The Long Run Economics Of Debt Based Stimulus

Tyler Durden's picture

Authored by MN Gordon via,

Onward vs. Upward

Something both unwanted and unexpected has tormented western economies in the 21st century.  Gross domestic product (GDP) has moderated onward while government debt has spiked upward.  Orthodox economists continue to be flummoxed by what has transpired.


What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity.  Although the fat lady has so far only cleared her throat (if quite audibly, in 2008) and hasn’t really sung yet, it is already clear that calling this system careening toward a catastrophic failure.


Here is the United States, since the turn of the new millennium (starting January 1, 2001) real GDP has increased from roughly $10.5 trillion to $18.6 trillion, or 77 percent.  Over this same time government debt has spiked nearly 250 percent from about $5.7 trillion to $19.9 trillion.  Obviously, some sort of reckoning’s in order to bring the books back into balance.

Throughout this extended episode of economic and financial discontinuity, the government’s solution to jump-starting the economy has been to borrow money and spend it.  Thus far, these efforts have succeeded in digging a massive hole that the economy will somehow have to climb out of.  We’re doubtful such a feat will ever be attained.

In short, additions of government debt over this time have been at a diminishing return.  Specifically, at the start of the new millennium the debt to GDP ratio was about 54 percent.  Today, it’s well over 100 percent.


US GDP and US federal debt, indexed (1984 = 100). Mises noted back in the late 1940s already that “it is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.”  If it was obvious then, it is glaringly obvious today. Greece and Cyprus demonstrated what happens when modern socialist welfare states have no independent access to a printing press and are thus unable to extend and pretend in the traditional Keynesian way. The Potemkin village disintegrates on the spot at the first whiff of suspicion. All the nations that have postponed the reckoning by printing money and the flight forward mechanism of amassing even more debt have simply made the eventual denouement more profound – click to enlarge.

The idea that the government could spend borrowed money to grow the economy out of debt has become patently ridiculous.  Nonetheless, government economists continue to advocate these policies because, academically, they have no other alternatives.  At the same time, politics may now conspire to push the U.S. government into debt default.

Arrested Development

This week the Obama administration’s debt ceiling suspension expired, and a debt ceiling of $20.1 trillion was triggered.  This reestablished debt ceiling is just a horse’s hair above the U.S. government’s current debt level.  Furthermore, getting the debt ceiling lifted will likely require an epic Congressional battle, including elaborate displays of Kabuki theater.

There’s a possibility a new debt ceiling agreement won’t be reached before the Treasury’s money runs out sometime in late-summer or early-fall.  This would put the U.S. government in a position of not being able to pay its debts.  At a minimum, even if some Congressional deal’s worked out at the 11th hour, the full faith and credit of the U.S. government will be tarnished.

Best case, a timely debt ceiling resolution will cut into President Trump’s plans to boost the economy by borrowing money and spending it on infrastructure and defense.  This will also cut into his plans to reduce taxes.  A stumble in either of these areas could prompt a long overdue stock market panic.


The debt ceiling could become a real problem this time, as the treasury has massively drawn down the cash balance it amassed by issuing humongous amounts of debt to US money market funds in 2016. In the final quarter of 2016, i.e., the dying days of the Obama administration, the federal deficit exploded by a stunning 208 billion dollars – click to enlarge.


The fact is, perpetual economic growth is required to sustain life as we know it in today’s debt-driven economic social order.  Any slight blip, such as 2008, massively disrupts the lives of hundreds of millions of people.  What’s more, economic growth must be at a level where the plebs believe they’re adequately reaping the fruits of their labors.

What that rate of economic growth happens to be is uncertain.  But so far the U.S. economy of the 21st century has failed to attain it.  What is known is that an economy that expands at 3 percent annually, will double the average living standard every 24 years.  In contrast, an economy that expands at an annual rate of 2 percent, will take 36 years to double the average living standard.

