The Economy and Debt

The Bureau of Economic Analysis released its initial estimate of 4th quarter GDP, soon to be revised downward.  Once more in Bidementia land, the initial estimate was well above expectations, at 3.3% versus 2% average expectations.  Not so great when you actually look at it, which I encourage you to do here, at the BEA website, where you can find not only a lot of detail but a description of how the numbers are put together, i.e., take the expectations and add at least one percentage point above that.   (BEA Data)  They aren’t quite that blatant, but close.

Consumer spending rose more than expected as did exports, which likely reflects oil and gas exports that Bidementia is attempting to stop.  Consumer spending was supposedly particularly higher at restaurants, for health care and for RVs.  Now supposedly these are “real” or adjusted for inflation numbers, but as far as I can tell, the government’s estimate for overall inflation is used as the deflator.  Since inflation for food and health care for example, is much higher than the average number, I suspect some of the supposed growth is actually failure to fully adjust for inflation.  People aren’t buying more, they are just paying more for it.

The underpinning to all the supposed growth was government spending.  This Zero Hedge post lays out the case that the deficit spending is driving growth, but it takes a dollar and a half of government outlays to get one dollar of GDP growth.  In a year with a supposedly healthy economy, we had a $2.5 trillion deficit.  What will happen when the government can no longer cover up the rotten mess beneath the surface and the economy sinks into stagflation at best?  (ZH Post)

There was a seven year Treasury note auction yesterday as well, which showed better results than the previous five-year auction, although still having to pay a higher interest rate that the Treasury hoped, and the overall trend in medium and longer term Treasuries remains upward.  (ZH Post)  As long as Bidementia uses excessive government spending and subsequent debt issuance to create a fake “healthy” economy, we will have this cycle of more debt, higher total interest payments needing debt issuance just to pay the interest, and high interest rates, which sustain inflation.  Ultimately the house of cards collapses one way or another–debt default, sudden clamp-down on spending forcing to economy to shift back to private sector growth and causing all the freeloaders to have to consider working, and/or higher taxes which stifles investment in actual productive activities.  It won’t be pretty.