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Did Washington Save the Economy? Part 1


A "jobful" rebound is unlikely to goose the recovery.

The first point of sobering evidence is that in February, once again, the Fed's ZIRP generated exactly ZIG (zero income growth). But that was only the headline number. The core trend that hovers beneath -- that is, the unprecedented collapse of private sector incomes -- continued to falter. It dropped for the second straight month and is now down $22 billion from December. In the grand scheme of things, however, there's probably no more important number than the sum of private wages and salaries + proprietors' income + rental income + dividend and interest receipts -- which is to say, everything the public has to save or spend, apart from government transfer payments and salaries.

The seasonally adjusted annualized rate reported for core private sector income is a big number -- $8.126 trillion to be exact. The trouble is, the February figure is down more than $500 billion, or 6.2%, since the third quarter of 2008 when Wall Street allegedly had its heart attack. Importantly, the half-trillion dollars missing in action here consists of everyday (nominal) money income of the kind that shows up in actual bank statements, not the doctored-up "real income" variety as deflated by the government's guesstimates on inflation rates. Quite simply, there's never been a sustained drop in private sector money incomes of any magnitude -- let along 6% -- during modern economic history; that is, since we escaped the dark ages of balanced budgets and gold standard money in the 1930s.

Moreover, the green shoots which have been omnipresent since last spring have had almost no impact on this fundamental rudiment of recovery. Over the past six months, core private sector income (as here defined) bounced by the grand sum of $62 billion. At this anemic rate of gain -- slightly over $10 billion per month -- it will take 52 months, or until June 2014, to regain the private income levels extant in August 2008!

The trend in the remainder of the income equation is similarly troublesome, and points squarely to the economic ambush looming ahead. Specifically, the balance of personal income -- consisting of social transfer payments and government salaries -- was $3.39 trillion in February. But in contrast to the cliff-dive exhibited by core private sector income, this figure represents a huge $400 billion or 13% gain compared to the third quarter of 2008. In other words, household and business spending has limped along solely because the massive $500 billion hole in private sector incomes has been largely offset by $400 billion of higher government transfers and paychecks -- a source of spending which, on the margin, was derived entirely from incremental public sector borrowings. But even the most bone-headed "borrow and spend" Keynesians don't argue that this kind of money shuffle can be sustained indefinitely.

Stated differently, the last economic boom came to a screeching halt in late 2007 when the household sector smacked squarely into Peak Debt, thereby culminating a 30-year run in which an increasingly larger share of each year's incremental consumer spending was borrowed, not currently earned. When the pace of new borrowing suddenly went negative, household spending growth vanished (out of mathematical necessity), even before giving effect to the incipient up-shift in its savings rate.
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