The Debt-Driven Expansion Requires Tweaks To Your Portfolio

The U.S. government spent $7.50 trillion above the country’s budget over the last six years to encourage economic growth as well as fulfill pre-existing obligations (e.g., defense/military, agriculture, Medicare/health, Social Security, education, transportation, interest on the federal debt, etc.). Yet the economy still only grew at annualized 2.1% in the period – a growth rate that is far lower than the expected average of 3.0%.

Similarly, the U.S. Federal Reserve created electronic dollars in the neighborhood of $3.75 trillion, encouraging investment in automobiles, equities and real estate at artificially low interest rates. People did buy cars, shares of stock and homes; prices did move higher, making homeowners and 401k plan participants feel wealthier. Nevertheless, public corporations primarily borrowed money at ultra-low rates so that they might repurchase their own stock shares, largely avoiding more productive avenues for the cash (i.e., research, development, mergers, acquisitions, marketing, human resources, training, product/service roll-out, technological upgrades, etc.). Financial engineering does little, if nothing, to help an economy grow.

In the end, there’s simply no avoiding a number of unfortunate realities. First, the U.S. economy has not been able to grow at its historical rate of 3.0% since the Great Recession’s official farewell, even after $7.5 trillion in excess government spending and $3.75 trillion in Federal Reserve interest rate manipulation. Second, the U.S. economy is nearing the possibility of contraction, practically stagnating since the Fed ended a third round of emergency level bond buying (”QE3″) at the tail end of October. Third, the U.S. economy – from the individual to the household, from the business to the government entity – is now addicted to debt. Consumption is driven by debt; entitlement fulfillment is dependent on the borrowed buck as well.

There’s enough blame to go around. Politicians do not get elected without making promises, many of which they cannot keep due to insufficient funding. Meanwhile, Fed policy makers do not have a goal of fortifying a house made of straw. They only have a predisposition to fueling credit expansion in the hopes that it might maintain an illusion of prosperity; if the mirage lasts long enough, employers might offer real positions with real wage growth. Sadly, a mirage is fleeting by nature.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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