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Guest Post: Why We Cannot Print/Borrow/Spend Our Way to Prosperity

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Ballooning government deficit spending and debt has a negative effect on private GDP, money supply, money velocity and wages.

 
I have often explained why the Keynesian belief that the government can print/ borrow and spend enough money to trigger self-sustaining prosperity is a nonsensical, magical-thinking Cargo Cult.
 
The following charts show why printing/borrowing and spending our way to self-sustaining prosperity has failed, and why it will continue to fail, with eventually catastrophic results: the returns on this unprecedented borrow-spend policy are diminishing to near-zero or negative.
 
Humanity has an innate attraction to conspiracy and complexity. Humans have been selected to seek patterns in Nature and in the behavior of the humans around them. No wonder humans are drawn to detective stories, puzzles and conspiracies.
 
While conspiracies are indeed a part of the human experience, focusing on human intent and collusion can distract us from the impersonal systems that dominate economic history.
 
In a similar fashion, an obsession with complexity distracts us from what is blindingly obvious. Just as the alcoholic refuses to admit his addiction lest he be forced to tackle his self-destruction, so too do we avoid the financially obvious lest we be forced to surrender our ardent hope that the increasingly fragile Status Quo we depend on is enduring and secure.
 
As long as the interest rate on debt is low, the path of least resistance is to keep borrowing to support politically untouchable fiefdoms, cartels and constituencies. Eventually, the cost of servicing the debt overwhelms the diminishing returns on the debt-based spending.
 
Let's start by admitting the unprecedented rise of government debt in the past decade.Here is the Federal debt, not including the bogus inter-governmental debts (mostly money owed to the illusory Social Security Trust Fund).
 
 
Everyone knows Federal debt has skyrocketed, but so has the debt of state and local governments: state and local government debt has risen by 250% just since 2002.
 
 
GDP includes government spending; this vast expansion of debt-based spending has had a very modest positive impact on GDP:
 
 
Courtesy of longtime correspondent B.C., here are five insightful charts. The first displays the ratio of GDP minus government spending to total Federal debt. This reveals the effect of massive Federal borrowing on the private sector--the non-government part of the economy.
 
When the line is rising, private GDP is expanding even as Federal debt increases. Thus the private economy expanded smartly from 1959 to 1973 while the Federal government ran relatively modest deficits. If we look at the first chart above, total Federal debt, we see that it was basically flatlined in this period--the deficits of this period barely moved the needle on total Federal debt.
 
 
As Federal deficits and debt increased in the 1980s, private GDP was negatively impacted. Only the twin speculative bubbles of the late 1990s to mid-2000s (dot-com and housing) reversed the trend. Once the housing bubble popped, the effect of rapidly rising Federal debt has had a very negative correlation to private GDP.
 
It's even worse when state and local government debt is added:
 
 
What is the correlation of rapidly rising Federal debt and money supply? It appears ballooning Federal spending/debt no longer boosts money supply much:
 
 
As B.C. observes: The purchasing power of wages is in freefall vs. the growth of debt-money. Increasing Federal debt and spending is not boosting wages.
 
 
The effect of rising government debt on wages has been declining for 40 years, a trend interrupted only by brief speculative bubbles.
 
 
Meanwhile, massive Federal borrowing and deficit spending has opened a structural deficit of monumental proportions: anyone claiming this is sustainable or healthy is either in a drunken daze or mesmerized by Cargo Cult magical thinking.
 
 
As government borrowing and spending skyrocketed since 2002, household income flatlined during the housing bubble and then fell off a cliff as the State-enforced financialization of the economy hollowed out household wealth and income. In a Central State/cartel capitalism system like America's, the cost basis for both enterprises and households constantly rises, pressuring wages lower for the majority of wage earners. We see this clearly on this chart:
 
 
What effect has this unprecedented expansion of government deficit spending and debt had on the all-important velocity of money? Catastrophically negative: Money Velocity Free-Fall and Federal Deficit Spending (January 18, 2013)
 
 
Ballooning government deficit spending and debt have a negative effect on private GDP, money supply, money velocity and wages. Printing money does not make us wealthier, nor does borrowing and squandering money on consumption and malinvestment make us wealthier.
 