The average annual rate of real GDP growth of the U.S. economy in the 21st century has been at a 1.78 percent state of arrested development.  The average annual rate of real GDP growth of the U.S. economy for the 16 preceding years was 3.43 percent – nearly double.  Alas, it has been 12 years since the U.S. economy’s eked out a single year of 3 percent GDP growth.


In spite of statistical distortions reaching fresh heights of absurdity year after year (their goal is generally to make “inflation” look smaller and GDP larger than they really are), economic output as measured by GDP is seemingly on a permanent downward trajectory. Many European countries look even worse. For instance, France had strong growth for more than two decades after WW2, but it collapsed thereafter. Today, government spending in France accounts for 58% of GDP and the country’s microscopic growth rates have become downright embarrassing. But don’t worry, Europe’s political elites and bureaucrats continue to prosper! – click to enlarge.


The Long Run Economics of Debt Based Stimulus

“In the long run, we are all dead,” said 20th Century economist, John Maynard Keynes.  This, in a nut shell, was Keynes’ rationale for why governments should borrow from the future to fund economic growth today.  Why wait for recessions to do the work of equilibrating the economy when a little counter-cyclical stimulus can push growth onward and upward?


J.M. Keynes is certainly dead, but we are still alive and can rightly be referred to as his victims. Keynes is often depicted reading a book, but evidently he must have read the wrong book. And all those who assert that he “didn’t really mean it this way or that way”  should perhaps take the time to read what he wrote. Keynes really was a Keynesian!


Of course, attempting to spend a nation to prosperity using borrowed money is not without consequences.  In the short run, an illusion of wealth can be erected.  In the long run, that illusion slips into decay and disrepair.

Over the past week we’ve been roaming the streets of Mexico City, visiting family and conducting  field research on your behalf.  In particular, we’ve been investigating the chronic effects of what happens when a government spends too much borrowed money, and then attempts to lighten its debt burden by inflating its currency. 

What follows a brief summation of our findings.

On surface, what happens is what you’d expect.  The currency gets utterly destroyed.  This has the effect of blowing the price of just about everything – especially imports – through the roof.  But it’s what happens after which is less obvious.  For the ill-effects of a debased currency express themselves in asymmetric ways.

On a Saturday afternoon walk through the historic city center along Avenida Francisco I. Madero between El Zócalo and the Palacio de Bellas Artes we were greeted with the appearance of consumer prosperity.  Bustling crowds of shoppers made their way through the chic fashion stores that are interspersed between historic 17th and 18th century colonial mansions and buildings.  Modern skyscrapers were in the distance.

Similarly, during a Friday night visit to El Moro, the famous churro and chocolate restaurant that has been in operation since 1935, we encountered a line extending out the door and down the street.  Customers were dressed to impress.  There was hardly a hint of economic hardship about the place.


The original El Moro outlet in Mexico City.


But venture outside the most inner streets of the city’s center and the conditions quickly deteriorate.  An endless sea of multilevel residential dwellings mixed with commercial and industrial properties in varying degrees of decay extend for miles and miles across the high altitude Valley of Mexico.  It appears that, perhaps 50 or 60 years ago, these structures were clean and well-kept.  However, that was before crumbled concrete and exposed rebar became the norm for these vast residential dwellings.

Contrary to what Keynes posited, counter-cyclical debt based stimulus didn’t produce the nirvana of rising long run living standards.  Rather it produced the disparity of stagnating GDP and rapidly rising government debt.  Later it produced the hell of declining living standards over the long run.

The truth is, in the long run we’re not all dead.  Actually, some of us are still here, living with the consequences of shortsighted economic policies.

Residents of Mexico know this all too well.  In the United States, the scope and magnitude of debt has been able to support an illusion of prosperity.  Still, as far as we can tell, many residents are experiencing the transformation of small pockets of slums into vast expansive ghettos.

Storing up a small hoard of gold and silver bullion may’ve never been more critical than the present, in the off chance the inevitable dollar debasement comes sooner rather than later.  So, too, one would be well advised to develop a side hustle now.  From our observation, everyone in Mexico City was working… though many didn’t have jobs.

