The Hidden Depression of the 2000s 52 comments
September 20, 2009
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For several weeks I have been working on the analysis of economic activity from the point of view that without some temporary, artificial and unsustainable factors, the U.S. would not have had what appeared to be prosperity during the years from 2002 to 2007. This article is the result. However, rather than providing answers, I think this piece just raises more questions. I have come to realize that this is the start of a research process, not the culmination. I am indebted to private discussions with Seeking Alpha contributor Steve Hansen, who has helped clarify my thoughts about how much more needs to be done.
The U.S. has been living on borrowed time, literally. In the past several years we have run up federal deficits at a record rate. We have expanded commercial credit far more in proportion to growth of the economy than previously. We have also used rising home equity as personal piggy banks. If we had not taken these reckless actions, we would have been in almost continuous recession since the third quarter of 2000. There would have been only one quarter that did not have negative GDP growth and that quarter (first quarter 2005) would have seen 0.1% GDP growth.
The Rationale
I have focused on three expansions of debt. Let’s view the overall economic picture of the situation as a cash flow. I have identified three cash outflow items that have exceeded historical norms: federal deficits, commercial loans (which includes credit card debt) and net home equity withdrawals. I have identified one “cash” inflow item, GDP. This is not really cash inflow, but the cash value of economic activity measured under the GDP formula.
Clearly these (cash outflows and inflow) are not related through any cause and effect. Debt was not taken on for the purpose of purchasing GDP. But, if you consider the economy before the bursting of the dot.com bubble “normal”, then expenditures in excess of what occurred prior to 2000 should be considered in excess of normal. For the purpose of this analysis, I have subtracted the total of those excesses from the nominal GDP each year from 1998 through 2008. In other words, the basis of the analysis is that the national “wealth” was changed positively by GDP growth and diminished by debt incurred above the normal baseline.
I have identified four possible inaccuracies of my approach in Appendix I. There may be more factors that readers can identify. If there are suggestions, it will help my further efforts on this topic.
Even recognizing these potential inaccuracies in the analysis, I believe it does put us in the ballpark, if not actually on the pitcher’s mound. The four factors identified act in opposing directions (two would affect the adjustments to GDP positively and two negatively), but I do not want to try to estimate to what extent they might be self-canceling.
Excess Commercial Credit
The following graph compares the growth of total commercial credit and nominal GDP.
The following table was prepared using the data from the above graph. It defines the “normal” level of commercial credit growth compared to GDP growth for the 27 years 1974-2000. It compares that to the higher commercial credit growth rate for 2001 through 2008.
For 2001-2008, growth of commercial credit above 0.4% per year was considered excess, an average of 2.9% per year.
Home Equity Extraction
The home equity piggy bank was used to support higher consumption in the face of stagnant and declining incomes in the past several years. This was defined in a Federal Reserve Bank paper by Alan Greenspan and James Kennedy (here). The following graph was prepared by Calculated Risk Blog (here) from the Kennedy-Greenspan data.
For the five year period 2003-07, from 6% to 8% of disposable income was obtained from the home equity ATM. For most of the 1990s, this source was 1% or less of disposable income. With the collapse in home prices, this source of money essentially dried up by the middle of 2008.
Federal Deficits
The Federal deficits used in this analysis are the on-budget deficits, which ignore off-budget offsets, such as Social Security fund surpluses. These deficit numbers were obtained from the U.S. Government Budget for 2010, Historical Tables (here). The annual deficits were divided into four equal parts for each quarter.
GDP Net of Excess Debt
The data and results of calculation are given in the table in Appendix II.
The graph below compares the changes quarter to quarter for Real GDP and Nominal GPD adjusted downward by the amount of excess debt. The gray shaded areas indicate the official periods of recession. The pink shaded areas indicate the areas of negative adjusted GDP growth.
The Stock Market Peak of 1999-2001
The most dramatic picture of the catastrophic decline in the U.S. stock market is shown in the following chart from www.chartoftheday.com . Charts could also have been drawn valuing U.S. stocks in a number of non- U.S. dollar currencies with similar, but less dramatic, declines. We have a depression-like stock market decline which has lasted more than ten years so far.