That which we sow now we shall reap later.

NEW VIDEO: A DELUSIONAL & DYSFUNCTIONAL STATE (29 minutes, 25 slides)

 

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Thu, 01/31/2013 - 12:59 | 3202835 Squishi
Squishi's picture

WHYYYYYYY?

Thu, 01/31/2013 - 13:04 | 3202863 Banksters
Banksters's picture

 

This is the endgame.    

 

G20 Pittsburgh: Scanner recordings of "police riot" at University of Pittsburgh

http://www.youtube.com/watch?v=W-cxHC_JU8o


 
Thu, 01/31/2013 - 13:16 | 3202907 LawsofPhysics
LawsofPhysics's picture

Not even close.  

Thu, 01/31/2013 - 13:40 | 3203001 FEDbuster
FEDbuster's picture

Beating up and gassing unarmed college students while in full body armor isn't very courageous.  Let's see how they do on the South side of Chicago against hungry gangs armed with Glocks and AK-47s while they are looting and burning.  I think the Rodney King riots are a better vision of America's future.

Thu, 01/31/2013 - 13:44 | 3203021 trav777
trav777's picture

yeah, because every town everywhere is just chock full of that demographic, right?

glocks and AK47s...lemme guess, you got that from rap music?  Fess up, moron

 

Thu, 01/31/2013 - 15:11 | 3203070 FEDbuster
FEDbuster's picture

No just watched the Rodney King riot footage and try to keep up on urban gang warfare news.  Not a big fan of rap music.  No, I don't think every town will see that kind of violence, mostly urban shit holes.

Trav your'e right, I forgot that convicted felon, gang bangers aren't allowed to own weapons.  Plus, Chicago has a handgun ban.  No need for Robocops to fear gun violence in major metro areas, they are "gun free zones". sarc off

Thu, 01/31/2013 - 16:27 | 3203764 economics9698
economics9698's picture

Yugoslavia 1989.

Thu, 01/31/2013 - 14:05 | 3203093 HappyCamper
HappyCamper's picture

We get that from shows like Sons of Anarchy.  Don't you watch TV???

Thu, 01/31/2013 - 15:10 | 3203406 Zap Powerz
Zap Powerz's picture

I think Mad Max (previous to road warrior) is a better vision of America's future.

Thu, 01/31/2013 - 13:45 | 3203025 Big Slick
Big Slick's picture

Even without looking at the later charts of GDP less govt spending, what's telling is this: early charts clearly show exponential growth of debt, matched by merely linear (non-exponential) growth of GDP. 

Within exponential growth in natural systems (of, say animal populations) you eventually see a saturation level and a breakdown of the growth.  The beginning of these breakdowns (all part of a normal cycle) are already evident in the graphs such as GDP less govt spending. 

For those waiting for the collapse, timing is very difficult on short timelines (months or even 1-2 years).  Look at the range of the graphs in this report; years and even decades long.  Timing is one of the major challenge for us now.  We are currently in a time range of maximum risk for breakdown, however this range may be 1-5 years in length.

You just need to ask yourself when Noah built the ark?  It was before the rain.  I'd rather be 5 years early than 1 day late.

Thu, 01/31/2013 - 12:59 | 3202845 Buckaroo Banzai
Buckaroo Banzai's picture

Hey kids! We're all going to Disneyland!

Thu, 01/31/2013 - 13:36 | 3202992 Big Slick
Big Slick's picture

Don't you mean Ecuador?

Thu, 01/31/2013 - 13:02 | 3202847 SheepDog-One
SheepDog-One's picture

3rd graders could have easily shown these MIT Eclownomists it would never work.

Thu, 01/31/2013 - 13:02 | 3202850 BandGap
BandGap's picture

Our friend Paul says we can, 'cause we're SPECIAL!

http://cnsnews.com/news/article/krugman-we-can-print-money

Thu, 01/31/2013 - 13:03 | 3202858 WALLST8MY8BALL
WALLST8MY8BALL's picture

MANBERNKRUG!

