In the first quarter of 2018, the financial and investing industry went into overdrive detailing the upside of the 2018 tax cuts and the positive impacts of a “business friendly” executive and congressional branch on business in America. The stock market hit record highs and the Federal Reserve proclaimed such good times as to raise their economic outlook and increase the likelihood for interest rate hikes.
From January 1, 2018 through March 28, 2018 (Q1), real GDP likely grew $110 billion (a 2.5% rise on an annualized basis). However, the fly in the ointment…according to the Treasury, from Jan 1, 2018 through March 28, 2018 (Q1), federal debt rose by an astounding $621 billion dollars (a 13.1% increase on an annualized basis). The chart below shows the quarterly change in federal debt versus the quarterly change in real GDP since 2000. Q1 2018 was the second largest quarterly growth in federal debt, only surpassed by the massive free spending of Q4, 2008.
Or, if we just subtract the quarterly growth in federal debt from the growth in real GDP…chart below.
Unfortunately, Q1 2018 is one of the worst quarters on record with the growth in federal debt doing laps around the “growth” in Gross Domestic Product (which of course counts all the federal debt fueled activity?!?). Incurring over $621 billion in new debt (to be serviced ad infinitum) to produce just over a $100 billion in new economic activity is something only government could achieve.
However, it gets downright miserable if you add in the massive $500 to $750 billion quarterly growth of unfunded liabilities alongside the growth in federal debt. Together, the UL’s and federal debt are rising $3 to $4 trillion annually while GDP is rising around a half trillion. The tax cuts and fast rising costs of social programs will continue to see deficits rise far faster than economic activity or resultant tax revenue.
How this can be reason for celebration…well, I guess it’s all a matter of perspective. The US can never grow it’s way out of this hole…but the Fed and federal government is the best leadership money can buy. In real time they are choosing (and aligning themselves with) the minority who will end up winners and leaving everybody else to endure the losses as this all shakes out.
One last chart below, showing four critical variables.
1) annual change in 15-64yr/old US population (grew line)
2) Disposable personal income (green line…total dollars nationally available for spending after all taxation is accounted for)
3) Wilshire 5000 (yellow line, market cap or value of all publicly traded US stocks)
4) Federal Funds Rate (black line, short term interest rates set by Federal Reserve)
As population growth of the adult core has decelerated (and subsequent growth in demand), interest rates have been cut to incent the substitution of leverage and debt to maintain growth. However, the growth has primarily been in asset values instead of economic activity or wage growth.
If you are curious how this fits in the bigger picture, recently I explained how The Faster America “Grows”, The Faster America Goes Bust . Please also consider Who Will Buy Those Trillions of US Treasurys??? Next, why the Ultimate Indicator Suggests US Never Truly Recovered From the Great Financial Crisis. How Did America Go Bankrupt? Slowly, At First, Then All At Once!!! And finally, please consider the global perspective, The Most Important Economic Charts…Aren’t Economic Charts