The Rotten Underbelly of Today’s “Booming” Economy

“The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.” – F. Scott Fitzgerald

On the one hand, things in the economy look pretty good. The mainstream pundits sure seem to think so. They fill the financial news shows with daily doses of good cheer. But is everything really sunshine and roses? Or should we be holding some opposing ideas in our minds as well?

In a recent article published at The Sovereign Man, Simon Black reflects on the 10-year anniversary of the Lehman Brothers bankruptcy. As the global financial system unraveled, Black recollects that the overriding emotion was fear.

People were terrified of what was happening in the economy. The real estate market had dried up. The stock market had crashed. Some of the most hallowed financial institutions in the world went bust in the blink of an eye.”

A decade later, that fear is all but forgotten. The consensus among mainstream economists, talking heads, politicians and central bankers is that the economy has come roaring back. As Black points out, there is certainly evidence to support this notion.

• Financial markets around the world have hit all-time highs.
• Real estate values are at record highs.
• US median household income is up.
• Governments around the world are seeing strong tax revenue.
• Economies are growing globally.
• US GDP has increased 38% since the Lehman collapse.

So, why should we be concerned about the economy? Why should we worry?

Because if you recall, there was this same kind of unbridled optimism in the months leading up to the 2008 collapse. And there was some very similar financial rot that nobody was paying attention to.

Despite all of the signs pointing toward a strong global economy, we have similar economic rot in the underbelly today that few people are paying any attention to. Most people are ignoring Fitzgerald’s “opposed ideas.”

What are we missing?

Debt.

Yes, US GDP has increased 38% in the last decade. At the same time, the US national debt has increased by 122%. As we reported last week, the federal government set a monthly spending record in August.

Black puts the government debt into some pretty stark terms.

In other words, in the last ten years, the US national debt increased by more than $3 for every $1 increase in GDP. It’s brilliant!”

And it’s not just the US that has run up huge piles of debt. Globally, government debt has tripled to $63 trillion since Lehman’s bankruptcy.

Consumer debt has also increased significantly. Total household debt in the US hit a record $13 trillion in 2017, eclipsing levels seen on the eve of the Great Recession. In fact, a recent report revealed that the bottom 60% of American income-earners accounted for most of the rise in spending over the past two years even as their finances worsened. The data shows that the rise in median expenditures has outpaced before-tax income for the lower 40% of earners in the five years to mid-2017. In other words, poor and middle-class Americans are driving the US economy by spending more than they earn.

We also have to add corporate debt to the mix. As Black puts it, “there are insolvent, money-losing companies that have no hope of paying back their debts that are able to borrow money at super-low interest rates.”

Debt isn’t the only thing that has increased astronomically in the last decade.

The amount of money in the global financial system is also near all-time highs. In the wake of the 2008 crisis, The Federal Reserve and other central banks created trillions of dollars out of thin air as they pushed interest rates to zero and below.

In simplest terms, the apparent economic boom we see today is built on a rotten foundation of debt and easy money – just like the boom leading up to 2008.

In the late 90s, the dot-com bubble burst and there was a deep recession. What happened? Central banks lowered interest rates and created money out of thin air. This easy money fueled the housing boom. A mountain of debt followed. As Black put it, it was totally ridiculous. Yet almost everyone was convinced the economy was strong and the boom would last.

Just like today.

It didn’t. And ten years ago the collapse took all the ‘experts’ by surprise. Now, a decade later, the experts once again agree that it’s all rainbows and buttercups. They believe they fixed a problem caused by too much bad debt by facilitating record levels of even worse debt. They believe they fixed a problem caused by too much money in the system by injecting trillions of dollars of new money into the system. They believe they fixed a problem caused by artificially low interest rates by slashing interest rates to the lowest levels we’ve ever seen in all of human history. They also seem to believe that this time will somehow be different.”

It probably won’t.

Photo by Andy Hay via Flickr.

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!