Thu, 01/31/2013 - 13:04 | 3202862 PUD
PUD's picture

THE MATH OF DEBT AS MONEY NEVER LIES.

Thu, 01/31/2013 - 13:06 | 3202875 LawsofPhysics
LawsofPhysics's picture

Finite resources.  Bah!  Someone "print up" some more oil on the double!

Thu, 01/31/2013 - 13:12 | 3202891 Cognitive Dissonance
Cognitive Dissonance's picture

Scientist - "Yes, I can print oil, but the process will consume more energy than it will produce."

Manager - "Great, then the flow will make next quarter's numbers look great. Do it."

Thu, 01/31/2013 - 13:13 | 3202904 LawsofPhysics
LawsofPhysics's picture

Yes indeed. EROEI is a bitch, but let the kids worry about it CD, we will be dead when it gets really bad < sarc off >

Thu, 01/31/2013 - 13:09 | 3202878 bania
bania's picture

When does Godot show up?

Thu, 01/31/2013 - 13:19 | 3202935 Orly
Orly's picture

He's the bus driver!

Thu, 01/31/2013 - 13:48 | 3203031 madcows
madcows's picture

Is it a short bus?

Thu, 01/31/2013 - 13:46 | 3203022 madcows
madcows's picture

He looked at this terd of a creation, decided He'd really F'd up, and went back to heaven.

Thu, 01/31/2013 - 13:11 | 3202888 No Euros please...
No Euros please we&#039;re British's picture

I'm, like, totally mesmerized by Cargo Cult magical thinking.

Oh, wait, was it mushrooms?

Thu, 01/31/2013 - 13:12 | 3202892 Overfed
Overfed's picture

Paul Krugman says you're wrong. He has a PhD in economics and a Nobel prize. He's really smart. He has the Conscience of a Liberal.

More printing to prop up the banks and more free money to the non-producers will bring about a quantuum shift in the economy and we will all be rich.

Really.

Thu, 01/31/2013 - 20:38 | 3204573 Walt D.
Walt D.'s picture

"a quantuum shift in the economy".

Economic recovery - coming to a parallel universe near you (but not to this one)!


Thu, 01/31/2013 - 13:12 | 3202895 Racer
Racer's picture

Well this is what the morons believe

Joe Biden: ‘We Have to Go Spend Money to Keep From Going Bankrupt’
Thu, 01/31/2013 - 13:13 | 3202897 hooligan2009
hooligan2009's picture

don't forget that the government deficits are people deficits born out of mobocracy and corruption.

the money supply QE is easily shot down.

why bother working 50 hours a week, sweating and taking pressure when the Fed can print that same money you earn by printing it?

Thu, 01/31/2013 - 13:14 | 3202908 LongSoupLine
LongSoupLine's picture

What the fuck... Stop assuming the fucking Fed is trying to spur recovery.  those fuckers are sole shitfired on supporting fucking asshole TBTF bankers.  that's fucking it, nothing else.

 

 

fuck you Bernanke, fucking dick.

Thu, 01/31/2013 - 13:43 | 3203010 madcows
madcows's picture

Bingo!  You and I are not clients of the FED.  Banks and Governments are clients of the FED.  So, who do you think they are going to prop up?  They've got to keep this money-pig going.

Thu, 01/31/2013 - 13:51 | 3203040 FEDbuster
FEDbuster's picture

The FED and the TBTF banksters are one in the same.  The banksters are the men behind the curtin when you are in the presence of the "Great and Powerful FED".

http://www.youtube.com/watch?v=YWyCCJ6B2WE

Thu, 01/31/2013 - 13:18 | 3202917 reader2010
reader2010's picture

It could have worked its magic in America if money/credit were issued by the Congress and parasitic class were not in existence.  History says it worked its magic in Hitler's Third Reich,  in Stalin's USSR, and to certain extent even in Deng Xiaoping's China.

