Current Government Spending Not Creating Enough Growth

The Bernanke put is keeping stocks priced levitated these days, at least in my opinion. Specifically, the Bernanke put exists because the stock market believes that the Federal Reserve can and will do “something” that saves the day, whatever saving the day is. Ultimately that belief falls into the same category as a superstition, like the evil eye or the tooth fairy. The reality is that the Fed cannot do anything to solve the fundamental flaw at the heart of the US economy.

Some of you have forgotten that the only logical reason to buy stocks based upon the possibility of central bank easing is that at some point soon after the last central bank intervention, the global economy will get better and grow fast enough to get us out of this mess. In other words, those who believe in the Bernanke put have to then believe that fast economic growth is likely sooner rather than later.

But all that ignores the fundamental flaw in the US economy. Right now the US is borrowing, printing, whatever you want to call creating $100 billion a month to pay its bills. All that borrowing is generating $20 billion per month in higher wages in salaries. To step back, the US government spends $300 billion each but collects only $200 billions in taxes per month. About $140 billion of the $200 billion comes from wages and salaries. That means it has to borrow, create $100 billion each and every month.

You with me so far? Wages and salaries of all 133 million currently employed are about $525 billion each month. At a 3% growth rate, wages and salaries are up by about $15 billion a month this year vs. the same month last year. Other income, from capital gains, partnership, is up about $5 billion per month. That is all of a $20 billion monthly gain. Yet the US government spends $100 billion. And what do we get? Only $20 billion per month in growth!

What the government does is the same as borrowing $100 to go to the race track or casino, having a good time, and coming back with $20. That means 80% of the borrowed money is lost. Explain that to the loan shark and then ask to borrow another $100.

Bottom line, the US government is borrowing to spend an extra $100 billion per month and that is creating very little economic growth. There is only one thing the government does effectively. And that is spend money. In fact, it is very good at spending a lot of money.

And even if the government was able to sponsor enough rapid US economic growth to match all time record highs, that still would not be enough to generate enough taxes to afford current levels of government spending.

Since 2000, the wage and salary growth rate peaked at over 8% only for the first half of 2006 and for the record, wage and salary growth averaged 7% between Q1 2005 and Q3 2007. Today wage and salary growth is down to 3%. Yes, if wages and salaries grew at the record 8% rate for 10 years straight, then and only then would the US economy be generating enough taxes to afford current spending amounts. And I would be shocked if wage and salary growth picked up to even 4% year over year before dropping back down to the 2% range given what is happening around the world.

To come back to todays stock market, the only reason to be bullish other than as a quick trade, is for you to believe that the Federal Reserve as well as the European Central Bank has some magical ability to turn a financial disaster into rapid economic growth. And then again, maybe the tooth fairy is real.

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