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#135: How Trustworthy is the US Economy?

A retired investor, at age of about 60-70 years, faces added life expectancy of 25 to 35 years (or 30 to 40 years if spouse included). Retirement funds are then expected to support living expenses for the remaining lives. Retirees should now examine the trustworthiness of the US economy until 2040. Can the economy sustain them over that many decades?

What constitutes adequate retirement assets should include potential investment gains but also inflation (over 3%/year in the US). In addition retirees should also anticipate rising medical costs. What are then the required savings that would keep a retired person with a satisfactory income?

There is no question that the US economy is superior to all others.  The top five countries rank their inflation-adjusted GDP as follows:(1)

The deflated GNP of Japan, Germany, United Kingdom should keep their slightly rising economies at current levels. An aging population, lower birth rates and social insurance should assure acceptable retirement living. Meanwhile, China GDP is rising but will not come close to the wealthy US:(1)

A continued prosperity of the US is assured. Even the higher GDP annual growth rate for China does not show as sufficient growth rate to assure the narrowing of the current GDP gap with the US. There is also a very large gap between China and the US in GDP per capita. The narrowing of such differences would be unrealistic:(1)

There are, however adverse trend that curtail US economic leadership. The US balance of trade has been consistently negative - imports exceed exports:(1)

A further detraction form the US economy is the government deficit:(1)

With the trade and budget deficits near $1.4 Trillion, the US economy carries a liability that current tax collection deficits are unlikely to correct. That is evident in the current US tendency to take advantage of existing wealth by increasing debt that defers any settlement into the future. Such deferred liabilities have also immediate effects on current affordability of social expenditures. 2017 spending for real US personal consumption is $12.6 Trillion.(2) The trade deficits plus government spending deficits now detract over 10% that would have been otherwise available for US consumers immediately.  

The immediate prospects of increased debt and deficits are not good. Though the US wealth is still enormous, does that constitute that a peak in economic history or only a rebalancing of what now constitutes an indefinite continuation of exorbitant advantage as compared with other nations?


There is no question that the present wealth of the US economy makes it superior to other countries. Whether families can benefits from such wealth is a matter of a personal accumulation and distribution of assets. Whether individual retirees can actually take advantage of so much wealth depends largely on personal circumstances. The fact is that the US still remains as the most prosperous country in the world. The US has by far more millionaires than any other nation.

In 2018 we may have possibly have reached the zenith of our progression from a poor country to the present high levels of prosperity. Rising deficits and escalating public and private debt may be one of the indicators of decline, while the rise of China may offer a challenge to take over US global leadership.

In the next few years the best strategy for the next 30+ years of retirement is to safeguard retirement assets against losses provided that a modest but low-risk income can be assured. The heady investment gains realized from 1950 through 2000 cannot be repeated. 

So far the US economy is trustworthy for the proximate future. What may happen in 2040 should be seen as a future that will generate new geopolitical risks for the US.   




   (1); (2)

Post 134 What Supports the Current Rise in the U.S. Stock Market?

Deregulation and tax cuts are bullish for the US economy as well as for corporate earnings and stock prices. On the other hand, the ballooning federal deficit—attributable to the tax cuts and spending increases—is putting upward pressure on bond yields at the same time that the Fed has moved to raise interest rates and taper its balance sheet.(1)

S+P 500 earnings got a big boost from the tax bill passed at the end of last year. The Tax Cut and Jobs Act (TCJA) lowered the federal statutory corporate tax rate to 21% from 35%. Since its enactment raised earnings expectation have been projected for the next year:

During Q1 and Q2 of this year, S&P 500 operating earnings in aggregate jumped 25.9% y/y to $1.25 trillion and 25.3% y/y to $1.31 trillion, respectively. S&P 500 revenues per share increased impressively for the same periods, by 9.4% and 10.3%:

Bullish deregulation boosting small business confidence. Deregulation, which started early last year, might amount to $4 per share in additional earnings.

The monthly survey conducted by the National Federation of Independent Business (NFIB) shows that significantly fewer small business owners have been reporting concern about government regulation and taxes. The earnings component of the NFIB survey is the highest on record since the start of the data during 1974:

There has been ample cash flow to finance capital spending, share buybacks, and dividends. Firms are using incremental cash flow for the short-term benefit of shareholders rather than investing in future earnings potential. Buybacks and dividends have been about the same as after-tax operating profits for the S&P 500 in recent years.

There has been a record amount of corporate cash flow, provided by depreciation allowances, that has been fueling corporate capital spending. Therefore capital expenditures are at a record high. Private nonresidential fixed investment in real GDP rose solidly by 8.7% during Q2, following an 11.5% gain during Q1. There has been plenty of funds to finance capital spending, share buybacks, and dividends.


No President has ever provided this much fiscal stimulus at this stage of the business cycle. In the past, such stimulus was provided during recessions or early recoveries, when the unemployment rate was at a cyclical high, not when it was near previous cyclical lows as it is today. 

