Without Trillions in Government and Consumer Debt, GDP Would Have Been Negative

Sadly, economic growth under President Trump is about the same as it was under President Obama.

Contrary to popular perception, we’re not seeing a growth miracle. We’re seeing more of the same, with the substance behind the figures and the figures themselves distributed somewhat differently.

Quarterly growth of the real US GDP from 2011 to 2018

We’ve seen improved nominal growth (operative term: “nominal”). But do we have any growth in “real” terms?

And if so, what’s the underlying fundamental cause driving it?

Jeffrey Gundlach, the new “Bond King,” has the answer to this question--an explanation that is stark, simple, and brutally sober.

US GDP growth is exclusively based on combined government, corporate, and mortgage debt.

If the US hadn’t gotten into debt in the Trillions, our economy simply would have contracted: “Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased,” says Gundlach.

In other words, GDP growth may look great “on the screen,” but such a figure “screens” the substance (or lack thereof) behind the numbers.

According to Gundlach, nominal GDP in three of the last five years would have been negative if the US Treasury hadn’t increased its national debt load.

And that’s not counting the mortgage debt, corporate debt, and student loan debt that experienced a massive increase over the same period.

But even if those three categories remained flat, GDP still would have been negative.

Sure, nominal GDP might have risen by 4.3% over the last five years, but so has total public debt, to the tune of 4.7%.

Gundlach, who oversees more than $130 Billion AUM for DoubleLine Capital, believes that stocks and bonds are headed for another round of extreme volatility. 

But like many institutional investors managing large accounts, Gundlach has been “comfortably” long gold, in his case, since the level of $1,190.

Gundlach sees gold prices rising to much higher levels as the US markets and economy faces turbulent headwinds.

Takeaway: If the US can’t sustain growth without debt, how sustainable is the increase in debt? When debt begins to exceed income at a rapid and increasing pace, the result is invariably a “default” through inflation, restructuring, or nonpayment. Although the timing may be uncertain, the outcome is not.

Investors should begin preparing for the inevitable consequences by increasing their allocations to cash and gold.