Debt-fueled spending? It's not the same as growth.
It can be tempting to interpret debt-fueled spending as economic growth. But it's really just a zombie economy.
The zombies are taking over!Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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Stocks went up 4 points on the Dow on Friday… Gold went up $10.
Noise. Distraction. Headlines. Opinions.
The important trend is the big one – the shift of resources from the private sector to the public sector.
During the bubble years, the private sector made a big, big mistake – taking on far too much debt.
Now, it is correcting its mistake…reluctantly, painfully, and with plenty of foot-dragging and interference from the government. Instead of letting the dead die in peace…the feds are pumping financial adrenaline into their veins…turning them into zombies.
It’s expensive work…so government is now making the same mistake the private sector made a few years ago. It’s pretending that debt-fueled spending is the same as growth. Ain’t no such thing.
The feds’ “growth” is even more pernicious and counterfeit than the bubble era growth in the private sector. At least people actually wanted houses…they just couldn’t afford to pay for them.
The feds, on the other hand, produce things that people wouldn’t buy even if they had the money – zombie products. Who would buy a billion-dollar software program to spy on other people? Who would pay other people to do nothing? Who would take on the debts of a failing financial institution?
“Fannie Mae, which owns or guarantees about 28 percent of the $11.8 trillion US home-loan market, has been hobbled by a three-year housing slump that wiped 28 percent from home values nationwide and led to record foreclosures. The company, which posted $120.5 billion in losses over the previous nine quarters, and rival Freddie Mac were seized by regulators in September 2008.”
Did you read that carefully? Fannie Mae guarantees almost a third of the $12 trillion home mortgage market – or about $4 trillion. And guess who guarantees Fannie Mae? You do!
Fannie made bad loans. It ought to be put down, like a horse with a broken leg. But Fannie’s bondholders don’t take a loss. The losses have been moved to the public sector and Fannie itself has been turned into a zombie company.
Assets, liabilities, spending – it’s all shuffling over to the government…and sucking the life out of the private sector. In the area of durable goods, only about 4.4% of them, on average, were purchased by the pentagon over the last 17 years. But since the beginning of the financial crisis, durable spending by private industry decreased…while pentagon spending went up. The most recent figures show that 8% of durable orders are now bought by the military.
Recovery? Don’t bet on it. This government spending only makes it look like a recovery. The numbers may show an increase in durable goods sold, but tanks and armored personnel carriers don’t lead to genuine growth. They lead to Soviet-style zombie growth…by the government, of the government, and for the government. The rest of the economy shrinks.
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