On Monday we traveled north of the city limits to the ruins of the ancient pre-Aztec city of Teotihuacán.  There we climbed up the Pyramid of the Sun and into the open areas of the Pyramid of the Feathered Serpent.  We walked the Avenue of the Dead toward the Pyramid of the Moon.


Teotihuacán – view from the pyramid of the moon. Aztec priests once ripped out the hearts of sacrificial victims to appease their gods (among those in need of appeasing were Huiztilopochtli, the god of war and the sun, Tlaloc the rain god and not to forget, good old Xipe, a.k.a. “Our Lord, the Flayed One”, god of sacrificial pain and suffering. And you should see their mama… (wait for it). The Aztecs had a god for everything, so there was a lot of sacrificing to do.


At its peak, around 450 AD, Teotihuacán was the largest city in the pre-Columbian Americas, with a population estimated at 150,000.  Yet by the 6th century the population began to decline and the city ceased to exist sometime in the 7th or 8th century.  No one quite knows what happened.


Well, here she is… Coatlicue, the primordial earth goddess, mother of the gods, the sun, the moon and the stars. Judging from her teeth, this multi-tasker was a carnivore.

One theory is that the city’s decline coincided with an extended drought.  Another is that there was an internal uprising.  Maybe a 99 percent situation developed. We kicked a few rocks.  We put our ears to the ground.  We looked.  We listened.

The spirits didn’t answer.  They didn’t have to.  We’d already seen and heard enough.

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Taint Boil's picture

My house in Mexico is about 45 minutes from those pyramids ...

Cognitive Dissonance's picture

While it is comforting to know we are simply repeating mass (financial) insanity practiced for thousands of years, it is NOT comforting that we are taking to a whole new level.

A. Boaty's picture

Whole new level = derivatives. But, don't worry. They have it all perfectly hedged.

Manthong's picture

Well, the good news is that within the atmospheric sphere, we are stuck to the effing earth and no matter what goes up… it must come down.
Gravity is not a forgiving entity, like the Fed.


Oldwood's picture

If it were ONLY government debt. People are more Keynesian than government, living well above their means in hopes that they will eventually catch up. Instead we simply adjust our Overton window of normalcy. Cheap imports, mass voluntary subsidized unemployed and the expectation of infinite cheap credit are now evidently another "right".

nmewn's picture

I eagerly await the day Keynesian's admit they were and are wrong. Just like lost souls eagerly awaiting ice water in hell. 

INTJ Economist's picture

It probably won't ever come.  Much like Austrians say that true capitalism has never been tried, Keynesians will continue to say that true Keynesianism has never been tried.

Kayman's picture

The flaw is in not recognizing the Financialization Sideshow from the Real Economy. Trillions are traded everyday in churning and skimming of debt and stocks, while the real economy is plucked dry.

Economic history began by describing and prescribing the value created and exchanged in the real economy.

Today the real economy is a side show to the Money Printers/Credit Creators (government mandated monopolies) as they spin and weave risk-free from their never-ending return of investment of buying politicians.

Keynes saved Crony Capitalism. That's all.

DingleBarryObummer's picture

Why. did the Aztecs starting mixing lesser metals into their coins?

Blue Snowflake's picture

DBO the last part of the article is non-sequitur filler material so the author could reach his word minimum.

Maybe I missed it. Seems the implication is that the Aztecs were Keynesians. 

DingleBarryObummer's picture

Thanks, I thought I was stupid or something, but I guess he wasn't clear after all.


City_Of_Champyinz's picture

Is that where you picked up the taint boil?

SallySnyd's picture

Here is an article that explains the economic impact of Washington's ever-growing debt level:


Unfortunately, with an intransigent and highly polarized Congress and Executive Branch, it is highly unlikely that any meaningful and long-term progress will be made to improve this situation.

Moe Hamhead's picture

We're all waiting for the year of Jubilee!