Depression of Personal Income
For the first time since the Great Depression we have a ten year time span with declining median income. From a 1999 high of $49,244 (2006 dollars), 2008 saw a 4.3% decline in median household income, as shown in the following graph.
Using the decline in payroll taxes as a guide, it can be anticipated that the median household income will have another significant year over year decline in 2009.
Note: The data displayed in the above graph was collected from three different U.S. Census Bureau sources and merged. This is described in Appendix III.
Depressed Employment
From an all-time high in April, 2000, full-time employment per capita has dropped approximately 10% in just over nine years. This is another depression-like economic parameter. There was an increase in full-time employment per capita 2004-2007, but it never regained the previous high. See the following graph.
Poverty
The years starting after 2000 and through 2008 constitute a period of time without a decrease in the poverty level of 0.5% or more. Only the “mini depression”, encompassing the 1980 and the 1981-82 recessions, has had a larger increase in poverty, but that increase spanned five years and this spans eight years so far. In the following graph, periods of rising poverty are shaded gray.
Conclusion
Whether you look at stock market values, personal income, poverty, employment, or GDP relative to newly acquired debt, we have had a depression for most of the early twenty-first century. It has been masked by unprecedented borrowing. Commercial credit and credit cards have been used at an unsustainable level. Home equity has been used like an ATM. Federal spending has been put on the tab. If you look at the U.S. as a black box, we have borrowed trillions of dollars, poured the money into a hole in the box, and gotten far less in value out the other side. That is what happens when you borrow for consumption, rather than for production. We have been on the mother of all consumption binges and now we have a colossal belly ache and hangover. How depressing!
Appendix I
There are four criticisms I can make of this analysis at this point in time:
1. The implicit assumption is that, by subtracting a dollar of GDP for each dollar of “excess” credit, the two dollars are equal. In fact, in the past few decades a dollar of increased debt (total debt, not just the three categories included in this analysis) has correlated to much less than a dollar of increase in GDP. In fact, the effect of “excess debt” on our national wealth and GDP decline may be greater than assumed in this analysis.
2. The “normal” assumed for federal deficits is the near zero values of the late 1990s. If the baseline were to extend further back in time, “normal” could be some value (for annual deficits) larger than zero, but still far below the deficits since 2000. If this higher normal baseline for annual deficits were selected, the effect on GDP decline would be less.
3. The entire full value of net home equity withdrawal was assumed to be excess. It might be appropriate to define some low level of net home equity withdrawal as normal. If this were done the effect on adjusted GDP would be less negative.
4. The calculations were all done with nominal values (not adjusted for inflation). If they had been adjusted for inflation (to obtain the so-called real values), the GDP declines would have been greater.
Appendix II
The following table is presented as two images to fit image editing size restrictions.
Appendix III
The median household income for the ten years 1999-2008 was obtained from three separate U.S. Census Bureau sources. These are shown in the following table, along with the deflators calculated from the data and the 2006 dollar values calculated for 2007 and 2008.
The active links are:
(a) http://www.census.gov/prod/2007pubs/p60-233.pdf Table 669 | ||
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Amassing of material wealth is only one of the seasons of nature. Amassing of spiritual and intellectual wealth is another season.
Humanity gets wealth from the Earth and wealth from the Heavens and they do not come in the same season, speaking metaphorically.
Crank up the interest rates and defend the currency during one season. Crank down the interest rates, expand the economy, and devalue the currency in the next. Only don't forget that there are two seasons to follow -- don't develop an ideology that only expansion is good and necessary, and the other season can be tricked in some way.
Ben Bernanke is like Faust trying to trick the Mephistopheles who has come to his door, ready to receive his payment.
The problem with this model, as humans, is that we like to be born, we like to grow stronger, we like to become richer, and be powerful in the world -- but that season that insists that we 'empty out', give up our riches -- is not so much fun, and we'd like to find some way to avoid that season. That is what the Fed has been doing since Greenspan became Ahab and began chasing the White Whale, trying to kill it through 'increased liquidity' -- by creating an ocean of debt out of the whole world. It's death we fear, the dark night, the mortality of our ambitions. We can run from it. But we can't outrun it. The Winter comes; but it doesn't last for ever.
