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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I was at a meeting in January where an over-lunch exercise was proposed: Pick 3 years, historically, where you would consider credit to have been reasonable, adjust for population, inflation, etc., and return with a predictied current value of the S&P if we return to that credit level. The results? 550 to 750.
Today our easy money policy is at zirp, even worse than before. Our off book accounting is still around along with an even more lax accounting standard. And our national debt has not only skyrocketed but under Bush Jr. and Obama is encouraging the worst, most counter productive allocation of resources in history by rewarding failed banks and quasi-public institutions with not only money but letting them eat marketshare and starve out any legetimate competition.
Eventually this will stop. Most likely it will end, sooner or later,in an austerity program for the US that will put this downturn to shame.
This is very provocative data in another well written article. The unasked question is: What comes next after the hangover?
So far, all the consumption you describe has been replaced by Federal stimulus spending. This is unsustainable and everyone is waiting for the next shoe to drop, which will probably take the stock market with it again.
After ten years of hidden depression, one could assume that the only direction left to go is up. Except that what was actually hidden in the depression was the decimation of the US manufacturing base. A form of capitalistic cannibalism. Which leaves very little to fall back on when the "recoveryless" recovery gets real. Certainly not jobs.
So the theory is the stimulus spending is buying time and providing capital for this country to rebuild. While the infrastructure may need help, it does very little good if there's no industrial base left to use it.
The real bellyache is going to be taking back all those Chinese and Indian jobs we lost while on a level playing field. Either the jobs will pay $10 a day or the goods and services will cost a lot more than now.
Not very enticing options. And that's if we don't run out of time first and the other shoe drops.
In the 1930s the problem was solved by the Second World War. Effectively, the depression ended when their was an external stimulus to the Supply side of the economy. This created jobs, lots of jobs which in turn boosted consumer spending power. Japan by contrast has been moribund for nearly two decades despite stimulation of the demand side through low interest rates and QE.
The hard truth is the way out of this mess, other than starting another Global War and hoping it leads to a sustainable trade advantage, is to work on the Supply side at the expense of the Demand side much as Thatcher did in Britain. Once the supply side is reinforced over a period of sustained inward investment then the Demand side will pick up because the consumer is generating his own wealth. In the short-term this is likely to lead to more pain, but more pain is coming down the pipe anyway. It is just a question as to whether the pain is a means to an end or just mindless misery.
Believe it or not, what America actually needs right now are higher interest rates. OK, that is just about going to kill of the retail sector and housing market, but is trying to pump them up with endless stimulus going to solve the problem? The bitter truth is that America is going to have to grind its way out of this mess through hard work, but to ensure that the hard work is spent to best effect, capital investment needs to be maximized and this will only be achieved by higher interest rates which will increase savings and attract and retain capital into the US economy.
The alternative is to follow Japans example as a Carry Trade economy where investment capital has bled out around the World which has left the domestic economy on life support. It has taken twenty years for Japan to go nowhere and Japan started in a much healthier position that the US does now. The bitter truth is that Obama might be a nice guy, but he is never going to drag America out of this mess.
They have enabled unaffodable, bloated government, Wall St. and grossly inefficient healthcare sectors which are bleeding us dry, along with the other propped failures government now runs. These sectors have grown so large and influential, it seems the only question what the policy mix and timeframe of inevitable default will be and what this once prosperous, free country will look like after all the debasement runs its course.
Maybe there is another "recovery" here anyway. James Grant writes in the weekend WSJ he thinks an unexpectedly strong snapback is possible. That, to me, would only enhance the crony power of already bloated nonproductive sectors and our march to serfdom.
>>In the 1930s the problem was solved by the Second World War. Effectively, the depression ended when their was an external stimulus to the Supply side of the economy.<<
Huh? Why (economically speaking) was the massive government spending for WW2 different (again, economically, not "morally") from any other massive government spending? In fact, one could argue it was economically LESS productive than a well-designed (if there is such a thing) peacetime stimulus program, as guns, bullets, tanks, etc.-- while absolutely necessary-- are not "productive infrastructure". Thus, you can't have it both ways: either WW2 spending DID end the depression, in which case government spending now could do the same thing, or the depression was ready to end anyway, in which case government spending now is a waste of money and a burden down the road on this and future generations.