ATM's picture

The Jubilee will come with fire and brimstone. I'm not looking forward to it.

Jubal Early's picture

I guess if y'all ask nicely I could come early.

skbull44's picture

Infinite growth on a finite planet, what could possibly go wrong?

overmedicatedundersexed's picture

seems one thing about this debt system is very clear:

it leads to concentration of wealth and power..(my definition of crime by the way)

so for the elite what's the problem?

Cognitive Dissonance's picture

Exactly. It (the debt money system) is a tool, a device, of the wealthy to extract productivity and wealth from the object being and me.

"We the Tooled"

LetThemEatRand's picture

Tool me once, shame on me.  Tool me twice, won't get tooled again.

Giant Meteor's picture

Hmmmm I slightly disagree here, we get tooled, over and over and over, and over again until death ...


Cloud9.5's picture

I went through a Jubilee in 2001 after I lost eight years of litigation against a bank that violated USC 18:1014 on numerous occasions.  A law the Feds had absolutely no interest in enforcing against one of the most powerful banks in the south east.  I lost my home, my land and pretty much everything else.  Nobody wants banker’s heads on a stake more than I do.   But here is the deal, I still use credit unions.  I still use the credit system and I still use fiat to pay for transactions.


Here is what I learned after my personal collapse:  The sun comes up again the next day.  If you are alive and in good health, you can begin again.  Bone crushing debt is an artificial construct.  The goods and services it generated still exist to a large extent after its collapse.  Their nominal value is substantially reduced but their tangible value still exists.  The bones of a failed business are picked up for pennies on the dollar, these assets can be repurposed by a new business and the process begins again.  The circle of life goes on.

Anonymous_Beneficiary's picture

Please do not worry. It's quite certain that Trump's "All-American Team Goldman" has everything under control.

nmewn's picture

"We will just inflate the debt away!" - idiot Keynesians circa 2008-2009

cherry picker's picture

This is all bullshit.  What debt?

A couple of countries bought some treasury bills, but most of those trillions are printed out of thin air.  At least they were backed by the paper they were printed on and the metail they were stamped on, now it is invisible bytes and bits in a place only Alice in Wonderland knows about.

We get these politicians who claim to know how to run our lives better than we do.  Economists who are as reliable as those climatologists who keep crying the sky is falling.  I don't think any of these people stuck their noses outside to see how the world operates.

It is a fake place we live in. Reality left long ago.  A few people from the M/E commit suicide and run around with guns telling people what to do and if they don't comply, they kill them.  They are called 'terorists'  The whole world sends missiles and bombs over there to show these terrorists it is not the 'right' way and lay waste to entire countries showing 'terrorists' that murder is not acceptable.

What kind of assylum did I find myself in?  Who ever created it must have one 'hell' of a sense of humor.

DrData02's picture

Bush and Obama created this mess, as tools of the MIC.

Colonel's picture

"Aztec priests once ripped out the hearts of sacrificial victims to appease their god"

Hunh! So they had lefTARDS back then too. LefTARDS bow down and worship shitstain pols while the priests at the fed and Wall St. rake in their blood money. But lefTARDS love it that way and will keep worshipping. So much for being "progressive".


The State is the Religion of the Hidden Corpse -





sister tika's picture

"At its peak, around 450 AD, Teotihuacán was the largest city in the pre-Columbian Americas, with a population estimated at 150,000. Yet by the 6th century the population began to decline and the city ceased to exist sometime in the 7th or 8th century. No one quite knows what happened."

By the 8th century, the JOOz at the Aztec Reserve Bank had sucked the last morsel of wealth out of the city and surrounding villages. The city could no longer pay the light bill. No more money for human sacrifices or the half-time show either. The city died and the Teotihuacánians moved away.

spanish inquisition's picture

Expanded step 2 of comic: print more, print faster, keep skimming.

roddy6667's picture

I wonder if that version of GDP includes financial services. All the money was made by banks and Wall Street because the FED set an artificially low interest rate. They don't really make or do anything. They just shuffle other peoples' money around and keep some.

