The first quarter of 2019 has passed, and before we move on, it’s worth taking a moment to reflect on what transpired. Here, we focus on two key metrics: Gross Domestic Product (GDP) and government debt.
According to the March 29 update from the New York Fed’s GDP Nowcast, GDP grew at an annualized rate of 1.3 percent for the quarter. To put this into perspective, a 1.3 percent annual raise is hardly motivating—most workers would suggest it amounts to very little.
In contrast, the U.S. budget deficit for the fiscal year 2019 is projected to reach around $1.1 trillion. This figure represents an approximate 5 percent increase in the current national debt of about $22.2 trillion. To illustrate the severity, government debt is rising at a rate approximately 3.85 times faster than nominal GDP, which stands at around $21 trillion.
These two indicators provide a stark view of our economic condition. Deficit spending is significantly outpacing economic growth, and while extensive fiscal stimulus measures are in play, the economy seems to be stagnating. In summary, the current economic situation appears dire.
As the economy starts to slow and potentially enters a downturn later this year, and as Washington implements further fiscal stimulus, these metrics will likely drift even further into chaos. Furthermore, the Federal Reserve is preparing to exacerbate this turmoil in every possible way.
Indefinite Madness
The Federal Reserve confirmed this quarter what many critical thinkers have recognized for a decade: there is no feasible method to eliminate the government bonds and mortgage-backed securities created through trillions of dollars of fictitious money in the name of quantitative easing. We are entrenched in this madness for the foreseeable future—there’s no turning back.
The Fed’s balance sheet will remain substantially inflated, as quantitative tightening is set to conclude this year with it standing well over 3.5 times its size from a decade prior. Additionally, the federal funds rate is unlikely to return to normal levels. A range of financial markets—including governments, corporations, and individuals—rely on the ongoing liquidity to stay solvent.
Since December, the Fed has shifted its focus from normalization to preserving a high stock market. Given that the economy is now teetering close to its longest, albeit feeble, expansion in the history post-World War II, it is reasonable to expect the Fed to reinstate its policies aimed at devaluing currency as the economy falters.
The distinction between now and the situation in 2008 is significant: the Fed will start easing from an already accommodative stance. Remember that before the recession of 2008-09, the federal funds rate was set at 5.25 percent with a balance sheet totaling $900 billion. Today, the federal funds rate hovers around 2.5 percent while the balance sheet has ballooned to nearly $3.9 trillion.
As we approach the next recession, the Fed finds itself with limited maneuverability. Future quantitative easing could escalate the balance sheet to $10 trillion or more, and with the federal funds rate so low, the Fed may need to reduce rates into negative territory to support financial markets.
This scenario will only intensify the existing distortions in both the economy and financial markets. Compounding this, the Fed is likely to expand asset purchases, potentially moving into corporate debt and U.S. equities.
As the Madness Turns
We find ourselves in a world defined by turmoil, one that is set to become even more chaotic as desperate policy measures are deployed to keep the costs of money low and asset prices high—all while ensuring that politicians in Washington keep benefiting from borrowed funds at the expense of future generations. However, it is crucial to acknowledge that this madness will eventually lead to a reckoning—starting with fear and escalating to anger, followed potentially by devastation.
The forthcoming crisis will meet a populace that has grown weary of its frustrations, those who feel disconnected from the economic successes touted by government reports. The benefits of the decade-long expansion never made their way into their paychecks; rather, the fruits of their labor were consumed by government excess long before they could enjoy them.
It’s essential to understand that these struggles of the American worker stem not from the failures of capitalism but from the shortcomings of a centrally planned economy. The combined effects of counterfeit currency and stifling regulations create barriers that are increasingly insurmountable.
In essence, the economy has become misaligned. The value produced by workers is siphoned off to Washington and Wall Street, where it is misplaced amidst a network of bureaucrats, cronies, and bankers. While the intricacies of these systems may remain obscure to many, the resulting frustrations of diligent individuals fighting for little reward are universally understood.
Unfortunately, proposed solutions, often in the form of promises of free money, will only serve to worsen the issue of excess currency. Scapegoats will be unjustly assigned blame, and demagogues will rise in power. In such a scenario, figures like Mark Zuckerberg may play a role in making tomorrow even less bearable than today.
Sincerely,
MN Gordon
for Economic Prism
