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Sunday, August 15, 2010

Is this Finally the Economic Collapse

In an article entitled "Is this Finally the Economic Collapse" posted on by Keith R. McCullough really does a good job in summing up were we sit in the economy today and foreshadows the future with QE2 (Quatatative Easing part 2).  To further support Keith's article I will provide supporting data to some key points made and try to break them down a bit from my own research.  Keith states that the crossing of 90% for the Debt to GDP ratio is the point of no return for the U.S. economy ( and we are beyond 90%).
Observe that in the 1940's we did have a Debt-to-GDP of 120% and we obviously came back from that.  So why is that different?  How if we came back from 120% percent Debt-to-GDP if 90% Debt-to-GDP today is a point of no return.  In 1946 our debt climbed to $279 billion (due to World War II accumulated debt) and never actually went down as you can see in the chart below which I changed to be debt in billions of dollars (i.e. we didn't pay it down).

Now if we look at how much GDP has grown we can observe how we came down from 120% in the 40's.
Overlaying GDP growth and Debt growth together between 1930 to 1970 reveals a very interesting development.  We didn't actually pay off all of our debt (actually we increased it), we just increased GDP more than our debt.  You can actually see the crossover of Debt and GDP.  
The next question is why don't we just do the same thing again to solve our current debt crisis or wait over time and GDP will increase.  A couple of issues come into play with that scenario.  First in the mid to late 1980's we started shifting our economy from a industrial to a service economy.  We now import most of our goods from other nations instead of creating them.  Even products our U.S. based companies get created or are mostly made from parts made overseas.  In this past decade we started shipping our service oriented jobs overseas as well.  Our ability to increase real GDP growth is greatly reduced.  The other issue is that we have consumed too much and created too much debt which continues to climb.  Interest on that debt starts to feed into that debt as our ability to pay debt, with Government revenues, exceeds Government revenues.  As of this writing the interest per citizen is $3,407.00, according the the U.S. Debt clock.  Now remember that was per citizen, not tax paying or employed citizens.

Another fact that doesn't bode well for our economy is demand for products from China (one of the main financiers of U.S. Debt) had decreased.  Last year imports decreased 12.3 percent from the U.S. to China.  Recent articles depict a further reduction in imports from China as the Chinese economy is slowing (China-US trade chart courtesy of
Using July 2010's U.S. workforce figure of 153,560,000 and the current food stamp figure of 41,720,812 from the US Debt Clock, we come up with 27% of the work force is on food stamps.  The workforce includes employed and unemployed people, they are the people eligible to work.  

Keith mentions the yield spread in his article and the fact that it continues to collapse, down another 4 basis points.  What is the yield spread you might ask, well the yield spread (or yield curve spread) is the difference between short-term and long-term interest rates.  In the past, a narrowing or flattening of the spread indicates a slower economic growth or increased pressure on bank earnings.  Another note interesting about the yield curve is that when it gets inverted (short-term rates exceed long-term rates) a recession usually ensues within 2 years.  

Here is a chart of the S&P 500 to illustrate what Keith was talking about it falling under its 200 day moving average, but first lets talk about what this is.  The S&P 500 is an index that is composed of 500 large-cap common stocks actively traded in the U.S.  This index gets companies changed out from time to time and can give indicators of how large-cap companies are doing.  The 200 day moving average is a average of the stock price over a moving window of 200 days.  Generally, if the index stays above its moving average that indicates growth.  When the index falls below its 200 day moving average it indicates slowing of these large-cap companies and a possible critical turning point (not always guaranteed as injections/interference from the government skews results).  Chart courtesy of yahoo finance.
The U.S. Volatility Index or VIX indicates the amount of volatility in the market.  When the VIX rises the difference between the high and low prices for the indices start to widen.  You'll notice large swings in price movement while the VIX is on the rise and a smaller price movement when the VIX is lower.

To end this post, I think the quote Keith made speaks volumes and is worth repeating.  "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money".

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