Bad Monday

Some Monday mornings are better than others.  Others are worse than some.  For one Amazon employee, this past Monday morning was particularly bad.

No doubt, the poor fellow would have been better off he’d called in sick to work.  Such a simple decision would have saved him from extreme agony.  But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness.

 

jumpGood-bye cruel world! On this our planet, ignoring air friction, wind and other buoyancy-enhancing obstacles for the sake of this example, someone jumping off a building that is high enough will eventually attain a terminal velocity of 122 miles per hour. The acceleration is 32.2 feet per second², which is why one has to start from an appropriate height (a skydiver in a spread-eagle position will typically reach terminal velocity after about 12 seconds, traversing a distance of 1,483 feet). Jumping without a parachute may provide an especially pronounced adrenaline high, but is generally not advisable; more often than not it will be a one-off experience.

 

From what we gather, upon arrival, he blasted out an email to hundreds of coworkers, including Chief Executive Officer Jeff Bezos, outlining several reservations he had with the terms of his “Performance Improvement Plan”.

After that, he executed a flawless swan dive off Amazon’s 12-story Apollo building, presumably to his death. Yet, somehow, he didn’t die.  He lived.  What now?

Quite frankly, we don’t quite know what this has to do with the economy by and large.  But we have an inkling there may be some relevance.  Perhaps it has something to do with an economy that is approaching self-destruct velocity, where every action has a far more negative reaction.

 

Trump!

President-elect Donald Trump was blessed with a stout sounding last name.  An onomatopoeia, of sorts.  Various synonyms for Trump include winner, decider, trump card, outdo, undermine, outmaneuver, outplay, surpass, beat, go one better, and the like.

Throughout his life, Trump has always lived up to his name.  As a reality TV star, for example, the stout man with a stout name made millions of dollars telling people, “You’re fired!”  People loved it.  They couldn’t get enough of it.

 

The Donald fires people left and right…

 

However, as President, Trump will inherit a steaming hot pile from his predecessors.  After a combined 16 years of George Dubya and Barry Big Ears, the U.S. National Debt has jumped from approximately $5.5 trillion to about $20 trillion.  That amounts to a 363 percent increase.

 

1-federal-debtberg The Federal debtberg in all its glory. What seems “normal” now was considered unimaginable when GW Bush’s reign began. At the time, some people were actually worried that  we would “run out” of treasury bonds, just because debt growth had flattened for a while under Clinton – which was primarily a bubble artifact – click to enlarge.

 

Yet, over this same time, U.S. GDP has only increased roughly 77 percent from about $10.5 trillion to about $18.6 trillion.  In other words, debt is increasing 4.7 times faster than GDP.  Similarly, the percentage of debt to GDP has more than doubled from about 52 percent to over 107 percent.

As President, part of Trump’s stated vision is to “create a dynamic booming economy that will create 25 million new jobs over the next decade.”  To do this, Trump intends to run massive deficits.  To finance the massive deficits, Treasury Secretary nominee Steven Mnuchin may have to issue 100 Year Treasury notes.

But what if this just accelerates the trend of rapid debt growth and lethargic GDP growth?  Wouldn’t that, in a sense, be a policy of economic self-destruction?

 

2-debt-gdp-ratioUS public debt to GDP ratio. The level it has now reached has historically been highly inimical to economic growth, not least because the much poo-pooed “Ricardo effect” is very likely quite real. We are referring to the idea that once government debt grows beyond a certain threshold, people in general, but especially entrepreneurs and capitalists, will take fewer risks and be more concerned with wealth preservation than wealth creation – for the simple reason that they all know the government will eventually have to get the money to pay for this debt from somewhere. Obviously, the entire citizenry will be in its cross-hairs – whether by taxation, debt default or inflation, the money will be forcibly taken. Prior to the advent of the modern welfare/warfare State, this was colloquially referred to as “theft” – click to enlarge.

 

Attaining Self-Destruct Velocity

One popular literary device of headline editors across the western world of late is to fuse the name Trump with another word.  Just this week, for instance, we discovered that Bernie Sanders – the socialist with a grumpy face – is an expert on Trumpism.  We also learned about the effects of Trumpflation and Trumpnado on the bond market.

Here Forbes clarifies the landscape with unequivocal certainty:

 

“Trumpflation is coming.  Everyone knows it.  It means higher interest rates in the U.S.  It means the end of QE, negative and zero interest rates in Europe and Japan.  It potentially means tariffs that will make prices of goods imported into the U.S. more expensive.  And, if president elect Donald Trump gets his fiscal stimulus pass the deficit hawks in congress, it means more money for the economy which could lead to wage inflation.  No American worker will complain about that.

But what do fixed income investors do now?  Especially after sitting on lousy yielding U.S. Treasury bonds for years?  Imagine those guys in Europe, holding negative yielding debt.  How on Earth do you sell that stuff?”

