by Rick Ackerman
Although no one can predict when the dam will break, plunging the economy into hard times to rival the 1930s, we can be quite certain that a day of reckoning is drawing near. Speculative mania across a wide swath of assets is at a millennial peak, stoked by out-of-control fiscal and monetary stimulus. To further destabilize the system and push insanity to untold heights, the Fed has led speculators to believe it will continue to do whatever it takes to sustain the illusion of economic growth.
Reflections from two economists who have remained aloof from the popular wisdom explain why this cannot last. They do so not with jeremiads warning of doomsday, but with clear, hard logic. Here’s Hoisington’s Lacy Hunt, PhD: “Each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980’s was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.” In case you missed his point, let me state it another way: It is taking roughly $3.70 of borrowing to create a dollar’s worth of economic growth at the margin, and the ratio is continuing to worsen. How long can that go on?