I had a borrower (Lisa) whose house appreciated from $300,000+ in the 1990s to about $1 million by 2007 – and she came to me every 12 to 18 months for a cash-out refi until she owed over $800,000.
The cash went into cars, a boat, a major remodel, and extravagant vacations. There was no “investment” with that cash, and it all came crashing down in 2008.
SIDEBAR: This constant non-stop cash-out mortgage borrowing is what drove the economy in the early 2000s. Part of the reason why the 2008 recession was so bad was because this mass cash-out borrowing got shut off like a spigot – when home values dropped and lending guidelines tightened up.
I had another borrower (Whitney) who lived near Lisa and who also pulled cash out in the early 2000s, but she only did so once. It was to start a business selling “cutesy things” on the internet. I can’t remember what the cutesy things were, but I do remember thinking it was ridiculous. And … she ended up killing it. The world clearly needed more cutesy things. My point is that her borrowing was an investment that paid off many times.
The U.S. government, unfortunately, is like Lisa and not like Whitney.
Biden: Debt Grew $1 Trillion More than GDP
When Mr. Biden took office, we owed $28 trillion, and we now owe $35 trillion. We added $7 trillion in debt.
At the same time, our GDP grew from about $23 trillion to $29 trillion. So, we only grew $6 trillion while borrowing $7 trillion (we borrowed $1 trillion MORE than we grew). Uh oh.
Making matters worse is the fact that much of that GDP growth was and is just wasteful government spending. We’ve all heard the stories: $7.5 billion to build 7 EV chargers; $42 billion for rural internet that connected … 0 people; and $11 billion or so for CA’s high-speed rail with no track laid.
These vignettes are on top of the tens of billions spent on studies, grants, pork barrel spending, expanding welfare programs, and make-work programs that generate NO actual wealth.
Reagan: GDP Grew $600 Billion More than Debt
In contrast, when Reagan was president, federal debt grew by about $1.7 trillion, while GDP grew by about $2.3 trillion. Not bad, and much of that growth was real too, particularly in the tech realm (computers, chips, cell phones, etc.).
Clinton: GDP Grew $3.7 Trillion More than Debt
Even better was the Clinton era, when federal debt grew by only $1.5 trillion, while GDP grew by $3.7 trillion. Much of that growth was very real too, largely driven by the advent of the internet.
The Keynesian Myth That Politicians Love
We were all taught in school that government spending can spur economic growth, largely based on the teaching of the famous economist John Maynard Keynes. And – Keynes was right if the spending goes into GI bills to support college, new seaports, an entire freeway system, new airports, or anything else that actually helps an economy grow. This also can be the case when the spending takes place during recessions.
The problem is that politicians use these Keynesian beliefs to justify every type of spending – whether it generates wealth or not. And by wealth, I am referring to things that will create more goods, services and real jobs that go into creating actual goods and services that people demand (not that government mandates).
Here is the bigger issue: too much debt. There is a famous study called the Rogoff study that says whenever Federal debt exceeds 90% of GDP, every dollar of additional spending and borrowing SLOWS DOWN the economy.
And we’re there – and then some.
We Are a “Lisa” Economy
We are currently a “Lisa” economy where we are spending like drunken sailors to appear wealthy, but we are not creating more wealth (like Whitney did). So, no, it is not sustainable.
I hope nobody is fooled by the GDP growth reports that continue to surface. The most recent one in fact was propelled by a huge surge in defense spending at an opportune time, right before an election.
