First comes production. Then comes income. spending and savings follow. All the rest is debt…….unless you believe in a magic Keynesian ether called “aggregate demand” and a blatant stab-in-the-dark called “potential GDP”.

I don't. So let's start with a pretty startling contrast between two bellwether data trends since the pre-crisis peak in late 2007—debt versus production.

Not surprisingly, we have racked up a lot more debt—notwithstanding all the phony palaver about “deleveraging”.  In fact, total credit market debt outstanding—-government, business, household and finance—-is up by 16% since the last peak—from $50 trillion to $58 trillion. And that 2007 peak, in turn, was up 80% from the previous peak(2001); and that was up 103% from the business cycle peak before that (July 1990).  Yes, the debt mountain just keeps on growing.

As a proxy for “production” I am using non-durable manufactures rather than the overall industrial production index for three good reasons. The former excludes utility output, which incorporates a lot of weather related noise, and also excludes oil and gas production, which, as we are now learning, embodies a whole lot of debt. Besides, if the US economy has any hope of growing, non-durables should not still be migrating off-shore at this late stage of the global cycle; nor are they subject to fashion or lumpy replacement cycles like cars and refrigerators.

Moreover, the virtue of the industrial production index is that it is a measure of physical output, not sales dollars which reflect inflation; or if deflated into “real” terms, the data points are not distorted by Washington's fudging and finagling of the prices indices.

So how are we doing on production of things the American economy consumes day-in-and-day out?  Well, at the most recent data point for November, production had soared…….all the way back to where it was in January 2003!

That's right. Domestic output of food and beverages, paper, chemicals, plastics, textiles and finished energy products (e.g. gasoline), to name just a few, has experienced no net growth for nearly 11 years.

Now that's a lot more informative than the Keynesian GDP accounts, which presume that government output is actually worth something and that do not know the difference between current period “spending” derived from production and “spending” funded by hocking future income, that is, by borrowing.

Stated differently, the current capitalism suffocating regime of Keynesian central banking and extreme financial repression has created systematic bias and noise in the so-called “in-coming data”. These distortions are the result of mis-allocations and malinvestments reflecting artificial sub-economic costs of debt and capital. The resulting bubbles and booms, in turn, cause highly aggregated measures of economic activity to be flattered by the unsustainable production, spending and investment trends underneath at the sector level.