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.
Growth meant that all unfunded obligations, personal, corporate , community and National could be financed by an ever expanding economy and that debt could be accumulated without inhibition by individuals, companies and the multiple political units. This is because wealth and income at very level would expand to create the asset base to support borrowing and the income to service the debt.
During the last 20 years the expectations and entitlements of growth became decoupled from the work, innovation, savings and proper resource allocation need to produce growth. Thus, the Great Divergence, which is the growing gap between the unwarranted growth expectations and entitlements about income and wealth and the capacity to produce income and generate wealth.
The appetite to attain wealth and consume income has grown apace while the capacity to produce these outcomes first stopped growing in 2008 and in 2009 is actually atrophying. The gap between hyperbolic fantasy and stagnant actuality is now becoming an abyss.
For years, the gap was unwittingly or willfully obscured, for most, by the fog of debt and in 2009 by the noxious vapors of criminal fiat money.
But debt and fiat money are not a bridge across the gap but haze of delusion and deceit.
Now, more Americans realize that the abyss is real, the facile expectations and avaricious entitlements are both narcotic and neurotic dreams and debt financed spending and consuming are a fog that has prevented them from seeing the chasm.
The choice is nearly upon us: Increase real capacity and control grotesque entitlements and undeserved expectations so the abyss can be bridged by savings, production and market governed discipline or.....Fall into the abyss.
Dave Wrixon excellent comment:
"The hard truth is the way out of this mess, other than starting another Global War and hoping it leads to a sustainable trade advantage, is to work on the Supply side at the expense of the Demand side much as Thatcher did in Britain. Once the supply side is reinforced over a period of sustained inward investment then the Demand side will pick up because the consumer is generating his own wealth. In the short-term this is likely to lead to more pain, but more pain is coming down the pipe anyway. It is just a question as to whether the pain is a means to an end or just mindless misery."
My thoughts as well, I see no other way to work our way out of this. Hoping and praying that indirect stimulus and our financial system is going to pull us out is just unrealistic to me.
Excellent comment. It raises a question I keep asking myself and for which I have not yet formulated a list of answers (yes, a list, because I think it is obvious that there are no simple answers). The question : Is growth necessary?
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?
That final question is a counter thought to what many have postulated would be an existence of subsistence and primal forces.
I think that this topic may not be one for SA, but more for a discussion of abstract philosophy. But I will remind you that economics is, at its origins, philosophy rather than science.
This was a good tool before 1970 when America was industrial based. Now industry is only 10% of our productive economy.
We can stand back and ask ourselves if private employment is now lower than it was in December 1999 - where was the growth in America?
It was a false growth at best, but looking at the infrastructure - i say it was very negative. Only 3rd world countries build things and do not maintain them. Our roads, our bridges, our declining education system.
On Sep 20 08:06 PM John Lounsbury wrote:
> User 353732 - - -
>
> Excellent comment. It raises a question I keep asking myself and
> for which I have not yet formulated a list of answers (yes, a list,
> because I think it is obvious that there are no simple answers).
> The question : Is growth necessary?
>
> 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?
>
> That final question is a counter thought to what many have postulated
> would be an existence of subsistence and primal forces.
>
> I think that this topic may not be one for SA, but more for a discussion
> of abstract philosophy. But I will remind you that economics is,
> at its origins, philosophy rather than science.
What was done in terms of fiscal and monetary policy was seen as necessary, at the time, to pull the nation out of the recession from 2001-2003. However, the damage had already begun during the roaring 90s. Using the data in the author's first table it appears that the ratio of credit growth to GDP growth was nearly as bad from 1995 through 2000 as it has been during the last nine years. It would therefore seem that the seeds of despair were already being sown during the later half of the last decade.
If our trading partners had had their industries intact it would have been a much different story, IMHO.
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.
On Sep 20 07:04 PM logicalthought wrote:
> Dave Wrixon wrote: