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The Daily Reckoning

Zombie spending and US debt

The mainstream media and the US government still won't acknowledge that stepping back and doing nothing may be the best solution for our economy

By Guest blogger / June 7, 2011

Bella Marx waits after having her make-up completed prior to the filming of a commercial to promote the upcoming Zombie Prom, at the Ogden Union Station in Ogden, Utah, May 13, 2011. Forty percent of spending in the US is "zombie spending," paying for interest on debt, writes guest blogger Bill Bonner.

Jim Urquhart / Reuters / File

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Yesterday, stocks continued to slide. The 10-year note yield fell to exactly 3%. Oil traded at $99. And gold rose another $4.

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Has the post-crisis bounce finally exhausted itself? It’s beginning to look like it. But you wouldn’t be surprised if this turned out be just another feint to the downside, would you? We’ve seen several. We expected the end of the bounce last summer. Instead, the rally has held up for a full year longer than we expected.

Is it ready to roll over now? Let’ wait and see…

We’re attending a conference of financial analysts, investment advisors and writers.

What have we learned so far?

How about this? Porter Stansberry told us that together, public and private sectors in the US now spend $3.5 trillion just on interest. Since almost all the borrowed money was spent on consumption rather than capital investment, this expense is just one big drag on the economy. It produces no growth, no real jobs, and no real wealth.

And here’s another big drag: taxes. Porter says the total tax take is about $2.5 trillion. Again, this is money almost 100% consumed…eaten up…used up, with nothing to show for it but people eager to consume even more next year.

These two expenses combined tote to about 40% of GDP.

No wonder the economy is not growing! Four out of every ten dollars is zombie spending. It supports hamburgers consumed in 1998…gasoline burned in 2002…bankers’ bonuses handed out in 2008…and food stamps distributed in 2011.

Debt, in other words. But what can be done about it?

Households are already defaulting on mortgage debt. As the Great Correction intensifies, there will probably be more defaults. And not just on mortgage debt, but on credit card debt and student loans too.

Over in the public sector, they’re counting on inflation to wipe out much of their debt. Already, inflation is said to have reduced seniors’ purchasing power by 32% over the last decade. And that is with an official CPI of only 1% or 2%. Wait until inflation really gets going!

Meanwhile, word is getting out. The mainstream financial media – which supported the feds’ nitwit interventions – is beginning to realize that they didn’t work. Here’s The Economist rubbing its eyes, waking from a long sleep:

RECOVERIES from financial crises are usually subdued, but America’s is starting to look comatose…

Last December an agreement between Barack Obama and the Republicans to extend George Bush’s tax cuts and enact new ones led to forecasts of 3% to 4% growth this year. But the new consensus rate of 2.6%, for a recovery now two years old, is barely above America’s long-term potential and scarcely enough to bring unemployment down. To be sure, the post-crisis imperative for banks and households to reduce their debt meant a V-shaped rebound was never on the cards. Even so, this is a terrible performance.

Economists have found themselves repeatedly making excuses. First it was the snowstorms. Then it was Japan’s earthquake, tsunami and nuclear disaster which crimped the supply of parts to car assembly plants in America. Then, as the snow melted, floods ravaged Arkansas, Mississippi, Missouri and Tennessee, and tornadoes battered Alabama and Missouri. America has suffered five incidents of extreme weather this year, each inflicting at least $1 billion in damage.