David Ramsey's Weblog

August 19, 2010

Where we are and where we must ultimately go

Filed under: Economics and Financial — David Ramsey @ 1:07 pm

I was explaining to a close friend why there’s been no real economic recovery and I showed him how far we have yet to fall. And we have a long ways to fall yet, folks. The graph I am going to paste below here illustrates the problem really well.

(Image courtesy of The Market Ticker ®.)

The above graph shows, since 1950, the growth in GDP (green) against the growth in total debt (yellow/red). The grey area is the debt-to-GDP ratio. Note that historically (and you can confirm this back before the Great Depression as well), the United States has been at its healthiest economically when the debt-to-GDP ratio was about 100%. That’s not Federal debt to GDP. That is TOTAL debt to GDP. Right now, today, Federal debt-to-GDP is just short of 100% all by itself. When you add in state, county, city, corporate, and private debt, the total ratio is over 380% debt-to-GDP.

So to get back to historic norms we have to remove almost 2/3rds of all debt from the economy. Yet what most people don’t realize is that in our fiat money system, debt is money. Therefore, the money supply must contract by 2/3rds. If something is worth $100 today, it will be worth about $33 once we return to historic norms. A $100,000 house will be worth $33,000. A $200,000 house will be worth $66,000. A $20,000 car will cost about $6,000.

But getting there won’t happen unless wages and salaries also fall to that level. And wages and salaries won’t fall to that level as long as people are still employed at their current wages and salaries. So business is going to contract, lots, for a long time.

That chart shows the mathematical absurdity of our current situation, no matter how much “For the children!!!” spin we put on it. Reality doesn’t really give a rat’s ass about the children and we will, ultimately, return to those historic norms whether we like it or not.

There’s another chart I want to link. This one is of the 4 week moving average of initial unemployment claims during the recession. Remember, that we need to get to 400,000 claims or lower just to break even. We need to get to 250,000 claims just to absorb normal population growth (150,000 new additional jobs per month, 3 million new people per year added to total population, with 1.8 million of those entering the workforce per year).

(Image courtesy of Mish’s Global Economic Trend Analysis.)

Look at that red box. That is the 9 months since December 2009 when everyone claimed the recession was over. Did we ever get down to 400,000 claims per week even one time in all that time? Nope. So there has been no job growth. No jobs = no income = no consumer dollars spent for those unemployed. And this is reflected in 18 straight months of food stamp usage growth, from under 30 million before the Great Recession to 40.8 million last month. I wonder what this month’s figures will look like.

August back to school sales numbers are already trickling in and they are worse than last year, during the “bad” year of 2009. People are now saying that all of the GDP gain in the first and second quarter was due to inventory buildup in expectation of a recovery that has not yet occurred. This could be a very bad autumn economically for the country, folks. I am going to once again urge everyone reading this to set aside at least 3 months of storable foods. If things come apart, you may not have time to stock up then. Keep your pantry full, your prescription and over the counter medicines stockpiled, buy a few camper’s water filters for worst case situations, and keep your ammo stock up as well. Companies that over bought for the fall are going to have to liquidate and some may not even be in business next year. That will mean fewer available goods in the long term and more unemployed as well. I don’t see how this can end well.

I don’t know when we start moving full speed down the backside of that curve in the first chart, but it will happen eventually. And when it does, I don’t want my friends caught unawares. The economy is not recovering. This is a depression, even if most economists and politicians won’t admit it yet.

P.S. If you want to read something sadly funny, read this Collection of Economic Quotes from the Great Depression.  I’ve saved that for years. Then go look at how many times Bernanke, Paulson, Geithner, Summers, Rubin, and that entire parade of economic clowns have been wrong so far. Now do you really want to bet your future that they are going to finally be right?

P.P.S. If I can get people to do one thing, please watch this Must Watch Kyle Bass Interview: “I Don’t Know How I Can Be Long Stocks”. In it he gives the very high level explanation of the problems facing the world. He doesn’t translate that into what will happen to us individually but it’s pretty clear that the entire world has a long way to fall to get back to any “rational” level of economic activity.


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