Thu, 01/31/2013 - 13:23 | 3202955 Gamma735
Gamma735's picture

More debt does not fix a debt problem.  Who'd thunk it?

Thu, 01/31/2013 - 13:32 | 3202980 tradewithdave
tradewithdave's picture

Won't happen as long as we have law enforcement such as Lanny Breuer who can judge the law and make sure we don't have "ripple" effects. Are you glad they are looking out for us so you can relax, watch the game, enjoy a cold one.

Thu, 01/31/2013 - 13:32 | 3202981 IamtheREALmario
IamtheREALmario's picture

I do not for a second believe that the Keynsians actually believe that they can print/borrow and spend their way to prosperity. Not believing that, then one can only conclude that it is in their personal interest to make others believe that they believe that the PBS approach is what they believe in.

... and he real question question then is: "Why?"

Secondarily, given that, what is the bigger goal?

Thu, 01/31/2013 - 13:44 | 3203020 Sudden Debt
Sudden Debt's picture

SURE YOU CAN!!! if you don't give a shit about how it ends and you have a private jet on standy 24/7 to fly you to panama if need be...

Thu, 01/31/2013 - 13:54 | 3203057 Barking Spaniel
Barking Spaniel's picture

Stop being so pessimistic!  The stimulus needs to be BIGGER!  Now, will ZH please publish something more positive, like stories on cute panda bears?  I need to get back to burying my head in the sand. 

Thu, 01/31/2013 - 13:55 | 3203068 Clesthenes
Clesthenes's picture

Charles, you wrote, “As long as the interest rate on debt is low, the path of least resistance is to keep borrowing to support politically untouchable fiefdoms, cartels and constituencies.  Charleshughsmith.blogspot.com  Oftwomindsblog

I agree, but you are modest, or gentle in your description of the debt.

Governmental debt is the process by which a generation of TAX CONSUMERS financially cannibalizes following generations of TAX PAYERS; in our case, to the end of time.; an opinion shared by a former comptroller of the US and a few professional (not necessarily degreed) economists.

Civilized men do not tolerate this practice.  In fact, it should raise several hard questions.  Such as, “Is anyone legally or constitutionally obligated to pay taxes to retire such debt?”  I mean, should we pay debts of those who sought to cannibalize us?  Those, for example, who used proceeds of government debt to perpetrate events of 9/11, and to block all inquiry of their crime (such a gentle word)?  My research tells me that it is practically and constitutionally impossible (one and two) to redeem all governmental debt; so far, my work is lawyer-proof.

Another question, “Is there anything we can do to make members of criminal and useful-idiot classes accountable for what they have done?”

Of course there is: we have to learn lessons of English rebels who brought down judges and tax collectors, bishops and kings who thot they had a divine right to impose taxes/debt on other men without the latters’ consent; the same men, who 150 years later, would guide American rebels.

They both used “the sovereign power”; what other men call the right of petition.

But there’s a problem here, such power is like any fact of reality or invention of man: it may be used for evil or for good.  As long as good men remain ignorant of this power (you can’t learn it from current history or law books), evil men will use it to perpetrate unprecedented crimes; and good men can only look on bound in futility.

Those who perpetrated 9/11, or any grievance that could be named, used the petitioning process to finance and profit from their crimes with cash from government debt.  Why can’t we use it in service for justice?  For example, they petitioned Congress for money to finance their crimes, and to obtain impunity.  Why can’t we do the same to finance investigations of their crimes?  Since those complicit (Congressmen, bankers et cetera) can hardly be trusted to hang or drown themselves, our petition would have the appropriation placed at the disposal of a First Amendment assembly established and supervised by us.

I suspect this proposal is a little outside the matrix of most people; but, with due diligence, that will change.

Thu, 01/31/2013 - 18:15 | 3204156 JR
JR's picture

We have entered the theater of the absurd.

In the words of Robert LeFevre:

“Where is the evidence that nonowners are not profit-seekers? If I were called upon to make a decision over my neighbor’s property, would I not be inclined to make a decision that would serve my ends, rather than my neighbor’s.”

