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.


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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.

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?!



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.” …

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.

Quaderratic Probing's picture

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