Monday, May 17, 2010

Debt Saturation Equals Diminishing Growth, Employment, and Capacity Utilization…

Subtitle: Federal Reserve – Debt Pushing House of Ill Repute…

When a debt based money system is born, the system is not yet saturated and adding debt (leverage) to the system works to increase growth of the economy.

The economy cycles, and if one adds debt time and again to stimulate down cycles yet fails to remove that stimulus on the up cycles then DEBT accumulates over time. This accumulation starts out slow, but with each cycle builds upon itself creating exponential growth. Witness the charts of public and private sector debts below:

Federal Government Debt:

Household Sector Debt:

As debt begins to permeate the economy, the stimulation effect diminishes as was thoroughly demonstrated in the last article on THE Most Important Chart of the Century:

I have been pointing out the continuous series of lower highs on that chart that gave way to a phase transition into negative territory at the debt saturation point. I’ve presented descriptions of a debt saturated environment and noted that employment and production should fall once saturation is reached and still more debt is added. This is due to the fact that new income must be used to service existing principal and interest payments. I even theorized that the recent “jobless” recoveries are part and parcel of debt saturation.

I have spent a lot of time examining charts, but it never crossed my mind to look for the same chart pattern as is present on the diminishing productivity of debt chart. But today it dawned on me that in fact I have seen the same chart pattern, just not in areas where the statistics are manipulated or based on dollars as they distort the pattern. So I started by looking at the employment charts… and look at what I found:

A chart with the same pattern over the same timeframe only it is inverted. A series of higher lows and a phase transition, that’s the chart of the Median Duration of Unemployment. Is the correlation exact? No, but the correlation is extremely high.

We see the same thing when looking at the Mean Duration of Unemployment, this chart goes even further back in time:

In fact, when we look at a chart of the raw number of people on unemployment we see the same pattern. Note that since the late 1940s that our population has doubled but that our number of unemployed has risen by a factor of 8!

Most of the production charts are measured in dollars and that makes them all follow the exponential money parabola. But what is it that is not tracked in dollars regarding production? How about Capacity Utilization? Again, same time frame, same series of continuously lower highs:

Capacity Utilization, Total Industry:

Capacity Utilization, Manufacturing:

Note that we are still operating at less than 70% capacity in manufacturing. Lower highs and lower lows.

I believe these charts are driven in a negative overall direction by debt.

And near the top of the debt pushing pyramid you will find the Federal Reserve and a money system that requires our government to borrow money from the private sector. Thus we wind up owing private individuals for the use of our own money. Who does the money system belong to after all? It belongs to the people, we should not have to borrow our Federal money into existence and we should not have to pay interest for the privilege of doing so! In fact, that notion comes pretty darn close to the fulfilling the definition of insanity – it certainly meets the definition of stupidity.

Let’s look at the Fed’s latest chart of MZM, currently their largest measurement of money:

Hmmm… only a little more than $9 trillion in money deposits, how does that compare to the amount of debt in the system?

Well, just from our first two charts, Current Federal Government Debt equals $13 Trillion, and Household Sector Debt equals $13.5 Trillion, or roughly $26.5 trillion. Simple question… aren’t the same people ultimately responsible for BOTH those debts? Of course they are. That’s $189,285 for every worker in the United States. And we didn’t even start adding up business, city, county, or state debt, nor did we launch into GSE obligations or unfunded liabilities.

So, if we start to pay back the debt with our money, how long will the money last? Not nearly long enough! Since the majority of the world’s debts are denominated in dollars, as people fight to pay down those debts, they need to first convert other assets into dollars. This increases the demand for dollars and thus we see the dollar presently increasing in value. Don't look now, but we just tripped a higher target on the dollar Point & Figure diagram that is all the way up at 112! That will require a lot of deleveraging:

What happens to the money supply then if we pay back debt? It goes down! And you can see that in John Williams latest chart, updated today, that M3 (previously the broadest money measurement and no longer tracked by the Fed) has gone hugely negative on a year over year basis, now dropping at 5%:

Chart of U.S. Money Supply Growth

How does that compare with history?

When we look at the discontinued series from the Fed going back to 1960, you will see that it has been very briefly negative on only one other occasion:

How will falling money and debt affect the economy? It won’t be pretty. Once you reach debt saturation the alternatives are bad or terrible. Letting deflation run its course is bad, but if you allow it to run its course then more cycles can occur without reaching saturation. If, on the other hand, you insist on throwing more debt into a debt saturated environment, then you are choosing fiscal and monetary suicide.

Frankly, the debt pushing Fed system could use a nice dose of suicide, then we could get on with establishing a system outside of the debt pusher’s debt-backed money box. In fact, where’s Dr. Kevorkian when you need him, we need a prescription for the Fed STAT!

Steppenwolf – The Pusher: