The Hidden Warning Sign of Recession

By diderot

Aug 28, 2019

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alk of recession is in the air.  Everywhere. Donald Trump calls it a conspiracy, and publicly complains that any problems could be eased if the Federal Reserve would just further lower interest rates.  But, he adds, “…the Fed doesn’t like helping me too much.” 

Helping him, not the economy. 

White House counsellor Kellyanne Conway scolded media, “the fundamentals are strong—and you know it.”

Which is a clever way of confining analysis of the economy to three traditional metrics--the stock market, the unemployment rate, and consumer confidence. 

But do these three metrics tell an overall truth?  Or is there something more sinister hiding behind those numbers? 

Before we get to sinister, let’s first look at the plusses and minuses of these three fundamentals:



Most agree that the Standard the Poor 500 is the most widespread measure of prosperity in the financial markets…and the S&P index has soared for most of this year.    


But a soaring market helps only some people. As we’ve reported before in The Shareholder Delusion, only half of Americans have any form of investment at all—and some of those investments have no connection to the stock market.  In addition, 90% of total stock market wealth is owned by just 10% of the population.  So, this is misleading as an indicator of overall economic health.



At the currently stated 3.7%, we are said to be effectively nearing full employment.  And that seems to be borne out by all the help wanted signs in store windows.  It’s a good time to be looking for a job—sort of.


While the media doggedly cling to this one narrow look at people out of work (only those who have sought a job in the last month), it disregards a more comprehensive measure that puts the true unemployment rate at 7.1%.  This measure includes people working part time against their wishes; those laid off from one job and forced to take a poorer paying one; and those who gave up and didn’t search at all last month.  And this doesn’t begin to count self-defined “retired” seniors aged 65+ who have been forced back to work to make ends meet.  The percentage of seniors doing this has doubled (to 20%) since 2008.



People continue to spend money—for reasons that aren’t particularly clear.  Maybe they trust Trump’s assertion, “our consumers are rich—they’re loaded with money.” That would be news to many.  True, wages are up a hair, but for most not enough to cover losees: rising health care costs, and declining or disappearing 401k matches and pension benefits. Yet people keep buying, frequently with no more understanding of how they’ll pay for everything than does the federal government as it keeps adding massive bloat to the nation’s deficit.


Collectively, Americans just passed $14 trillion in unpaid bills.  The average household with a credit card owes over $8,200.  And total outstanding student loans amount to more than all credit card debt. Furthermore, a full 22% of us say we don’t have enough money to pay our monthly bills—and this includes many people with theoretically “good” incomes. 

Together, the evidence above does not confirm a vibrant economy. 

But arguing over these three indicators is not the point of this story. Instead, understanding America’s economy becomes easier when looking at one seldom-reported metric.


et me introduce you to something that puts things in a clearer light. It’s a stat that looks beyond just what we “produce” (our GDP), and instead considers what we “own” (think of it like the difference between your annual income and your net worth.) Then it compares that ownership to other nations.  It’s wonkily called the Net International Investment Position, or NIIP.  (I know! Economists, right?).  NIIP includes everything (private and public) that belongs to a nation measured against what is owed to the rest of the world.

Here are a couple other ways to think about it in real world terms. You may drive “your” car…but if you still owe the bank $10,000 before you pay it off, the bank gets to claim that $10k as an asset…and for you, that amount is a liability.

Or, let’s look at a sports analogy(!).  Soccer is the world’s most popular sport, and the EPL in England is that sport’s most popular league.  Great Britain is justifiably proud of it.  But of the top six teams in last year’s standings, only one was English-owned.  The winner, Manchester City, belongs to a member of the royal family of Abu Dhabi.  The runner-up, Liverpool, is part of the American Fenway Group, which also owns baseball’s Boston Red Sox.  And third-place Chelsea is the toy of Russian oligarch (and Putin pal) Roman Abramovich. (According to Forbes, the total net worth of just these three franchises is about $7.5b.) All their fans adore these English sides.  But in financial terms, each club’s actual value belongs to owners far away.

So, the NIIP exists to put together all the value of one country’s “ownership”.  That includes corporations…everyone’s investments… its real estate holdings, and everything else. Then it subtracts debt, and balances the result against every other nation. 

If it’s true that a picture is worth a thousand words…this graph might be worth a million:

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Hey, look at that—we’re number one!  (Just turn your screen upside down.)  That U.S. shortfall here exceeds eight TRILLION dollars.  Does this look like a “boom” to you?

To clarify the graph:

  • America’s net global deficit is immense—it’s nine times larger than the runner up (Spain). It’s almost 17 times larger than “poor” Mexico.

  • America’s debt is bigger than the surplus of the three most prosperous countries (Japan, Germany and China) combined.

  • History buffs will note that the top two surpluses today belong to the two nations we “left in ruins” after WWII--while we “victors” are now dead last among the deadbeats.

If you’re suspicious, you might sense a trick here.  After all, this chart runs to 2017, when Donald Trump had barely taken office.  How can he be blamed for something that happened before he really took over!?

Fair enough.  But fortunately for us, there’s an update available for America’s NIIP that runs all the way to April 1st of this year.  Here’s how the Trump magic is working:

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What we owe the rest of the world has (by now) exceeded ten trillion dollars.  China alone holds more than a trillion dollars of our assets in U.S. Treasury bonds. Should we worry?

There is a current school of economic thought called modern monetary theory (MMT) . It holds that none of this matters; if we need to pay a debt, all we have to do is print more money (i.e., sell more Treasury bnds.). Thus, we can pay for any program—anything—we want. It’s that easy. In the opinion of Stephaie Kelton, an economics professor and key advisor to Bernie Sanders in 2016, concern about debt and the government’s interest payments are an “impediment” to getting things done. MMT is also at the heart of Alexandria Ocasio-Cortez’s Green New Deal.

You can choose your own belief. It’s a free country. As has often been said, you can find numbers to prove anythng, i.e., “lies, damn lies and statistics”, and all that. 

However, this one stat—the NIIP—stands on its own. It is a dynamic, wide angle panorama, not a close-up snapshot in time. 

And it helps explain why talk of recession is such a raging bull market right now.

The NIIP says we’re already in free fall.

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