disaster for Main Street America.

  In fact,
the propagandistic excuses and obfuscations made for this patent failure are so analytically threadbare and mendacious as to make Donald Trump sound like an intellectual powerhouse by comparison.

  THE “CARRIER” VOTE AND THE TRUTH ABOUT JOBS

  Among the many surprising twists during the GOP primaries was the fact that Trump not only won the GOP nomination, but locked it up early and essentially did so in the Indiana primary.

  That was supposed to be Senator Cruz’s last stand. But in hindsight, the conventional rightwing senator from Texas ended up getting blown away by the “Carrier” vote. United Technology’s plan to move its air conditioner factory to Mexico became Donald Trump’s whipping boy, and the metaphor had deep resonance.

  And for good reason. Since the year 2000, the United States has lost 5 million of its highest paying full-time jobs in the goods producing economy—that is, energy and mining, construction and manufacturing. Indiana was just Flyover America writ large.

  At the turn of the century, there were 24.7 million goods-producing jobs, but then a devastating counter-cycle began. After the 2002–2007 Greenspan housing boom there were only 22 million such jobs, marking a 11% decline in the midst of what was claimed by the mainstream media to be an awesome “Goldilocks” business cycle expansion.

  And then it got still worse. Notwithstanding endless crowing by the White House and Fed about a huge jobs recovery, there were only 19.6 million goods-producing jobs in June 2016. That amounted to another 11% decline in the midst of what the Washington and Wall Street elite claim to be a solid recovery.

  In all, that’s a 21% shrinkage since the turn of the century. Yet since the fount of productivity and efficiency gains in any economy is goods production, it is not surprising that U.S. productivity growth has nearly ground to a halt.