On Sep 21 02:03 AM derryl wrote:
> John posed the question, "The question : Is growth necessary? <br/>
>
> That one question opens a flood gate: Will our system actually collapse
> (as you suggest) if growth stops? Or does the nature of our individual
> existences fundamentally change in that scenario? What would a world
> be like if existence was subsistence and intellectual?"
>
> Long ago I came to the conclusion that growth is not economically
> necessary but our financial system will collapse without it. Banks
> create our money as loans, which is debt to us. We spend our loans
> into the economy and the people we buy stuff from save some of it,
> invest some, and spend some. The money that is spent and invested
> in the real economy all ends up as somebody's income. The money
> that is saved is removed from the economy and is not available for
> people to earn as income.
>
> Banks are not allowed to lend out their depositors' account balances.
> They can only create and lend out new money. So all the money that
> is "saved" is now unavailable to the old debtors who originally spent
> that money into the economy, but the old debtors need to recover
> that money as incomes in order to repay their debts (i.e. in aggregate,
> all debtors). The only money that is available to earn as income
> is the newly created debt-money that is subsequently spent into the
> economy. And some of that money is saved, too, so more new money,
> in aggregate, needs to come into the economy in order for ALL the
> old debtors to have access to enough income to pay back their old
> debts.
>
> This is basic arithmetic. All money begins its existence as debt.
> If some of that money is removed from the economy then there is not
> enough money in the economy for everybody to repay their debts.
> Total debts are D; total savings are S; total amount of money in
> the economy is D - S, which is less than D.
>
> So the kind of "growth" that is necessary is growth in the circulating
> money supply. Savings are money that is taken out of circulation
> and it doesn't matter if you put the savings in a bank or in a sock.
> That money is unavailable to the economy. Only evermore new money,
> new debt, entering the economy can keep this system working as long
> as any money at all is taken out of the system as savings.
>
> If you ask a financial economist, of the 'apologist' type who believes
> in the current system, "Where does the money come from to pay interest
> on bank loans?", he will tell you that the bank distributes the interest
> received as incomes to its employees and shareholders and so puts
> it back into the economy for the debtors to collect. When you ask
> how the borrower can collect his redistributed and respent interest
> payment before he pays it you get a dumb stare.
>
> A further problem is when loan money is spent and ends up in the
> hands of someone who takes it out of the productive economy (where
> it can be earned back by the debtors) and uses it to buy stocks or
> other financial investments. Most of this kind of financial investment
> money stays in investments of one kind or another, circulating among
> the investor class who comprise a small portion of the population,
> and is unavailable to be earned as income in the physical economy.
> This kind of investment money has almost the same effect as saving
> money. It removes it from the economy where indebted people need
> to earn it back in order to repay their loans.
>
> Once you understand that money is created by banks as loans, which
> are debts to the borrowers, and this is the ONLY source of money
> in the system, it becomes clear why "growth" is "necessary". It
> is a necessity caused by the way our monetary system is designed
> and I will repeat what I said in a long ago comment. It is a piss
> poor system.
It seems that every great economic crisis is preceded by notable people proclaiming that we have reached a new permanent level of prosperity. It happened in the late 1920s and again in the late 1990s, irrational exuberance excepted. (I am sure there were notable quotes of warning from the 1920s, as well.) However, when it is proclaimed that times can never be bad again, lay in extra provisions.
On Sep 21 02:14 PM Michael Clark wrote:
> Day Cycle of expansion 1983-2001. With this understanding, the Fed
> should have begun to raise interest rates slowly in 1998 and 99 and
> eased into the contraction phase that will run from 2001-2019. ......
On Sep 21 03:00 PM John Lounsbury wrote:
> Michael - - -
>
> It seems that every great economic crisis is preceded by notable
> people proclaiming that we have reached a new permanent level of
> prosperity. It happened in the late 1920s and again in the late 1990s,
> irrational exuberance excepted. (I am sure there were notable quotes
> of warning from the 1920s, as well.) However, when it is proclaimed
> that times can never be bad again, lay in extra provisions.
