Hussman: The US Economy Is Becoming a Ponzi Scheme
Wednesday, 24 Sep 2014 07:01 AM
By John Morgan
The United States has evolved into a nation with a Ponzi economy, in which the continuous expansion of debt is the only thing that keeps prosperity alive, according to Federal Reserve critic John Hussman.
In his weekly commentary, Hussman, founder of the eponymous Hussman Funds family of mutual funds, said the U.S. economy appears fine on the surface, but that capital accumulation and labor force participation have buckled below – with dire prospects for the American future.
"Over time, growth in the standard of living is chained to and limited by growth in productivity," he wrote.
"When the most persistent, most aggressive and most sizeable actions of policymakers are those that discourage saving, promote debt-financed consumption and encourage the diversion of scarce savings to yield-seeking financial speculation rather than productive investment, the backbone that supports a rising standard of living is broken."
Hussman said real gross domestic investment has "crawled" at an annual growth rate of only 1.4 percent since 1999, compared with a 4.9 annual rate in the previous five decades.
In recent years, he noted, "financial repression by the Fed has held interest rates at zero, discouraging savings while encouraging households to go more deeply into debt." The same mentality has allowed the government to go even more deeply into debt while expanding unemployment compensation and other assistance to obscure the damage.
"As long-term economic prospects have deteriorated, the illusion of prosperity has been maintained through soaring indebtedness, coupled with yield-seeking speculation in risky assets that has repeatedly (albeit not always immediately) been followed by crashes throughout history."
The effect of the Fed's wanton excess has not left corporate American unscathed, according to Hussman.
He said corporate and junk yields are insufficient to justify their additional credit risk, and leveraged use of corporate debt at historically extreme valuations is especially alarming.
"If you wonder why the economy feels 'fine' despite the persistent thinning of the U.S. capital base and the hollowing out of its middle class, it’s because we are covering the shortfall at every turn with the endless issuance of cheap debt that needs to be rolled forward forever."
Hussman offers a recipe to start fixing the problems, including raising bank capital requirements, offering investment tax credits and job training credits, a return to normal interest rate policy by the Fed, more local enterprise zones and more curbs on leveraged transactions by too-big-to-fail financial institutions.
"Despite the short-term enjoyment that comes from living within an ever-growing Ponzi scheme, our long-term economic future relies on ending it," Hussman concludes.
Hedge fund billionaire Julian Robertson sees bubbles in both stocks and bonds now, leaving investors few places to go, CNBC reported.
Bonds "are at ridiculous levels, so that the saver, the small charity, has no place to put his money except into stocks. I think that situation is serious on that score. Nobody seems to be concerned about that," he noted.
"It's a worldwide phenomenon that governments are buying bonds to keep their countries moving along economically. I don't know when [bursting of the bubbles is] going to happen, but I think it will happen in a very bad way," he said at a Bloomberg conference, according to CNBC.
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