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Real Growth, Real Debt

The upheaval in financial markets has left many Americans stunned.  How could this have happened?  Even worse, how could this have happened with so few people giving us any kind of warning that it was possible?  I certainly did my best to tell everyone, but in the end there’s only so much anyone can do.  Now I’d like to explain why I think this happened and why the Five Crises are so tightly related – and what we can guess this will mean in an election year.

To begin with, we need to look at how economic growth since 2001 has been driven by government spending.  When George W. Bush took office, the budget he inherited was based an economy with a GDP of $10.2 trillion and a total debt of $5.8 trillion.  That’s where we ended fiscal 2001, in October of that year.  But we all know what happened at the end of that period, as the 9/11 attacks created a recession and a new war.

Since that time, the economy has grown to an estimated $14.4 trillion, but the debt will be at least $9.6 trillion if only $300 billion of the rescue plan is realized in October.  That works out to an annual compounded growth of 5.1% in the economy but a full 7.5% in debt.  By year, it breaks down like this:

Real growth in the economy has hovered between 1 and 2 percent since 2001, after the effects of excess Federal spending are taken out.  Sometime this year, the net growth has plummeted to less than the Federal outlays, taking the bailout partially into account.  Real growth after this effect is on the order of –2.0% and falling.

This chart shows that there has been little real growth in the economy, and that the Recession of 2008 looks much more like a Depression, at least in terms of the magnitude of the contraction.  Once the full $700 billion bailout is taken into account, nominal growth less Federal excess will likely be on the order of –4%.

This is not a significant problem in itself.  After all, Keynesian Economics is the process of the Federal government injecting money into the economy during a downfall to lessen the effects.  The problem here is that this Recession has been made so painless that the restructuring common to recessions has not taken place; it’s just business as usual.  In addition, the bailout comes to over $6,200 per household, compared to the $700 “stimulus checks”.  The priorities have clearly been tilted towards protecting the weak financial sector and keeping the party going on rather than real economic reform that will make a strong recovery.  That is why the proposed authorization for the bailout contains language to restrict the ability of anyone outside of the Executive Branch to monitor or otherwise counter the plan (Section 8).

If we are already in something like a Depression, why haven’t we heard this from the candidates or the press?  The reason is subtle, but important.  This has been kept from us so far and voters are unlikely to reward the bringer of bad news.  Consider for a moment the platform that FDR ran on in 1932.  This has a shadow of the reforms that the New Deal brought, but only barely.  One plank even calls for a balanced budget, and another for free trade.  Social Security is called for as a state program.  If FDR could not honestly tell people what was coming, what can we expect in a time where we have yet to even admit we have a potential Depression on our hands?

Do not expect frank speaking through this election.  What comes along in terms of additional failures and the potential remedies will be something of a surprise, unless you learn how to read the signs.  This is an inside game, but the dice that are being rolled tell the future of this entire nation.  Stay alert.

7 thoughts on “Real Growth, Real Debt

  1. I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

  2. Ironic how people always assume the Republicans are “better” for the economy when the past 60 years or so shows quite the opposite.

    So we’re giving $6,200 per household in bailout money?! Ouch!!

  3. The size of this is simply tremendous. Our total debt is a 1 with 13 zeros after it – one for every stripe on the flag. That’s about $100,000 per household.

    This bailout, when applied back over the last 7 years when the bad debt was created, shows that economic growth has been essentially zero once you take out government spending, mania, and inflation. If anyone asks what we do in this nation, those three are it.

    Hopefully people understand what I’ve been saying now.

  4. Cristy, it’s not that Republicans are better for the economy. It’s that conservative ideology is better for the economy, when followed, and Republicans are elected by conservatives. Unfortuantely, President Bush has not been very fiscally conservative. And at a time like this, no one can afford to be fiscally conservative because that would involve not bailing out businesses that the market cannot support, which would bring about short term severe crisis, which would make someone unpopular in an election year. I think we all know what’s going on here. The forces of human ambition, vanity, and fear are at work, destroying our financial tower of Babel in spite of ourselves. We’re all the same in a crisis; just human.

  5. I think Cristy was being facetious. But that was the popular belief, wasn’t it?

    I’m glad you pointed out that we are all humans and subject to human failings. Any great and marvelous “system” that forgets that is doomed to failure. Our whole culture seems to forget this very often, since human frailty is inconvenient, and may be doomed to failure as a result.

    But you are very, very right, AR, and thanks for bringing it all back to my favorite topic. We are human and we do things for very human reasons. Once we understand that, we have a shot at understanding what’s going on around us.

  6. Pingback: Say What? « Barataria - the work of Erik Hare

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