Batman11's picture

There is productive lending into business and industry and unproductive lending into real estate and financial speculation.

Productive lending into business and industry generates the wealth to pay back the debt.

Unproductive lending into real estate and financial speculation blows asset bubbles that burst and destroy wealth.

“Stocks have reached what looks like a permanently high plateau.”Irving Fisher 1929.

No. It was a wealth destroying asset bubble like 2008, Japan 1989, Ireland 2010 and spain 2012.

Banks focus on unproductive lending into real estate and financial speculation to blow up economies through debt deflation.

The Asian Tigers in their stellar growth phases ensured bank credit creation was only used for productive lending into business and industry.

It’s not even hard but bankers are idiots.

Dilluminati's picture

Let me share a thought:  Global warming data is decreed as science, look at the numerical facts! (let us make it illegal to deny global warming)  

Budget deficeits and deflation remains voodoo and religion however and yet it is more firmly based in science and simple math than climate change could ever be.

Climate change could in fact change, warming offset with a volcano or an unknown event.

Defeceits on the other hand are not!  They are simply math entries that require a two tiered approach to notional accounting or an economy to continue to persist.  A way of reckoning where animal farm is the rules.  Some pigs more equal than others.

If I were to rank the fears that are rational I would say stick with the facts.

Global warming may well be variable, certainly debt defaltion is not.

I'd lose more sleep due to a dead ocean and Fukushima, a world genuinely altered by man made poison, and no news coverage.   I lose no sleep over global warming.  I practice continually investing and lifestyle with an eye to debt deflation.

Of all the certainties of worry that one is real.  Those facts never end well.

In animal farm the inequality that is certain is more of a danger than the imaginary threats, it is even more dangerous than the real threats.  Anyone who claims that the debt deflation isn't real and persistent is simply ignoring accepted math which can deliver you to another planet (perfect reasoning) and instead making appeals to animal spirits and false gods.

Never have more cynical and ill spirited humans joined together to promote what currently passes as economics, ironically the liberals being even more unethical than the conservatives whom seem harsh.

Here is a fairly good analysis of the simple equation and if you plug in the numbers and then trace them on historical events you see the clear trace of history.  I look at the elliot wave and laugh, other charts and moving averages like some bird entrails and false god omens.  Again a genuine math equation.  True sciecne.

It is as efficient to jawbone where the water leaks from Fukushima as to deny deflation, Japan gave us both.

EmeraldWI's picture

Reagan did a job on stagflation. And, that's when wages began their current plight. High interest rates and high unemployment levels seemed permanent until the not so novel idea of shifting the Phillips curve was finally sold to those that it would hurt the most: workers. As the ability of workers to bargain for wages collectively was dismantled, the curved shifted inward toward lower interest rates. At the same time, employment improved but at wage rates that were declining. As the money printing presses cranked out near record debt, the lesson being learned by those now teaching the lesson was to borrow at the lowest possible rate. The interest on the debt would have been the death spiral in the Bush $11 trillion tax cuts or the bank bailouts if it had not been for wage deflation and its continuation. Interest on the debt is a relatively low number, it needs to remain that way and they will not allow inflation as shown by the recent, inexcusable, rate hike. Yellen's job is to simply look like an idiot. Things are the way things are because that's the way they want it to be.

Escapeclaws's picture

Great article on deflation. Thanks for posting that. Just think opposite of inflation in the equation r = i - infl, where r is real rate, i is nominal rate, and infl is inflation rate, so you get r = i + defl, where defl is deflation rate.

Interestingly, debt is easier to pay off as the $ loses value under inflation, as we all know from experience. Each $ is worth less but you have more of them due to rising wages. Goods are harder to buy as the dollar loses value. Thus, under deflation each $ is worth more, but you have fewer of them due to shrinking wages and the debt is harder to pay off. Goods are easier to buy while debt becomes harder to pay off.

