For the past six years, we’ve anticipated that the U.S. economy would finally gain the momentum necessary to thrive independently, without needing ongoing monetary or fiscal stimulus to prevent stagnation. Unfortunately, current trends suggest that this might not be achievable.
In essence, the U.S. economy may require a significant downturn before it can truly recover and grow sustainably. It has become excessively burdened with debt, making true progress difficult. Recent data reinforces this notion.
The International Monetary Fund (IMF) has projected that the U.S. economy will only grow by 1.6 percent this year, which is approximately one percent lower than last year’s forecast. This indicates that economic growth is not just stagnant; it’s actually declining.
The IMF notes that this slower growth is attributed to the ongoing slump in the oil industry, reduced business investments, and a persistent surplus in business inventories. Could this mark the end of the weakest economic recovery since World War II? Only time will tell.
However, those attentive to the current economic landscape recognize the grim reality: business is not thriving, and corporations are struggling to enhance their earnings.
Debt Dependency
Particularly alarming is that corporate earnings for S&P 500 companies have witnessed a decline for five consecutive quarters. This prolonged slump raises concerns as we await the third quarter’s results, which could reveal a sixth straight quarter of falling earnings.
While earnings eventually may rebound following a significant downturn, we believe a more substantial adjustment is imminent. This may lead to increased layoffs, corporate restructuring, and even bankruptcies.
In today’s economy, growth is increasingly reliant on escalating debt levels to survive. Despite this, central bankers and treasury officials have failed to eliminate business cycles, resulting in inevitable recessions characterized by towering debts and bankruptcies.
Concerning government finances, even a slight slowdown can wreak havoc on budgets, which have already been stretched thin. When tax revenues decline, deficits soar, necessitating even more debt issuance—often in the form of stimulus—to manage the accumulating debt. Ironically, retrenching from new debt can lead to an overall increase in total debt, which aligns with the Keynesian argument against austerity measures.
Heading Towards Collapse
While we may not agree with this trajectory, it is clear that the current system promotes a cycle of dishonest money that penalizes savers while rewarding borrowers.
This deceitful framework is headed for failure. Once an economy becomes overly reliant on stimulus, any new efforts to stimulate growth end up ineffective. Much like the mythical Ouroboros, a serpent consuming its own tail, the system is bound to self-destruct.
From a financial perspective, the United States is on a precarious path. The national debt stands at a staggering $19.5 trillion, yet the GDP is merely $16.5 trillion.
According to the IMF, the growth forecast for 2016 is 1.6 percent, while the budget deficit is projected to be 3.3 percent of GDP. The picture is clear: debt is climbing while growth is stalling. What does this imply for the future?
At the Economic Prism, we strive for simplicity. From our perspective, the rising debt coupled with declining growth indicates a divergence. The economy must either recuperate or risk slipping back into recession.
Current indications suggest that the economy may need to retreat before it can progress forward. Hence, it’s wise to plan accordingly.
Sincerely,
MN Gordon
for Economic Prism