Trump is making a very big bet on supply-side economics. The idea is that tax cuts will boost growth by boosting productivity, so inflation should remain subdued. That could work as long as growth isn’t weighed down by rising interest rates. If inflation does come back, then the latest supply-side experiment will end very badly indeed.

(1) This analysis is derived from 

133: Why Has the U.S. Stock Market Increased by 300%?

The root causes of the U.S. corporate bond and stock market bubble are the ultra-low interest rates. Though interest rates have been falling since the 1980s, the trend has been supported by the Federal Reserve since the Great Recession of 2008 and 2009.

In an effort to jump-start their economies after the recession, central banks cut interest rates to record low levels and pumped trillions of dollars worth of liquidity into the global financial system and markets via their quantitative easing (QE) programs. The central bank-driven liquidity boom has led to "yield-chasing". That has sent bond prices soaring and yields plummeting, as shown in the following the chart:(1)

While the climbing U.S. stock market received attention, a dangerous bubble has been forming in the corporate bond market. This bond bubble is one of the main reasons why the stock market has been consistently pushing to new highs. The purpose of this Post is to explain why the corporate bond bubble poses a risk to the stock market and economy.

The Fed printed brand new fiat money and used it to buy Treasury bonds and mortgage-backed securities. These programs helped to boost the overall bond market. The chart below shows the growth of the Fed's balance sheet since the Great Recession as it created over $3.5 trillion worth of new money:

Low corporate bond yields have encouraged U.S. public corporations to borrow heavily in the bond market since 2007. Total outstanding non-financial corporate debt has increased by over $2.5 trillion, which is a dangerously high level. U.S. corporate debt is now at an all-time high of over 45% of GDP, which above the levels reached during prior excessive pricing conditions. 

Corporations have been using the proceeds of their borrowing to boost their stock prices via share buybacks, dividends, and mergers & acquisitions, instead of making the long-term business investments and expansions that were typical in the past. The chart below shows share buybacks and dividends. Share buybacks are expected to top $1 trillion this year:

The low interest rates and the debt-fueled share buybacks helped the S&P 500 to rise by over 300% from its lows and more than 80% from its 2007 peak:

U.S. corporations are using borrowed money to buy their own shares at very high valuations. That amounts to "throwing good money after bad." For instance the Shiller cyclically-adjusted price-to-earnings ratio (or CAPE) shows that the S&P 500 is hovering near 1929 valuations. The S&P 500 prices have been overvalued since the late-1990s:

Shiller cyclically-adjusted price-to-earnings ratio (or CAPE) now exceeds the perilous levels of the 1929 crash. This suggests a very high level of vulnerability and indicates that another recession may be now forming.


The U.S. corporate debt bubble will burst due to tightening monetary conditions which includes rising interest rates. It is the loose monetary conditions that has created the current corporate debt bubble in the first place.  Ending of those conditions will puncture the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will  most likely cause the current stock buybacks to come to a screeching halt which will ultimately lead to the creation of a downward recessionary spiral. When that will happen is not certain because the government is still inducing rising corporate profits that will continue supporting rising stock market prices.


132 US Deficits and the Rising Debt

The US is currently incurring deficits which then become debts. It is the purpose of this posting to describe the conditions under which debt accumulates and how rising interest costs will then give rise to further budget shortfalls.

The federal budget deficit was $895 billion for the first 11 months of fiscal year 2018. The Congressional Budget Office estimates that this deficit was $222 billion greater than the shortfall recorded during the same period last year. 

Much of the negative contribution in the trade of goods and services comes from China, which has displaced a large share of the US manufacturing capacity. Chinese low labor costs and effective investments in modern manufacturing technologies made their exports to the US attractive while their imports from the US were lagging.

The US budgetary deficit has declined sharply since 1992. One of the causes was a steadily increasing negative balance of trade, currently running at about $50 billion per year:

Trade deficits plus large budgetary deficits from government operations resulted in a rise in the total federal debt because excesses in spending were never balanced with rising incomes.

The US fiscal policy since the 1970's favored the passing of all deficits to increasing national debt instead of favoring the management of US finances that prevailed during the prior decades as a balance between expenses and incomes. 

It can be seen that the increases in US debt since 1970 have been correlated  primarily with fiscal deficits from the budget of government operations:

The above chart shows that the current federal budget deficit that averages over trillion dollars/year coincides with corresponding federal debt increases.

One of the consequences of the rise in debt has been an increase in interest payments:

Interest rates paid on debt are now 2.25 percent. Looking forward the federal funds interest rate is projected to to over 3.00 percent by 2020.(1) That suggests interest payments in excess of a trillion dollars per year in the federal budget, thus squeezing out many discretionary expenses that benefit the population.


A rising debt the results from deficit in trade as well from government operations will result in an increase in the costs of interest that the government pays to holders of treasury bonds. 

   The future impacts of such payments, as the credit-worthiness of US declines, will become a critical issue in fiscal management. The future costs of US debt will become a major influence on the fiscal prosperity.