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.

Thus, during the peak-to-peak cycle between 2000 and 2007, industrial production was reported to have generated a modest 1.5% per year growth rate. But that was almost entirely accounted for by construction materials and defense equipment. Production of non-durable manufactured goods during that period, by contrast, expanded at just a 0.2% annual rate.

But, alas, defense production inherently destroyers economic wealth, whether it provides for the national security or not. And the housing and commercial real estate construction boom did not add to permanent output growth and wealth at all; it amounted to a bubble round trip that has gone nowhere on a net basis during the last 11 years. And the graph below which documents this truth is in nominal terms, meaning that real private construction spending for residential housing, offices, retail and other commercial facilities has shrunk by 10-15% after inflation.

Stated differently, bubble finance does not create growth; it funds phony  booms that end up as destructive round trips.

Yet, here we are again. The graph below reflects production of oil and gas, coal and other mining products including iron ore and copper. It has soared by 35% since the 2007 peak, and accounts for virtually all of the gain in industrial production ex-utilities over the last seven years.

Yet the plain fact is, this explosion of mainly oil and gas production did not reflect the  natural economics of the free market, and certainly no technological innovation called “fracking”. The later wasn’t a miracle; it was just a standard oilfield production technique that was long known to the industry, if not to CNBC. It became artificially economic during recent years only due to the massive and continuous distortions of both commodity prices and capital costs caused by the world’s central bankers.

Indeed, there are two charts which capture the central bank complicity in the latest bubble distortion of the “in-coming” data. At the time of the 2008 financial crisis, what remained of  honest price discovery in the capital markets threw a hissy fit at the hundreds of billions in dodgy junk bonds that had been issued during the Greenspan/Bernanke boom of the preceding years.  Accordingly, yields soared to upwards of 20% when massively overleveraged LBOs and other financial engineering gambits went bust.

Needless to say, that urgently needed cleansing was stopped cold in its tracks when Bernanke tripled the Fed’s balance sheets in less than a year after the Lehman crisis, and then officially adopted ZIRP and the greatest spree of debt monetization in recorded history. The resulting desperate scramble for yield among professional money managers and home gamers alike caused nominal interest rates on junk to be driven to levels once reserved for risk free treasuries.

But it wasn’t cheap debt alone that fueled the energy bubble. The 14 year graph of the market crude oil price shown below is an even greater artifact of central bank financial repression. The unprecedented global credit expansion since 2000, and especially the financial crisis in  China and the EM, caused several decades worth of normal GDP expansion to be telescoped into an artificially brief period of time.

As a result, demand for industrial commodities ran far ahead of new capacity—–even as the latter was being fueled by low-cost capital. That’s why iron ore prices, for example, soared from $20 per ton  prior to the China boom to $200 per ton at the peak in 2012, and have now plummeted all the way back to $60 ton——even as the massive boom induced investment in mining capacity and transportation infrastructure adds massive new increments of supply.

Call it “operation twist”——reflecting a twisted imbalance of supply and demand that has been generated by central bank bubble finance. But now we see the back side of the cycle as capacity races by sustainable consumption requirements, causing prices, profits margins and new investment to plunge into a violent correction. Iron ore is just the canary in the mine shaft. The same thing is true of nickel, copper, aluminum and most especially hydrocarbon liquids.

So the oil price chart below does not represent a momentary dip. This time the central banks are out of dry powder because they are at the zero  bound or close in the greater part of world GDP, while the lagged impact of the bloated industrial investment boom continues to pour into the supply-side.

Needless to say, the emerging worldwide liquidation of the energy bubble will hit the highest cost provinces first—-which is to say, the shale patch and oils sands of North America. When drilling rigs start being demobilized by the hundreds rather than just by the score as at present the US mining production index shown above will bend back toward the flat-line just as housing and real estate construction did last time around.

Stated differently, there is no “escape velocity” in the forward outlook, and even what meager production and job growth there has been in recent years will be taken back as the energy bubble comes back to earth.

So that leaves us with the Keynesian pettifoggers at the Fed and other central banks around the world. Once again today in its post-meeting statement, the Fed majority could not bring itself to let go of ZIRP, choosing to assert that it will remain “patient” as far as the eye can see presiding over N-ZIRP.

Needless to say, almost free money for the carry trades is all the Wall Street speculators needed. Within a minute or two, the robo-traders and gamblers managed to put a half-trillion dollars of fairy-tale money back on the screen.

But here the thing. The meaning of the oil crash is that the central bank fueled bubble of this century is over and done. We are now entering an age of global cooling, drastic industrial deflation, bubble blow-ups and faltering corporate profits.

So if some headline grabbing algos want to hyper-ventilate because the clueless money printers in the Eccles Building have now emitted the word “patient”, so be it.

Providing assurance that the Wall Street casino will have free money for 76 months running, and that it will be quasi-free long thereafter only means that the bubble will become even more artificial,unstable and incendiary.

In any event, it ought to be evident by now that “potential GDP” is a fairy tale and that N-ZIRP has no more chance of generating that magic ether called “aggregate demand” than did ZIRP.

What counts is production of real goods and services based on honest prices and the efficient utilization of labor and capital resources. That cannot happen under the current  central banking regime of false prices and drastic misallocation of economic resources.

The current illusion of recovery is a result mainly of windfalls to the financial asset owning upper strata, the explosion of transfer payments funded with borrowed public money and another supply-side bubble—-this time in the energy sector and its suppliers and infrastructure.

But that’s not real growth or wealth. Its why the American economy is not even maintaining its 20th century level of bread winner jobs. And its why  real median household incomes—- which are not distorted by the bubble at the top, are still lower than they were two decades ago.