Thus, if we start having deflation now, people who took out jumbo mortgage loans at say 2 or 3% are in trouble. It is as if their debt inflates at the deflation rate!

What happens to gold and silver under deflation?

yogibear's picture

One huge central bankster game that eventually impoverishes the masses and leads to a revolution to overthrow the government.

It may take a while.  J.M. Keynes knew that he would be dead by the time people found out his system was another scam.

Basilian's picture

It used to be hard to kill millions so the focus was on controlling millions ..... killing millions is easy now........ I myself plan on a 100% ice cream diet as a coping mechanism.

Colonel's picture

"Maybe a 99 percent situation developed."

More than likely, the pyramids and daily sacrifices are a big tell.

Dilluminati's picture

Charts and Power point are for the illiterate, it is the stupid passing false relics around, fascinating how stupid people can persist for as long as they do.

Lonesome Crow's picture



The author makes the same mistakes as the economists, especially the Austrians,  by accepting the monopoly's false definitions regarding the nature of money.

In this manner, they work to serve the monopoly not oppose it.

ThrowAwayYourTV's picture

Hahaha! Love the cartoon. "Then a Miracle Occurs."

Well it was fun while it lasted. Just like racing on a back road.

DingleBarryObummer's picture

Keynesian economics functions off of materialism and gluttony.

wdg's picture

John Maynard Keynes 1936 book, The General Theory of Employment, Interest and Money is a crackpot theory that would have been relegated to the dustbin of history if it wasn't promoted by banksters to rob and plunder citizens of the western world. So-called Keynesian Economic Theory provided the intellectual cover for these thieves and gangsters to print trillions of dollars which enriched them while debasing the currency, lowering our standard of living through inflation, and causing endless boom and bust cycles for massive speculation. At the heart of this massive system of fraud and theft is a monetary and financial system consisting of central and fractional-reserve banks, such as the banker-owned Federal Reserve. There will be no peace and prosperity until these central banks are bulldozed to the ground and the cabal of international bankers responsible for this system indicted for massive fraud and theft. 

djrichard's picture

The saying is that FDR was needed to help save capitalism from itself.

I guess the same can be said of Keynes ... he was needed to protect central-bankism (counterfeiting through fractional-reserve lending) from itself.

So if you want to get rid of centra-bank fed reserve, then a way to get there quickly is to to get rid of Keynesianism.

Similarly, if you want to get rid of capitalism, then by all means, let's get rid of FDR's social programs.

In fact, I think you'll find the two go hand-in-hand.

Escapeclaws's picture

Here is the culprit: e^x.

Usury by any other name is still usury.

ZeroBeek's picture

The Aztecs sacrified to appease their gods.

The Americans now sacrify to Goldman Sachs

 surrounding Trump.

Basilian's picture

Great you talk about $20 trillion ..... but isn't that always disengunous to an absurd degree? Blythe Masters and the derivitives and exotic products department has already leveraged the global GDP 90X. The Pentagon reported losing trillions recently ...just gone .. but not gone from the debt score. I believe the DOD has reported "losing" trillions 3-4 times now with NO explanation and no follow up at all. This debt lands on the bottom line as does the derivitives delayed debt--the people that sold the derivitives of course are all paid up front on the fraud/treason. So while I like your article -- can anyone speak to these "lost" trillions or 90X GDP? To not speak of them is simply unacceptable isn't it? Ha -- its unacceptable that I even have to ask such a question ........

Iconoclast's picture

Once again someone erroneously refers to Keynes and his theories, without bothering to take time out to do a bit of research. Far too many empty headed, fukctarded columnists simply use the lazy trope and stereotype that Keynes suggested "unlimited capital creation" as some sort of cure all, which he never did. FFS up your game, or give it up.

"The Keynesian wet dream of an unfettered fiat debt money system has been realised"

Fed-up with being Sick and Tired's picture

Just spent some time in Puerto Penasco: Americans everywhere, replete with Cash....spending and building.

Seasmoke's picture

Pull everything forward and leave the debt for the future. Criminal.