A home run is thrilling, but a flock of singles win ball games. Some of the most successful strategies I know for individual investors involve buying something like 400 shares (maybe not all at once) and automatically selling 100 when you are up 30%, no matter how great the fantasies; sell another 100 when up 60% and another 100 when up 100%. Stay with the last 100 shares with trailing stop loss orders (maybe something like -25%), either forever or until a better opportunity is seen.
I believe in stop losses, and would never take a loss once a stock is up 10%. Be careful though, as the gains accumulate you can be unhappy by keeping the stop loss orders too tight and getting "whipsawed" out on a temporary pullback.
On Sep 21 03:09 PM Michael Clark wrote:
> John: I noticed long ago when I am investing and my stock goes up
> 30% -- and I began to fantasize it going up 3,000%, that is the actual
> top of the stock. Something to do with Euphoria being the top of
> the mountain and the first step down again.
And, the those entrusted with US budgets, as shown in the historical tables must be terribly inept.
Whereas, Bernanke & Co are suggesting green shoots everywhere and an economy that is springing back, bolder than ever, the 2009 budget shows a drop in 08 to 09 for individual tax receipts of 17% and a massive 48% for the Corporates, followed by an anemic & imaginary minor pick up in the 2010 estimates.
Meanwhile, outlays are set to jump 34% bewteen the 08 to 09 comparison and the deficit is set increase 40%, to $1.84 Trillion in 2009, up from $458 Billion in 2008, which in turn was up from $160 Billion in 2007.
So, we have the above, then we have -
1) Consumers have taken a massive hit, via falling housing equity, lower share values & reduced access to credit.
2) The economy is deleveraging and will do so, for some time to come. Derivatives is the other Elephant in the living room!
3) Two of the three major growth drivers (Oil & Population), have Peaked and are heading south.
4) Unemployment still rising.
5) Business Earnings are falling dramatically and bankruptcies are rising, which is where the falling Corporate tax receipts com from.
6) Consummer activity is down.
7) Massive increases in Health and Social Security Costs, are on the way, again expanding government deficits.
8) Problems arising from Climate Change and Food Production are also set to interfere with future plans.
9) Share Markets first fell some 50% and have since increased some 50%, still leaving a massive reduction in total wealth.
10) Gold is rising & the US$ is falling.
And yet, we have P/E ratio's moving into orbit, based on what???
I don't know about alchemy, nor green shoots or whether the government can budget, but I do know where the US & Global economy is likely to go over the next few years and it won't be a place for bulls!
On Sep 21 03:52 PM John Lounsbury wrote:
> Michael - - -
>
> A home run is thrilling, but a flock of singles win ball games.
> Some of the most successful strategies I know for individual investors
> involve buying something like 400 shares (maybe not all at once)
> and automatically selling 100 when you are up 30%, no matter how
> great the fantasies; sell another 100 when up 60% and another 100
> when up 100%. Stay with the last 100 shares with trailing stop loss
> orders (maybe something like -25%), either forever or until a better
> opportunity is seen.
>
> I believe in stop losses, and would never take a loss once a stock
> is up 10%. Be careful though, as the gains accumulate you can be
> unhappy by keeping the stop loss orders too tight and getting "whipsawed"
> out on a temporary pullback.
Your presentation turns attention to the elephant in the room.
A large number of people are left behind as just road kill on the 'creative destruction' highway to nowhere.
Stimuli/government spending just preserve overcapacity a la Japan and so lengthen the crisis which is one of surplus capacity and capital.
There's a new angle for you. It's devilishly complex.
Good luck
W.
On Sep 20 07:40 PM John Lounsbury wrote:
> lookingsouth - - -
>
> I will take note of your request. I will warn you though, I am feeling
> overwhelmed just trying to make sense out of the U.S. part of things
> so I may not get to your suggestion very soon.
>
> logicalthought and Dave Wrixon - - -
>
> Your comments are on to something that has been bothering me. It
> is common wisdom that the Great Depression was ended by WW II. However,
> that event prompted a huge debt bubble and unwinding that credit
> inflation created some severe recessions in the following years.
