Save America from Collapse

Dear Reader,

“The cost of every pleasure” — as the great Buddha probably never said — “is the pain that succeeds it.”

If true… the United States economy is in for a dreadful thumping.

Come July, the present 10-year expansion will rank history’s longest.

The stock market has tripled in value over that same space… and once again floats near record heights.

Meantime, American household wealth trounces all previous records.

It recently swelled to a record 535% of GDP. The historic average since 1952… is 384%.

That is, today’s household wealth-to-GDP ratio rises some 50% above the post-WWII average.

It exceeds even the preposterous and dizzied heights of 1999 and 2006 — shortly before terrific plummetings:

Richer on Paper Chart

But this prolonged delirium merely extends a larger trend…

The last four expansions rank among the six longest in the history of the United States.

Can we credit the kindly and nurturing influence of the central bank?

The Federal Reserve wriggled out of its golden handcuffs in 1971, sledgehammered them into millions of pieces… and seized immediate control of the printing press.

It has had the same printing press running in high gear ever since — with few interruptions.

In 1970 — the year before Nixon scissored the dollar’s final golden tether — public debt totaled $275 billion.

Or in today’s dollars, $1.8 trillion.

U.S. public debt today exceeds $22.4 trillion… and expands with each tick of the merciless and punishing clock.

The following chart goes into evidence:

A Picture Worth 1,000 words

In the official telling, the Federal Reserve has tamed the business cycle because of it.

MarketWatch:

Prolonged expansions have become the norm since the early 1970s, when the tight link between the dollar and gold was broken. The last four expansions are among the six longest in U.S. history.

Why so? Freed from the constraints of gold-backed currency, governments and central banks have grown far more aggressive in combating downturns. They’ve boosted spending, slashed interest rates or taken other unorthodox steps to stimulate the economy.

But as Deutsche Bank strategy men Jim Reid and Craig Nicol argue — in understatement perhaps — “There has been a cost.”

Like the gutter tosspot woozied by the false seductions of the bottle… the deadbeat economy goes along on artificial and temporary stimulant.

And the system is increasingly “prone to crisis”:

This policy flexibility and longer business cycle era has led to higher structural budget deficits, higher private sector and government debt, lower and lower interest rates, negative real yields, inflated financial asset valuations, much lower defaults (ultra-cheap funding), less creative destruction and a financial system that is prone to crises.

In fact, we’ve created an environment where recessions are a global systemic risk. As such, the authorities have become even more encouraged to prevent them… So we think cycles continue to be extended at a cost of increasing debt, more money printing and increasing financial market instability.

Watch out when all scales balance, all accounts are squared… and the cycle completes.

A heavy account already lies against us…

The United States government has since borrowed some $11.6 trillion since the financial crisis alone.

Yet the American economy expanded only $5.1 trillion.

In words other, GDP has increased 35%. But the national debt has risen 122%.

Meantime, the Congressional Budget Office projects annual GDP will peg along at an average 1.9% over the next decade.

But debt is piling on at 6% per year.

At what point does debt cease to stimulate at all?

Economists Carmen Reinhart and Kenneth Rogoff have demonstrated that annual economic growth slips 2% once debt-to-GDP scales 60%.

When it strikes 90%… growth is “roughly cut in half.”

The United States’ debt-to-GDP ratio eclipsed 90% in 2010.

It presently rises to 105%.

Meantime, the stock market jogs far ahead of the economy it theoretically reflects.

Emerging from the lost decade of the 1970s, United States GDP ran to some $2.8 trillion in 1980.

Total market cap of the stock market equaled perhaps $1 trillion.

That is, the stock market substantially lagged the economy.

Now come forward…

Today’s GDP is $21 trillion — roughly eight times 1980 GDP.

But at $30 trillion… today’s total market cap is 30 times greater.

And the stock market presently enjoys a nearly 50% lead over the underlying economy.

When will the scales of economic justice reverse once again?

We have no answer, of course.

But the stock market will likely get a good hard lacing once they do…

We have recently hauled forth evidence that the Dow Jones could plummet 35.3% come the next bear market.

And the Federal Reserve may well be out of tricks next time around.

We thus conclude where we began:

The cost of every pleasure is the pain that succeeds it…

Regards,

George Gilder
for The Daily Reckoning

The Daily Reckoning