Thursday, September 30, 2021

The US Economy: Is It A Couch Potato?

 The US is certainly the world's largest economy - but is it the healthiest? Today, just one chart says it all.

The Fed's balance sheet was a lean 6% of US GDP in 2008.  Then the Credit Bubble collapsed and the Fed had to step in to avert a total meltdown of America's financial system and a repeat of the Great Depression. It bought Treasurys and other securities (mostly mortgage-backed bonds), fattening its balance sheet to 18% of GDP.  But it wasn't enough. Though the immediate crisis had passed, the US economy wasn't really on solid footing, so the Fed kept pumping and buying assets up to 25% of GDP in 2015.  

Eventually things settled down, the economy recovered and the Fed eased back to 18% of GDP at the end of 2019. Mind you, 18% was still huge by any historical monetary/fiscal fitness standards.

Then the pandemic struck and the Fed threw all caution to the wind - its balance sheet assets exploded and are now at an obese 35% of GDP (2Q21 data) - see below.. 

The Fed Goes El Gordo 

What does this really mean? 

The Fed's assets are bonds: Treasurys, corporates, mortgage backed (MBS) and municipals (bonds issued by local governments). Therefore, the chart shows that the US economy is currently financed to a very, very great extent by its central bank.  And where does the central bank get the money to buy the bonds? Simple: it creates dollars entirely out of thin air, trusting (hoping?) that Americans and the rest of the world will continue to have faith in them. That's what I call faith-based financing - the American economy is now faith-based. "In God we trust", the motto printed on every dollar bill, now has literal meaning.

How healthy is the American economy? I don't know about you, but when I see an economy that floats on a rapidly rising sea of faith-based dollars, I worry about what will happen if this faith suddenly evaporates.

Let me put it in medical terms: a lean individual who eats right and exercises regularly has very few chances of getting a heart attack. But if he becomes a couch potato, puts on a lot of weight, eats burgers, fries and shakes every day, then he is a prime candidate for a sudden heart attack. And if he also believes/hopes that everything is fine, regardless... then he really has a death wish.

Interestingly, there is solid scientific evidence that such biological/social behaviour explains the rapid decline of empires (thanks to loyal reader AKOC for the link). Here is a quote from the article:

Most disturbingly, Dr Penman sees exactly the same process as taking place in our own age, but at a “far more accelerated rate” because of the West’s greater prosperity. The effects are already being seen in economic stagnation, a growing gap between rich and poor, and a collapsing birth-rate.