by David Stanowski
31 May 2013
In 2008 and early 2009, the FED was afraid that the economic collapse was going to lead to the massive liquidation of bad debts, deflation and depression, so it began creating enormous amounts of new credit to offset what was being destroyed. The economy needed a purging of bad debt and mis-allocated capital, to build a new base for economic growth, but that was not allowed to happen. The politicians never want to face reality!
Trillions of dollars of new debt was created to "jump start the economy", but most of it has been mis-allocated, once again, into speculation in the stock market and more recently the real estate market, as well as to reward political cronies; activities that do not result in real economic growth.
With some stock indexes at new highs, and the beginnings of a new real estate bubble, the government tells us that we are in a "recovery". But, how well has the massive creation of new debt really worked to "stimulate the economy"? Have some rising markets lead to more income for most people?
After trillions of dollars in new debt creation, real GDP growth is still the worst it has been since 1950 (63 years)! And this data is calculated using the government's understated inflation numbers, so more accurate and truthful data would look even worse than the graph shown below.
What do real economic conditions look like at the individual level? Real disposable personal income has not made a new high in 19 straight quarters! If it continues for another quarter, it will be a full five years!
This is the worst period of stagnation for this metric since 1947 (66 years).
People curtailed frivolous spending during the 2008-2009 financial meltdown and raised the personal savings rate to 8.3% by May 2008, but with the anemic "recovery", many are beginning to spend their savings again to make ends meet, so the personal savings rate has collapsed below 3% so far this year!
In addition, long-term unemployment continues to be the worst it's been since 1947!
In conclusion, with the unprecedented use of food stamps and disability claims, there is no doubt that we are trapped in the worst economic period since WWII, regardless of the distractions provided by certain speculative markets. With no way to cleanse the system of bad debts and mis-allocated capital, there is no base on which to build a real recovery, so this is becoming a permanent malaise.
The economy needs to get worse before it can get better.
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