|
|
There
is wide agreement among economists and the financial media that our
lackluster economic performance stems from continued "deleveraging"
among consumers and businesses. Although it is certainly true that after
decades of overly speculative borrowing, individuals and corporations are
paying down debt, rebuilding their savings, and generally repairing their
respective balance sheets. But these activities cannot be faulted for our
economic malaise.
In fact, as a country, we haven't deleveraged at ALL. All the moves
made by the private sector have been vastly outpaced by the federal
government's efforts to add leverage to the economy. The net result is that
we are much more indebted now than we were before the recession began; as a
result, we are digging ourselves even faster into debt.
The good news is that households paid down debt for the 9th quarter in a row.
In Q2, they deleveraged at a 2.3% annual rate, as their total debt
outstanding dropped from $13.52 trillion to $13.45 trillion from Q1. That's
still around 92% of GDP, which is way up from the 48% level in 1980, but the
direction is positive. Ultimately, the message here could not be clearer:
American households have decided - either voluntarily or involuntarily - that
it is in their best interest to quit borrowing money and reduce their debt
levels in order to reconcile their balance sheets. The bad news is that most
economists view this as a pernicious tendency.
To counter the trend, economists have called for government to provide the
spending that others have deferred - and the feds have been thrilled to
comply. In fact, during Q2, Washington accumulated debt at a 24.4% annualized
rate! So, even though households and state and local governments have begun
to learn some valuable lessons, DC still managed to increase the overall
level of non-financial debt in the US to a record $35.45 trillion. In an era
of supposed deleveraging, the rate of debt accumulation has increased from
4.5% to 4.8% annualized over the past quarter.
By focusing solely on the behavior of the private sector, and ignoring the
equally important fiscal habits of government, the financial media and
mainstream economists have displayed a dangerous blind spot in their
thinking. They fail to understand or acknowledge that borrowing done by a
household or a government is virtually the same thing. The US government does
have any independent means to generate wealth to pay off debt. It doesn't own
factories or mines, and it does not operate a profitable service-sector
business. It does not have an independent store of savings in another
dimension, from which it can produce goods outside the bounds of economic
law.
In the real world, all government stimulus comes from borrowing, spending, or
printing, or to put it another way: deferred taxation, capital
redistribution, or inflation. That means all US debt is ultimately backed by
the tax base of the country. Therefore, whether the consumer or the
government that does the borrowing is really unimportant because, in the end,
it is the consumer that will receive the bill.
Meanwhile,
government interventions are particularly pernicious because they encourage
short-sighted behavior in the private market as well. It was reported today
that corporations are using the rock-bottom interest rate environment to
execute leveraged buybacks of their shares. While this temporarily increases
shareholder value, it ultimately leaves the corporations - and the broader
economy -- even further in debt.
As of Q2 2010, total non-financial debt is rising at a 4.8% annual rate but
GDP is growing at only 1.6% annualized. US debt as a percentage of GDP
continues to climb, which should put to bed any talk of a deleveraging or
deflating economy. Consumers are clearly only part of the equation - and, for
now, the smaller part. The US government, in fighting the claimed
deleveraging, is sending the total debt level into the stratosphere. As we
watch it soar upward, the dollar steadily drifts downward.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A 15-year
industry veteran whose career began as a trader on the floor of the New York
Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
|
|
