The chart shows cumulative growth in GDP since 2010 compared to the cumulative amount of deficit spending by the federal government. Without that deficit spending, GDP over the past decade is negative.

Let me restate that last sentence: When we strip out the money we are printing and injecting into the economy, what is left in our economy is going in reverse. When we add up personal consumption, business investment, and net exports, our economy is shrinking. The Modern Monetary Theorists out there might find this to be a great argument for deficit spending, but it’s really a pretty simple trick to grow the economy by $1 trillion today by borrowing $1 trillion from tomorrow.

So ponder this: On what basis has the stock market been going up all this time? The answer: None. The underlying economy of big box, strip malls, drive-through food, cheap homes on remote lots, luxury condos, and Stasi-inspired apartments on the edge of down is deeply dysfunctional. A decade of propping it all up has made that dysfunction into a multi-generational financial tragedy. Coronavirus might be the spark that lights this rickety scaffold aflame.

I was in Salida last week. It’s a small town in a remote part of Colorado that is experiencing severe problems with housing affordability. In Salida, investors from outside the community are buying up homes and other real estate. They rent them out or, in some cases, just hold on to them and let them sit empty. Property values appreciate dramatically and the locals are priced out.

Where is this investment money coming from? When we pump money into the system – through deficit spending, quantitative easing, low interest rates, and other top-down stimulative measures – that money has to go somewhere. It’s finding its way to Salida, and your neighborhood as well, dramatically shifting prices upward.

As a hypothetical, let’s say there are three possible investments to be made at one dollar each (three dollars total). There is only one dollar of investment capital. That means only one of those investments will be funding and two will fail from lack of funding. In a market economy, we can be confident that most of the time that will mean the best investment gets the money.

Now let’s double the amount of investment capital. Two of the three investments will now be funded. Again, the second one might not be as good an investment as the first, but it’s better than the one that didn’t get funded. The market is distributing capital in a way that we might even call efficient.

Now make it three, four, five, or maybe even ten dollars of capital that is made available, money that needs to be invested, money that needs a return in order to cover debt interest and other promises. There are only three investments, so where does the money go? Well, now the worst investment is fully funded – in fact, investors are fighting over it, even though it is possibly a ridiculous idea – and money managers are sitting there with lots of cash hunting for anything else that looks like it could pay a return. One thing is certain: A lot of bad investments are going to be made.

That’s how trying to solve an economy that is fundamentally broken by giving it more money only makes things worse. It’s how a lot of bad investments linger on when they should have been killed off a long time ago. It’s how housing in Salida becomes grossly expensive out of all proportion to the resident’s capacity to afford it. It’s how cities with too much infrastructure are induced to build more roads and pipes.

Now drop the stock market by 10%, maybe more. All those bad investments start to be revealed. Capital contracts – literally disappears – as valuations drop. In Salida, investors try and sell their properties to retain their capital. Prices drop. So, is this good for Salida? Of course not. The community is insolvent. To juice the national economy, they have been induced to run expensive roads and utilities all over the place so they can have a Walmart, a McDonalds, and a Comfort Inn. They need elevated property valuations, and lots more growth and expansion, just to float along financially over the next year. A retrenchment in the markets is devastating.

Checkmate.

I’m not sure where markets will go, and I have no idea what coronavirus will bring, but don’t let anyone tell you this is a “black swan.” As Nassim Taleb would say, if you repeatedly drive over a bridge you know to be old and rickety, it’s not a black swan when the bridge finally collapses. Our economy is brutally fragile because it’s comprised of cities that are brutally fragile, the wealth of our places long stripped out in service of national short-term growth objectives.

In Chapter 5 of my book, Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity, I give this advice to local leaders trying to weather this coming storm:

Local governments are bribed to take on unpayable long-term liabilities so that the national economy can experience growth today. In the name of efficiency, they are stripped of nearly all means of ingenuity. Our cities orient up the government food chain, allowing themselves to be positioned at the bottom, grateful for the crumbs they receive. This is backward. To build Strong Towns, local leaders will need to take steps to opt out of these systems. This is difficult because it’s the water we all swim in, and the current gets stronger as things become more desperate. Still, if we are to truly serve the people in our communities…. we need a new path to prosperity. Our cities must now intentionally sacrifice growth in order to have stability. In the infinite game we are playing, stability is a requirement, growth an option. Cities are a collection of us; they are the way we take collective action in our communities. Over the past century, we’ve gradually given up this responsibility, deferring the direction of our places to the priorities of others. If the people are to lead again, if we’re to create a prosperous future for ourselves and our neighbors, local government must reassert leadership.

Let’s learn the lesson this time. Let’s commit to building Strong Towns.

Top image from Pixabay.