Either the person owning the property will make the decisions regarding his own property or a person not owning the property will make the decisions. Making those decisions more and more today are Obama’s constituents and The Fed – Bernanke not only controls our money and resources, he even controls the decisions - the future worth - on the little spot of earth we call “home.”

If the government decides that "a nonowner should make the decisions over a property an individual owns, what incentive would there be for anyone to own anything?" And therein lies the Achilles" heel of Socialism.

Yet that is Power with a capital “P” of ruthless financial feudalism for "man is totally dependent upon property.”

Thu, 01/31/2013 - 14:00 | 3203083 marcusfenix
marcusfenix's picture

this is what happens when the legislative branch of your government willingly abdicates any and all fiscal and monetary responsibility to the executive branch, the central bank and the TBTF crowd.

through their own greedy, slothful, psychopathic, myopic, selfish, immoral, shallow, short sighted, self centered, actions have they become completely and utterly irrelevant in the governance of this country.

congress has surrendered all of it's dignity and the vast majority of it's power and has become the realm of head bobbing, public trough feeding lemmings bereft of any ability to lead or legislate. 

let's face it we don't have a congress or a true republic anymore, the legislative branch and it's masters and allies are firmly in control and run this ship while the house and senate have been degraded to a three ring circus freak show that we all point and laugh at. 

sadly though it's really not that funny considering what history has taught us happens when power is taken away from the governed and placed in the hands of the psychopaths who crave domination and power.             

Thu, 01/31/2013 - 14:10 | 3203108 Fix It Again Timmy
Fix It Again Timmy's picture

Amen to marcusfenix!  What he says is all you need to know.  Act accordingly...

Thu, 01/31/2013 - 14:18 | 3203145 KnightTakesKing
KnightTakesKing's picture

Hypothetically speaking, if the Fed buys ALL of the US Treasury bonds and rebates back all of the interest to the Treasury, then the cost of borrowing is zero, right?

Seems like the government could continue that scam from a long time, no?

Thu, 01/31/2013 - 14:36 | 3203253 KnightTakesKing
KnightTakesKing's picture

Why the down arrow? I'm trying to understand how this all plays out. The above is inflationary but the cost of money then becomes a non-issue. It's a serious question that folks need to consider if you want to model/ anticipate possible outcomes.

Thu, 01/31/2013 - 18:12 | 3204151 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

I don't know the exact mechanics of how the middle man works but it doesn't work out to be zero as far as I understand. It is correct when the FED buys the Treasury Securites they rebate back the interest but first the primary dealers aka TBTF banks have to purchase the securites from the Treasury then the FED buys the securities from the primary dealers and in turn they transfer directly or loan to the Treasury. If I understand it correctly if it is a loan then the primary dealer charges interest on it which the Treasury has to pay back to the primary dealer somewhere down the line.

If I am explaining it wrong someone please correct me here.

Thu, 01/31/2013 - 14:27 | 3203206 batterycharged
batterycharged's picture

The problem is with anyone that thinks one solutions is ALWAYS the right solution.

yes printing sometimes helps the economy. Sometimes it destroys the economy.

Sometimes feeding capital helps the economy, i.e. laissez-faire, sometimes it creates large inequity and poverty (as it is now)

What we need are people that don't think in absolutes. Sometimes protectionism helps!

We need an economic theory that says "use the right tools at the right time" rather than this individualism vs collectivism BULLSHIT.

 

Thu, 01/31/2013 - 14:28 | 3203211 venturen
venturen's picture

Hey I am all for it....the FED can print money and give it to me instead of corrupt banks!

Thu, 01/31/2013 - 14:39 | 3203276 Hedgetard55
Hedgetard55's picture

Hey, printing money saved Zimbzbwe. Krugman is right.

Thu, 01/31/2013 - 14:53 | 3203332 NitneLiun
NitneLiun's picture

Ask the Japanese what they think of Krugman. It will be a splendid opportunity for you to learn some Japanese profanity.

Thu, 01/31/2013 - 15:31 | 3203497 dadichris
dadichris's picture

skyrocketing debt is an IMPERATIVE of our monetary system.  this is not being done by choice.  without it the system will collapse.