 

Since the election, the approach to selling Treasuries has been to sell them.  Hence, yields have gone up, prices have come down.  For example, since the election the yield on the 10 Year Treasury note has risen from 1.86 percent to 2.44 percent.

 

3-tnx10 year treasury note yield, daily.  How does one sell treasuries or other government bonds? The market has already answered the question posed by Forbes: one just sells them – click to enlarge.

 

Of course, rising interest rates will make financing the national debt more expensive.  Moreover, as deficit spending ramps up – maybe even to $2 trillion per year – the cost to finance the debt will compound.

One popular rationale for deficit spending by economic policy makers is that the effects of the fiscal stimulus will allow the economy to achieve escape velocity.  Under such a scenario, the economy would, somehow, be able to grow its way out of debt; the percentage of debt to GDP would come down.

However, over the last sixteen years, and even more so over the past eight, the grasp for escape velocity has come up empty handed.  Debt has mushroomed while GDP has stagnated.  Yet, regrettably, the effects of Trumpflation and Trumpnado will likely accelerate this trend.

Thus, rather than attaining escape velocity, like the Amazon jumper, the economy would attain self-destruct velocity.  Prepare accordingly for the extreme pain and agony that are coming.

 

Charts by: St. Louis Federal Reserve Research, StockCharts

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 
 

 
 

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5 Responses to “Attaining Self-Destruct Velocity”

  • woodsbp:

    “One popular rationale for deficit spending by economic policy makers is that the effects of the fiscal stimulus will allow the economy to achieve escape velocity. Under such a scenario, the economy would, somehow, be able to grow its way out of debt; the percentage of debt to GDP would come down.

    Its probably a tad more complicated – ie: increasing your acceleration, because that is what ‘economic growth’ – in the correct Newtonian Mechanics sense, actually is. And please try not to confuse increasing your velocity (m/s) with increasing your acceleration (m/s/s) – ie: increasing your velocity (m/s) over time. Most economists and misled commentators commonly make this essential mistake.

    Economic growth is a physical process. You unbury, bash and burn raw stuff and you use technology to manipulate the raw stuff into useful stuff : you produce, that’s Plan A. The next bit, Plan B, has become a bit of a problem: selling your useful stuff to folk who are – and this is the VIP bit, both willing and able to purchase your produced stuff. Those consuming folk need to have incomes which are increasing (not stagnant nor declining) to make Plan B happen. As I said – there appears to be a problem with Plan B. So plan A looks a bit iffy.

    Theoretical ECON (ie: the Invisible Hand and the Magic Market) are merely that, theoretical. Real hands and real markets are fundamentally physical process subject to the immutable laws of nature and the iron rules of math – not to mention us useful idiot humans running interference. So. ???

    Just wish the President-elect good luck with that ‘economic growth’ wish list. He’s going to need all the help he can muster.

    Just a thought. Is virtual wealth actually real wealth? – you know, a ‘trans-substantiation’ sort of truism thingy? Like Copper and Zinc may be asserted to have the same properties as Gold and Silver?

    • HardMoney:

      The ECON people have this figured out for 200 years. It’s called Say’s law I.e., the people creating the stuff accumulate wealth that they then go and buy stuff with.

      The problem of course is when bureaucrats, politicians, and such commandeer our resources to build what they think we need. The demand will come – it just may not be for the stuff that is built/ produced.

      • woodsbp:

        What is wealth anyway? Is it related in any way to one’s waged-labour income or income from ‘rents’ or inherited or your endowment or what? Sure, one wealthy fellow could exchange something of value with another – that’s barter. Which is economically useless for the type of ‘economic growth’ that is so much in demand right now.

        There is little actual evidence that so-called wealthy folk actually release sufficient of that wealth such that it has the effect of expanding economic activity generally. However there is evidence that the equitable distribution of nett economic income achieves both a small, steady increase in individual wealth for many due mostly to the steady increase in economic activity.

        That Say’s Law is quaint in theory but in practice its nonsense. Imagine the manner in which money (metal or paper) has to be created and then ‘flow’ such that physical inventories have to be reduced; then the internal contradiction starts to become apparent. The Econ. are great at carving Modls. – like some peoples make and erect totems and monuments and then confidentthat the Gods will be pleased that all will be economically hunkydory. Has not worked out so well for most folk so far. Keep trying?

        “The problem of course is when … the wealthy commandeer our politicians (our government) to ensure that resources are used to further enrich the wealthy rather than ensure there is a more equitable distribution of wealth (aka: waged-labour incomes) to the majority. The reason that our western economies cannot expand at the necessary rate (3% p/a, compounding) is two-fold. Resources and resources. I’ll leave it to folks to figure out which is which are the hardware and which are the software.

  • No6:

    Amerika is now a slave nation.

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