Even as policy wonks are calling for the U.S. federal government to turn away from monetary policy and “austerity”, Treasury debt outstanding has already seen massive annual increases since 2007, and not just in the US but around the entire world, Bloomberg market strategist Chris Maloney writes.
Which brings us to this week’s report on the U.S. federal government’s monthly budget statement. As Maloney puts it, "for eight-plus years now the U.S. federal government’s fiscal policy has been one of unprecedented deficit spending, pushing total debt to $15.3t from $6.1t (a 153% increase); this excludes ~$5.1t intra-govt debt holdings."
Yet GDP since the end of Jan. 2008-June 2009 recession has averaged just 2.1%, below the 2.7% average seen from 2000-2007 while the last five quarters have seen a steady drop from 3.3% to 1.2%.
Meanwhile, debt has continued its relentless rise higher, pushing the ratio of US government debt/GDP to an all time post World War II high of 105%.
The rest of the world isn't any better; in fact when adding across all debt categories, a terrifying chart emerges.
The methodology which counts government spending as part of GDP (“economic growth”) is arguably flawed as “growth,” in order to make sense, must be profitable.
As Maloney correctly puts it, spending certainly stimulates economic activity but not necessarily economic growth - recall that the Soviet Union “grew” its economy right into the dustbin of history.
Fiscal stimulus is already in the cards as CBO is projecting uninterrupted deficits for the next decade, totaling an additional $9.4t in debt and warns these “reflect the significant long-term budgetary challenges facing the nation.”
According to these forecasts the deficit as a percentage of GDP will grow to 4.9% in 2026 from 2.9% this year and in dollar terms to $1.36t from $439 billion.
This is a long-term trend as U.S. federal government has managed an annual budget surplus just 4 years out of the last 46; it has averaged $249b in annual deficits over that period.
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Keep in mind that any time someone says "fiscal stimulus" all they mean is increasing debt even more; what they don't say is that the reason the global economy is in its current slow (and slowing) growth predicament, is due to unprecedented amount of global debt (debt/GDP was 286% as of Q2 2014 according to McKinsey; it is well over 300% currently), which forces central banks to intervene and keep interest rates as low as possible by monetizing debt.
And what they never add is that one can't grow out of a debt hole by adding even more debt, which is precisely what the so called proposed "fiscal stimulus" solution is all about.
Chris Maloney's conclusion:
Issuing new debt eats our tomorrows today; eventually it needs to be paid back, thereby lowering future demand. “Fiscal stimulus” is in the long-run a wash, at best, and pushed too far it can be fatal.
Alas, this potentially "fatal" solution is all the world has left.