Main Menu

This was written on Feb. 1, 2010 – and the fact that President Obama made his budget announcement today is just coincidental, although helpful to making my point, so I am glad that it happened on the same day that I wrote this, so I could include a reference to it right away. 


Real economic growth is the highest when long-term economic cycles are young and lowest when long-term economic cycles are (very) old. 

In the current cycle, economic growth was high until the late 1960’s (the middle of the cycle), then went into the economic slump of the 1970’s, which started the road to lower real economic growth. 

In the 1980’s, economic growth was substantially lower in real terms that it had been so far, in the current cycle, before the recession of the 1970’s, and it was even quite substantially lower in real terms in the 1990’s, but the 1990’s felt better because the stock market was soaring. 

The economic growth in the 2000’s was even quite substantially lower in real terms than that of the 1990’s - real economic growth in the 1990’s was anemic and economic growth in the 2000’s was quite anemic (overall). 

In fact, the 2000’s should have been a time of economic downturn (i.e., negative economic growth).

The only reason they weren’t was because of government deficit spending, which propped the economy up enough to keep it out of negative growth most of the time. 

In fact, the time of highest growth in the 2000’s was at the height of George W. Bush’s spending for Iraq, when deficit spending was the highest during his presidency and annualized growth was recorded in real-time at 8%. 

When the deficit spending came back down, so did the recorded economic growth – and it was my observation in the time afterward that the economic growth was falling faster than the deficit was. 

We still managed to stay out of negative growth until the very end of George W. Bush’s presidency, but only because deficit spending stayed high enough to keep us nominally in positive growth. 

 

In fact, over the course of time, it is taking ever-greater government intervention, with ever-larger government budget deficits (which is obviously not sustainable), to keep us out of negative economic growth.

The government debt has grown quite rapidly in the meantime (and, in fact, a note as of Feb 1, 2010 – it was announced this morning that President Obama is proposing a record budget of $3.8 trillion, with a record annual deficit of $1.6 trillion, which will surpass the previous record, set just last year, of $1.4 trillion, which was about three times higher than George W. Bush’s peak deficit of about $500 billion several years ago). 

 

As far as I can tell, the total government debt went past the knee of the exponential sometime between about March and October 2008 - in other words, in the months just before Obama was elected president. 

That also means Obama’s huge budget deficits are not putting the U.S. government’s debt over the top, George W. Bush’s deficits did that – they are what put the U.S. past the knee of the exponential before Obama even took office; Obama’s deficits are just accelerating how quickly the U.S. will end up going into the vertical part of the exponential, which is taking quite some time, overall, because the overall exponential is so huge in this case, i.e., in the case of the U.S. government debt. 

 

Once the U.S. debt reaches the vertical part of the exponential, the U.S. is going to be in big trouble very quickly – and we are not far away from that point anymore.  That is also when the government will no longer be able to prop up the U.S. economy with deficit spending in an effort to keep the U.S. in positive economic growth – and that time is not at all far off anymore, which is why I am putting such emphasis on getting one’s house in order before it happens. 

 

Once we reach that point, not only will the government no longer be able to prop up the U.S. economy, I think the U.S. economy will quickly tumble into negative economic growth rates quite relentlessly for a long time to come – and I think the economic growth rates will be particularly severely negative, i.e., relatively very large negative numbers, because of all the efforts by the government over the past many years to keep the system propped up. 

In other words, society will pay, with particularly strongly negative growth rates for a particularly long time, for the effort by the government over so many years to try to keep a downturn from happening.  Stated another way, society will pay a price for the fact that the economy was not allowed to go into negative economic growth, at least for a while, much earlier, in other words, it will pay a price for the fact that the economy was not allowed to turn down when it (otherwise) would have done so under normal circumstances – i.e., the economy is going to play catch-up by going more negative for a longer period of time than it otherwise would have if things had been allowed to run their course normally. 

 

In other words, we are going to go into a particularly severe downturn for a particularly long time – and Austrian economics predicts it, whereas Keynesian economics (which is what is known by most American economists and is what is taught in most American universities) is incapable of predicting it (due to the nature of the theory), which is why most American economists don’t see it coming. 

 

Why am I so confident that it is coming when most American economists are so confident that it isn’t? 

Well, let’s start with the fact that most American economists did not predict the downturn of the past couple of years (which has been especially strongly noticeable in the time from October 2008 to March 2009), which my model that is presented on this website did predict.  My model is based on Austrian economics – and both the Kondratieff wave and Elliott waves are consistent with Austrian economics, but not with Keynesian economics.  My model not only predicted the downturn of the past couple of years – according to my model, the downturn of the past couple of years was completely inevitable in light of what came before.  My model also predicts that what happened during the past couple of years is only the (very) beginning of what is happening – what is to come will be much worse than what has already happened during the past couple of years and that is why people who want to make it through what is coming will have to prepare. 

 

Also - wages grow the most in the first half of the long-term economic cycle. 

As the economic cycle gets old, wages stagnate more and more. 

Toward the end, very wealthy people benefit the most from the continued economic activity (which tends to be more and more financial in nature), with the gap between rich and poor getting wider and wider. 

At the end, the well-off get almost all the financial benefit and wages are almost stagnant, if not even stagnant - just before the economy rolls over and everyone, including many, if not even most, of the rich people, take a hit, except for those who are actually prepared for what is coming. 

The purpose of this website is to prepare the reader for what is coming. 

It should be noted that toward the end of the long-term economic cycle, more and more of the "economic" activity tends to be financial in nature. 

If the economic cycle goes on for long enough, in the end it can get to the point where almost all of the remaining "economic" activity is in the financial sector. 

We have at least come close to that during this long-term economic cycle - and, in fact, in terms of sheer amount of money being moved around, a lot of the activity is centered around just making money on money, with much of that activity centered in companies on the island of Manhattan in New York City, with the money never actually leaving the island. 

The big banks are making tons of money - but they make it on financial speculation, much of it in the stock market itself, on the New York Stock Exchange, which is in lower Manhattan, which then turns into "profits" for the banks, some of the largest of which are headquartered in Manhattan, and they then circulate the money right back into more financial speculation. 

The fact that this is happening on such a grand scale (in terms of the sheer amount of money involved) shows just how late in the economic cycle we really are - considering that the wage for the average man is now stagnating more than ever. 

Pretty soon, the game will be up - and even many rich people are very much going to be hurt when that happens.  Only people who are properly prepared will not be - and I suspect that will be a very small minority. 

 

Another comment – as I noted above, the closer one gets to the end of a long-term economic cycle, the more emphasis gets placed on financial gains for their own sake. 

I think this was represented, and epitomized, by the CEO transition at Goldman Sachs a few years ago. 

President George W. Bush asked Hank Paulson, the CEO of Goldman Sachs at the time, to become Secretary of the Treasury – and, of course, given that it was the president who asked, Mr. Paulson said yes, which meant that Goldman Sachs had to appoint a new CEO. 

Hank Paulson had come out of the investment banking division of Goldman Sachs (the part of the company that makes money by investing in companies) – just like just about every previous CEO of the company had.
 


But this time around, the company decided to appoint the new CEO out of the trading division – Lloyd Blankfein, the head of the trading division, was appointed to replace Hank Paulson. 

The trading division spends its time trying to make money by trading in the markets – and I think that is very indicative of where we are at in the big picture.