Let’s Consume More Than We Produce!

By David Stockman  |  March 18, 2019

“Oh, ‘tanstaafl.’ Means ‘There ain’t no such thing as a free lunch.’ And isn’t,” I added, pointing to a FREE LUNCH sign across room, “or these drinks would cost half as much. Was reminding her that anything free costs twice as much in long run or turns out worthless.” 

“An interesting philosophy.”

“Not philosophy, fact. One way or other, what you get, you pay for.”

– Robert A. Heinlein, The Moon Is a Harsh Mistress (1966)

“Whatever it takes” stimulus by the state’s fiscal and monetary authorities has many victims. That includes, or course, historical principles of sustainable capitalist finance and sound money.

But one of the most crucial is common sense itself.

Consider the repeated refrain in the Mainstream Media that trade statistics for 2018 denote a strong economy. Indeed, we’ve been told you can get ever richer by going broke.

Here are the knuckleheads from Politico, Imperial Washington’s house organ, in something they like to call “Morning Money”:

Trump embarrassed on trade – President Trump based his campaign on reversing the nation’s trade deficit, a dubious pledge given the deficit usually reflects a strong economy. But now he’s going to have defend the fact that the deficit with China hit a new record in 2018. The overall trade deficit of $621 billion was the highest since 2008. 

The blithering ignorance is on full display in the phrase “given the deficit usually reflects a strong economy.” It’s also a weak swipe at the Donald.

The good news is we have evidence.

It happens that the U.S. has experienced continuous and rising trade deficits since the early 1970s. They now add up to more than $15 trillion. Presumably, that deficit explosion coincides with an increasingly “strong economy”…

Except it doesn’t.

That’s the conclusion after four decades of “bigger and better” trade deficits. The real annual growth rate for gross domestic product (GDP) on a rolling 10-year trend basis has fallen from postwar heyday rates of 3% to 4% to only 1.5%.

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About that 1.5% trend rate…

It’s so abysmal that we never got that low even during the 1930s. So, yeah, it’s worse than the Great Depression.

We’re not talking about short-term, point-to-point deltas you can cherry-pick just to prove a point. There are few things more robust than a 10-year rolling average stretched over the course of seven decades.

Real GDP growth is sinking…

10-Year Average Real GDP Growth line graph; Please consider allowing your email client to download images associated with this email.

[Click to Enlarge]

They’re ignoring the compelling evidence of the last 70 years.

If soaring trade deficits reflect a booming economy, how is the “boom” being financed?

Common sense tells you a boom financed 100% by rising employment and productivity is a wholly different kettle of fish than one financed 100% by debt and rising leverage ratios.

The latter is exactly what’s happened since 1971. It’s a rolling national leveraged buyout with one unmistakable characteristic…

Our leverage ratio – that’s public and private debt divided by national income – has erupted by two full turns of debt. In plain language – and by today’s economic scale – that amounts to $40 trillion.

The debt-to-income ratio for the U.S. in 1971 was 1.48 times. Today, it’s 3.47 times.

That, folks, is the only elephant in the room that should matter. Other than during the Great Depression, when national income collapsed, the approximate 1.5 times leverage ratio had prevailed since 1870. That’s through boom and bust, war and peace, good weather and bad…

That 3.47 times leverage ratio is the corollary to America’s soaring trade deficits. Cheap central bank credit and sustained interest-rate repression have enabled the U.S. economy to live way beyond its means for decades.

We’ve consumed more than we’ve produced, year-in and year-out, while borrowing the difference.

In a closed economy with no central bank printing press, that trick wouldn’t work. Interest rates would rise in the face of surging credit demand, offsetting the rising spending of some households, businesses, and/or government units with the increased savings of other such units…

That, again, is an honest market-based system.

Our monetary central planners, however, have validated the free lunch…

Merits of a Sound Model

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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