Thu, 01/31/2013 - 16:22 | 3203740 JR
JR's picture

"Economic control is not merely control of a sector of human life which can be separated from the rest: it is the control of the means for all our ends. and whoever has sole control of the means must also determine which ends are to be served,which values are to be rated higher and which lower--in short, what men should believe and strive for. Central planning means that the economic problem is to be solved by the community instead of by the individual; but this involves that it must also be the community, or rather its representatives, who must decide the relative importance of the different needs." --F.A. Hayek, The Road to Serfdom

Ben Bernanke, as central planner for the American economy and the Congress, first chooses that the community takes precedent over the private property of individuals, such as savings, home equity and wage earnings. And, then, he decides that what's best for the community is to increase the size, importance and wealth of the banks at the expense of private property.

Going even beyond his job description, Bernanke decides that a soaring equities market in spite of an economic downturn for the people would be beneficial for the political retention of a banker-controlled Congress.

Thu, 01/31/2013 - 17:01 | 3203906 Herkimer Jerkimer
Herkimer Jerkimer's picture

'

'

'

'

I'm no finance guy, and everyone around here is way above my head, but why is it that all these graphs and charts seem to go for a crap, around 1973, when we got off the gold standard/Bretton Woods?

 

Might this not be an insight into where we went wrong?!

 

•J—<
V-V

Thu, 01/31/2013 - 17:42 | 3204051 JR
JR's picture

Good observation! You might want to read an article corroborating your find by Henry Hazlitt (May 1979) on Gold versus Fractional Reserves who said at the time: “I regret that I cannot join some of my fellow champions of the full gold standard in urging their respective national governments to return immediately to such a standard. I believe such a step at the moment to be both politically and economically impossible. Confidence in the monetary good faith of governments has been destroyed.”

But, he concludes, “if governments would permit private individuals or banks to mint gold coins and to issue gold certificates, a dual currency system could come into existence that could eventually permit a smooth transition back to a sound gold currency.”

It begins…

“The present worldwide inflation has done, and will continue to do, immense harm. But it may eventually lead to one great achievement. It may make it possible to restore (or perhaps it would be more accurate to say to create) a full 100 percent gold standard.

“That could come about in a simple manner. Our government has made it once more legal to hold gold, to trade in gold, and to make contracts in terms of gold. This makes it possible for private individuals to buy and sell in terms of gold, and therefore to restore gold as a medium of exchange. If our present inflation, as seems likely, continues and accelerates, and if the future purchasing power of the paper dollar becomes less and less predictable, it also seems probable that gold will be more and more widely used as a medium of exchange. If this happens, there will then arise a dual system of prices — prices expressed in paper dollars and prices expressed in a weight of gold. And the latter may finally supplant the former. This will be all the more likely if private individuals or banks are legally allowed to mint gold coins and to issue gold certificates.

“But even of the small number of monetary economists who favor a return to a gold standard, probably less than a handful accept the idea of such a 100 percent gold standard. They want a return, at best, to the so-called classical gold standard — that is, the gold standard as it functioned from about the middle of the nineteenth century to 1914. This did work, one must admit, incomparably better than the present chaos of depreciating paper monies. But it had a grave weakness: it rested on only a fractional gold reserve. And this weakness eventually proved its undoing.” …

http://mises.org/daily/3560

Thu, 01/31/2013 - 21:02 | 3204635 LibertarianMenace
LibertarianMenace's picture

Hazlitt is right. The classical standard was still essentially a fiat standard, albeit based on gold. No matter, the note issue has to be competitive to be successful. Dispense with the legal tender laws (thanks Lincoln!) and Free Banking paper ends up being superior to government backed metallism. Lew Lehrmann is making the case for classical gold these days. I like Lehrmann, but he obviously needs to read more Hazlitt.

Thu, 01/31/2013 - 22:39 | 3204887 Quaderratic Probing
Quaderratic Probing's picture

The product of banking is debt. Debt is an asset to the bank. The more debt the better

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