"For a third year in a row mainstream economists and
analysts are once again planting the seeds of hope for a return to stronger GDP
growth. The White House, if you look at their budget estimations, are banking
on it as part of their long term deficit reduction plan. Unfortunately, it is
highly unlikely that we will see growth in the economy return to 4% for a very
long time.
Currently, the deficit between real GDP and the
CBO's estimated potential GDP, is at the greatest deviation on record. However,
that data point really doesn't tell us much other than the economy is currently
operating well below its potential level. While most economists will point to
the likely culprits of employment, wages, industrial production and consumption
as the problem, which is correct, those issues are byproducts of the 50-Trillion
pound Gorilla that sits quietly in the corner. That seemingly invisible Gorilla
is simply - debt.
To get a better idea of what I mean let's take a
look at economic growth in relation to debt levels. Prior to 1980 it took on
average, beginning with 20 cents in 1952 and rising to 80 cents at the end of
1980, 37 cents of debt to finance $1 of GDP. Today, that same $1 dollar of GDP
growth requires a little more than $4 dollars to finance it. That's right - $4
of debt to finance $1 of GDP.
Therein, of course, lies the problem of returning to 4%
economic growth in the foreseeable future. With real GDP currently at $13.4
Trillion and debt at $54.1 Trillion the ratio is 4:1 debt to GDP. In order for
GDP to reach 4% growth in 2012 - GDP would have to expand to roughly $13.97
Trillion. This means debt would need to expand to $56.3 Trillion or a whopping
$2.17 Trillion in the coming year.
To repeat that process in 2013 GDP would need to
expand to $14.5 Trillion. In order to achieve that growth debt would need to
expand further by another $2.25 Trillion. So forth and so on. Are you seeing
the problem here?..."
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