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Weekend Reading: Sentient Illumination

Written by Lance Roberts | May, 5, 2017

With a continuing resolution for $1 Trillion passed this week, which will fund the government for 5-whole months, there seems to be little consideration given to the disconnect between increase debt levels and slower economic growth. The chart below shows the growth of total debt as compared to GDP growth since 1966.

Not surprisingly, as the system becomes inherently more leveraged (as corporations issue debt to buy back stock and investors lever up) there rise in asset prices is not surprising.

The problem, however, is that rising asset prices and surging debt levels, despite rumors to the contrary, do not translate into stronger economic growth. As shown below, the transition to leverage starting in the early 80’s was the turning point for the growth rate of the economy.

To put this into economic terms, it currently requires almost $4.00 of debt to create $1.00 of economic growth. This is a problem when 70% of the economy is driven by consumption and there is a finite limit to the amount of debt that can ultimately be taken on by households.

I know. It’s crazy talk.  But I see two options for Congress here:

  • If you want 3-4% economic growth in the future, you can start taking some fiscal responsibility and pay attention to the “debt elephant” in the room.
  • Or, you can pass a health care bill that will hit taxpayers for another $250 Billion in subsidies over the next decade along with continued high costs of insurance for individuals. 

One of those isn’t going to work. 

In the meantime, here is what I am reading this weekend.


Tax Plan/Politics


Markets


Research / Interesting Reads


“It’s fine to celebrate success but it is more important to heed the lessons of failure.” – Bill Gates

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Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube

2017/05/05
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