I’ve been on Larry Kudlow’s CNBC show arguing that the US will have 2% growth indefinitely–no real recovery, no double dip, no banking crisis, but no bank stock rally. Today’s depressing numbers are in line with my depressing expectations. We’ve got a creative-destruction economy, without the creation: the startups, the venture capital, the entrepreneurship. MySpace and LinkedIn don’t count: they are a faddish extension of old technology, a means by which Americans who bowl alone can pretend to have lots of friends.
The only thing expanding is the government sector, and that by a spectacular margin. Nearly a fifth of all personal income receipts by Americans now consist of transfer payments, which is to say that a fifth of all personal income received by Americans is redistribution of tax payments from other Americans.
Transfer Payment Receipts as a Percentage of All Personal Income
Source: Commerce Department
The Johnson administration’s Great Society program doubled transfer payments from a mere 7% of income to an average of 13% during the four decades from 1976 to 2006. The last spike to the 18% level is ominous.
Government spending now comprises 40% of American national income, up from 30% in 2000. That’s the same proportion as in Germany; “socialist” Sweden is at 47%. By contrast, ex-communist Russia is at just 34%, and China at 18%. Since America’s victory over Russia in the Cold War, in a sense, America and Russia have switched places. Comparisons of this sort, to be sure, can be misleading, for most of the increase in US government spending reflects the aging of the US population and the consequent demands on Social Security and Medicare.
If we consider the state of the credit markets, though, the de facto socialization of the US economy seems all the more alarming. In effect, the US Treasury under Obama borrowed an extra trillion to trillion-and-a-half dollars, while private credit markets cut their borrowing by a similar amount. That is entirely without precedent.
Bond Market Issuance by Sector (Billions of Dollars)
Source: SIFMA
And total loans and leases at US commercial banks continue to plunge:
I hate to repeat myself, but this kind of implosion of private credit creation, never, NEVER happened before. We are in uncharted territory. We have had NO recovery in the private credit creation mechanism since the 2008 crisis. The banks keep buying Treasuries, and shedding risk assets.
The reason we’re not going to get a double dip is that there’s no more risk to be shed. There are no more workers to be fired. There are homes to be liquidated, but the banks have enough capital to absorb it, and they’re not making loans anyway. Mortgage lending has collapsed, the housing sector is flattened, entrepreneurship is despondent–but big corporations can still take advantage of global economic growth. They will churn out profits but they won’t hire.
This is NOT, NOT, NOT a business cycle. Throw out your macroeconomics textbook. It was lousy in the past when we had business cycles. Now we have a different sort of economy.