> I want to look at the credit and cash flow balance sheets for that
> time to see when the Great Depression actually ended based on economic
> growth rather than credit bubbles. My gut tells me the Great Depression
> might have lasted 20 years or so, when the proper factors are recognized.
>
>
> There is a common saying that "you can't borrow and spend your way
> to wealth and prosperity". However, I think that there may be more
> times in our history than realize that we created the appearance
> of prosperity rather than had the real thing.
>
> I've got to dig into this idea and see if there is anything there.
Thanks for your input.
Perhaps this is part of the reason WWII may have had some austerity and stringent restructuring influences;... but perhaps WWII really only truthfully reallocated and refocused resources away from the elite strata and classes in a way that is entirely anathema to the "Supply Side" methodology. It leveled the class operative constrictions and opened up class defined "barriers to entry" far better through its demands than any supply side contingency could ever formulate.
Supply side selectively EXECUTES the demand side in a way that mimics the controlled order of a prisoner of war camp. I suppose that works for the Wardens of injustice.
It might also be argued, by the way, that the post WWII sequences and consequences saw the reemergence of a class factor that gradually captured not only the ideological legitimation of the cold war, but gradually emerged as the capture of capital formation and political convergence in the 1980s from which the seeds and roots of our current distress would propagate into complexity of finance dependencies and what might be called the debt debacle of botched American Ascendency into cheap greed and treacherous deceptions and devisiveness.
It is a sickning thing to hear this same cancerous dogma repeated here in intelligent circles of America's business elites...and still bedeemed acceptable and appropriate.
It might also be argued, by the way, that the post WWII sequences and consequences saw the reemergence of a class factor that gradually captured not only the ideological legitimation of the cold war, but gradually emerged as the capture of capital formation and political convergence in the 1980s. The political economy staging from which the seeds and roots of our current distress would propagate into the complexity of today's crisis of financial sector dependency and political capture.
I would retract the unnceesary irrational "exuberance" of the final line.
Thanks for commenting. I certainly understand some of the things that you are against, but you could do a better job of identifying what you are for. Or maybe I am just dense.
On the technical side, however, It amazes me that this sociopolitical and political economic crisis is still assessed as a business model. If we use the health reform arena as a model, it becomes clear that all sorts of modulated distortions appear from self interests that simply drive the problems into emotional appeals to politicized judgements. If you follow the markets and blogs, it is abundantly clear that intensive misinformation and bias is a major contributor to daily flow. The one dimensional flow chart is essentially all we have (figuratively) to assess the "quality of life and the living economy" and that is simply a incomprehensible neglect. What I want is accountability and credibility restored in a system that has been restorative rather than "business as usual and more of the same" = REcovery? To what??? It's regressive horizontally and progressive hierarchically and vertically.
What bothers me most is that we are selling our freedoms into debt and our entire salaried standards are ultimately subject to the fiat currency values that are being captured in scale, along with the future of the next generation of America. All methodically measured, meanwhile, with these same old models.
What I would like to see most is a convincing job from the professional community that there is an economic will to support a healthy public interest (while they are in the process of pursuits for private goals) and manage an economy that prioritizes integrated foundations rather than an indentured service economy in America.
I appreciate your analytical process and the questions you have raised in your blogs. Seeking Alpha, of course, is a market oriented format. It is a credit to this format that it has invited a wider audience into the arena of questioning what's going on. I do think that the health of the market depends on a comprehensive understanding of all this "forward looking statement" process. History and background go hand in hand with prudence and due diligence in the full spectrum.
In your commentaries I found it interesting that people could comment on the world war and hypotheticals about its influence on the Great Depression era. It doesn;t strike you odd that the War Economy from Bushwacked economics is never mentioned? Why is it that the War Deficit has somehow become a background memory in all this "Recovery"?
On Sep 23 07:35 PM John Lounsbury wrote:
> BRUCE E.W. - - -
>
> Thanks for commenting. I certainly understand some of the things
> that you are against, but you could do a better job of identifying
> what you are for. Or maybe I am just dense.
Thanks for the clarification. The impact of war expenses on economic growth is a topic that I find very interesting.