These Are the Worst of Times

By David Stockman  |  March 11, 2019

Credit is a system whereby a person who can’t pay, gets another person who can’t pay, to guarantee that he can pay.

– Charles Dickens, Little Dorrit (1857)

After 116 months, the weakest recovery in history is running out of steam.

As I noted on Friday, Goldman Sachs’ estimate for first-quarter gross domestic product (GDP) growth started at 0.9%, reflecting “an expected drag from inventories, sequentially slower consumption growth, a decline in residential investment, and a four-tenths drag from the government shutdown.”

The New York Fed’s GDP Nowcast is down to 0.88% from 1.22% two weeks ago and 2.17% in January, pricing in declines in personal consumption, housing starts, wholesale inventories, and other key inputs.

That’s despite the fact we saw the strongest credit growth in 2018 since before the Global Financial Crisis/Great Recession. And it was led, of course, by the U.S. government. Total debt – public and private – grew by $2.52 trillion last year.

But it’s clear now that the Donald’s 11th-hour fiscal pump-priming has been an abject failure.

It was a foolish piling on of even more debt on the very eve of the next recession. Imagine what happens when red ink surges because of falling tax payments and rising Welfare State outlays.

It took 218 years for Uncle Sam to accumulate the $8.8 trillion of public debt outstanding at the end of 2006. But, during the next 11 years, that nearly tripled.

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Indeed, it’s difficult to find a worse juxtaposition: the explosion of the public debt and the weakest 11-year growth rate in history during the same period…

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From 2007 through 2018, real gross domestic product (GDP) grew by 18.85%. That’s less than the 19.89% gain posted during the Great Depression, from 1929 through 1940.

That’s right: The last 11 years have seen the weakest gain recorded since modern GDP statistics were invented.

Is it any wonder why desperate folks in Flyover America put Donald Trump in the White House? It wasn’t for the irony, I’ll tell you that…

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We haven’t seen anything even close to this bad since the Second World War.

For instance, the stagflationary 1970s is thought to be the worst economic period after the Great Depression. But the peak-to-peak real GDP gain between 1969 and 1980 was 38%. That’s more than double the growth of the past 11 years.

Let’s add some context by look at some “good” cycles. During the 1960s “guns and butter” boom, cumulative real GDP growth was 51%. And the tech boom of the 1990s generated an 11-year peak-to-peak gain of 42%.

If there was ever any proof needed that debt is not the elixir it’s cracked up to be, the last 11 years should remove all doubt.

The U.S. economy is now saddled with a rock-bottom net savings rate, soaring public and private debt, and the lowest trend rate of growth ever recorded.

Here’s the smoking gun:

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That’s a 10-year moving average of real GDP growth. It removes the short-run squiggles and the longer business cycles. After a decade of the biggest combined monetary and fiscal stimulus in U.S. history, the real growth rate is 1.5% per year.

That’s lower than it’s ever been, even during the 1930s.

I don’t know about you, but I’m certainly depressed…

The Importance of Loss Prevention

Everywhere you look, there are signs of weakness.

The Great Disruptor may indeed succeed in right-sizing the American Empire – but it’s through no intentional effort of his own.

You see, the world is tiring of the “Indispensable Nation.” It’s starting to suffer too much the costs of “Team America: World Police!”

That doesn’t mean, however, that Imperial Washington is on board to end Forever War… far from it. Neocons are ginning up the old martial spirit against Iran, and Very Serious People on both sides of the Duopoly are eyeing Venezuela for intervention.

The Warfare State will metastasize until something bigger stops it. AOC-and-MMT-style socialism plus the Green New Deal promise the same for the Welfare State.

What it does mean – and this is the short version – is “easy money as far as the eye can see.”

The inability of our monetary central planners to do anything but feed Leviathan and appease Wall Street is the focus of the March issue of The Stockman Letter.

Appeasing Wall Street is, of course, critical to maintaining the status quo. The Fed is therefore merely an instrument of Imperial Washington.

So, we’re stuck abroad… And Main Street is stuck in stagflation… The fundamentals are terrible… All we have is debt to sustain us.

But our monetary central planners will test the absolute limits of U.S. hegemony – including the durability of the dollar as the global reserve currency – to nourish the Acela Corridor.

That’s the way it is in the March issue of The Stockman Letter.

As always, I’ve included “tactical” notes based on The Stockman Model throughout the issue.

The Model is built precisely for the type of disruption that comes with the ends of empires…

To common sense,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR