The futility of stimulus on the back of an over stimulated economy

This is a chart of US deficit spending since 1935

FRED Graph

The following, is the related chart of US government borrowing (debt)…

Graph: Gross Federal Debt

… and this is a chart of US GDP year on year (yoy) percentage progression …

FRED Graph

All charts are official US government data provided by the Fed of St Louis. And although self explanatory, I am going to parse what these charts mean.

The short explanation is that despite borrowing and spending ever increasing amounts of money, we are not getting wealthier and each additional dollar of “stimulus” has an exponentially decreasing effect on GDP expansion with the result that Western governments are today bankrupt and, by necessity, are shifting towards a fascist form of government.

The longer answer.

As stated in previous essays, government is not a for profit entity. Government’s only income is through taxes (licenses, fees, duties, income taxes, inheritance taxes, sales tax, stamp duty …).

Just like you and me, if government spends more than what it receives in taxes, then it must borrow the difference.

Just like you and me, when government borrows money, it pays interest. The more money you borrow, the more money you have to spend on interest… but… government has no income so it can only pay more interest if it extracts more money from the economy in the form of taxes.

If you can get your head around that, then observe the charts I present above.

What the first chart at top indicates is that the US government has pretty much always run a deficit. In other words, the US gov has consistently spent more than what it earned and other than an outlier during the Clinton era, the secular trend has resumed its downward trend with a vengeance.

Before you stand up and clap for Clinton, observe the next chart in the middle.

Although in the first chart it would appear that Clinton brought deficit spending under control during his tenure, the second chart shows that his borrowing did not abate.

The third chart is the chart of US GDP yoy progression that you will find in many of my essays.

When you take the three charts together, the conclusion is inevitable. The US gov has consistently spent more than what it made in taxes and made up the shortfall by taking on increasing quantities of debt…. but GDP has only ever progressed at a rate of 3% year on year with occasional peaks at 6%

So, despite having overspent like the proverbial drunken sailor for the best part of the last forty years, despite having borrowed sums that have no comparison in human history, we’ve only ever been able to get GDP growing at a clip of 3%yoy.

But wait. That’s not all!!

Not only has GDP only progressed at 3%yoy but, in the meantime, we’ve become a service based economy to the point that consumption constitutes 70% of GDP. This is important to the extent that somebody should ponder the question of how much real wealth is created in a consumer economy; i.e. what part of the 70% of consumption creates the conditions and the means to create something else.

But wait. That’s not all!!

Not only has GDP only progressed at 3%yoy and, along the way, we’ve become a service economy but debt and the monetary base have consistenly expanded at an average of 10%yoy over the past forty years. When money and credit expand faster than the economy, you have inflation. So, a good chunck of that 3% is due to inflation really.

As I point out here, here, here and here, a fiat monetary system combined with “democracy” has an inherently logical and inescapable conclusion. The only variable is time; i.e. how long a government can postpone said conclusion. A fiat monetary system is in fact a pyramid scheme; that is, its existence is predicated on your ability to bring new contributors in at the bottom of the pyramid.

I maintain that our modern fiat monetary system was conceived along with the inception of the US Federal Reserve in 1913. Since then, as the hegemon, the US was able first to manipulate gold’s convertibility domestically thus creating the conditions for unchecked inflation which brought us to 1929. That first crisis lead us straight into WWII. After that, the US was still able to use inflation and debt to carry out hegemonic activities like the Marshall Plan, putting a man on the moon and expanding the military and nuclear arsenal till the late 60s when the cows came home. At that point, Bretton Woods was abrogated and the US convinced all then industrialized countries to abandon a monetary system based on gold and to adopt instead the US$ as their reserve currency along with fiat money. Thus, the hegemon was able to bring in several new contributors at the bottom of the pyramid. Then in order to keep feeding the pyramid, we immediately set to work on the Euro to devalue the currencies of the European countries thus giving a breath of fresh air to the now interconnected global monetary system as well as globalization thus brining in all other countries in on the US$ reserve fiat monetary system.

Great.

Except that today, short of introducing a new world currency, we have run out of contributors to bring in at the bottom of the pyramid.

Of course, if you scan my blog you will find clues that, indeed, we are working on a world currency. The question is, can we effectively introduce a global currency in useful time to give the global US$ based fiat monetary system some new wind. “Useful” time here means in a few months from today!

So, unless someone, somewhere, does not come up with a brilliant idea to restart a modicum of inflation, we are pretty much looking at the same situation the US found itself in at the end of the 60s – that is, sovereign countries are staring at bankruptcy.

Of course, by now you know that I maintain that no Western country will admit to bankruptcy. But as unemployment climbs to unprecedented heights and as social services are reduced and then necessarily discontinued, the West becomes a tinder box of social unrest. As Western governments feel they are losing their grip on power, they will engineer a war.

At this rate and unless something changes in the coming months, I say we have us a global conflict by 2013/2015

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One Response to “The futility of stimulus on the back of an over stimulated economy”

  1. Why stimulus is nonsense « Guido’s temple of the absurd Says:

    […] Guido’s temple of the absurd On politics, morality, society, religion, the economy… and war… and some good food ideas… « The futility of stimulus on the back of an over stimulated economy […]

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