Despite nearly three years of uninterrupted job gains, the U.S. economy still can’t generate a paltry 2% GDP rate, and every quarterly rise in growth is inevitably followed by disappointing contraction.
Frustrating? Yes. But not really mysterious. The underlying problem for the U.S. economy, and for all of G-7 nations for that matter, is debt. Bloomberg published a neat little article that highlighted the full extent of the problem.
“Between 2000 and 2007, borrowed money was adding about $330 billion a year to Americans’ purchasing power, according to the Federal Reserve Bank of New York. By 2009, households were diverting $150 billion to pay back debt — a swing of almost half a trillion dollars, even without counting the impact of lost jobs.”
The de-lever continues, and that is probably the single biggest reason why the consumer is not coming back.
|Will consumers be able to save this economy despite curtailed purchasing power and stagnant incomes?|
With purchasing power curtailed and incomes stagnant, company profits stop growing as well. For a while, after the 2009 rebound, many of the U.S. multinationals grew their profits in emerging-market nations. But with commodity prices crumbling and with China struggling to stay afloat, that party is over as well. Little wonder that Google, Microsoft and now Apple are entering a “profit recession.”
With private demand curtailed, the only macro solution is a massive Keynesian infusion of government spending, but here debt presents the same problem. Most of G-7 nations are dangerously close to their 100% debt-to-GDP ratio, with Japan well above that figure.
There simply is no political will to spend more, which leaves the whole global economy in the hands of the central banks, who can dutifully print all the money they want only to see it go unspent.
|“Quantitative easing and now negative interest rates are the economic equivalent of hitting your head against the wall.”|
Quantitative easing and now negative interest rates are the economic equivalent of hitting your head against the wall. Easy credit has helped fuel asset bubbles and eased some government financing, but it has done very little to stimulate the economy simply because it can’t stimulate the economy. At a time of great debt, no one wants to borrow even if the money is free.
So we find ourselves in this no-man’s-land as advanced industrialized nations continue to muddle on, propped up by central banking that continues to support financial assets, but true growth will elude us as the mountain of debt overshadows all.
So how does that all add up for investors? It means that interest rates will stay low for far longer than anyone believes and that dividend stocks will be the new “bonds” for those seeking yield.
Britain’s economy slowed at the start of 2016, hit by a struggling global economy and uncertainty ahead of the June 23 referendum on European Union membership. First-quarter gross domestic product grew by 0.4%, down from 0.6% in the final quarter of 2015. That was in line with economists’ forecasts. Economists said the weak global economy and doubts about Britain’s future in the EU had contributed to the slowdown.
The general election has all but started in the race for the White House. The two front-runners celebrated big primary showings Tuesday night, with each scoring major wins in East Coast states, taking big steps toward their potential nominations.
Republican Donald Trump declared that the GOP primary was over. “I consider myself the presumptive nominee,” he said. “Gov. (John) Kasich and Sen. (Ted) Cruz have really, really hurt themselves with a faulty deal that was defaulted on before it was even started.”
Democrat Hillary Clinton signaled at a campaign rally that she would work to win over supporters of Vermont Sen. Bernie Sanders and unite the Democratic base. “Whether you support Sen. Sanders or you support me, there’s much more that unites us than divides us,” Clinton told a rally in Philadelphia.
High school seniors in the U.S. are slipping in math and not making any progress in reading, according to test scores released Wednesday from the so-called Nation’s Report Card. Only about one-third of the seniors are prepared for the academic challenges of entry-level college courses, based on tests given for the National Assessment of Educational Progress.
One-quarter of 12th-graders taking the tests performed proficiently or better in math. Only 37% of the students were proficient or above in reading. The average score for math in 2015 fell 1 point from 2013, the first drop in a decade. Reading scores were flat over the same period, and down 5 points from more than two decades ago. The test was first given to students in 1992.
The Money and Markets team
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