Reality vs academic research… sometimes they match

Eric Sprott digging out scientific papers that show the inherent diminishing return of debt i.e. showing the mathematical limit of excessive spending.

With thanks to Zero Hedge.


If we use the Fed’s own numbers, the impact of debt on GDP is even more dismal. In Chart B below, we present the marginal impact of debt on marginal GDP since 1966 using data from the Federal Reserve. Deficit spending, which has generated smaller and smaller increases in GDP over time, is now generating a negative impact on GDP due to the costs of servicing the debt. The chart suggests we have already entered what PIMCO refers to as the “Keynesian endpoint”, where the government can no longer afford to increase debt levels.10 No debt = no stimulus. No stimulus = ???

End excerpt –

Eggspurt (expert) research is of course always welcome but the ability to notice empirical evidence can save you a whole bunch of time and headache. Deficit spending has an inherent diminishing-return quality about it. How else could you explain that since 1980 government debt has progressed from US$2Trillion to US$12Trillion and yet GDP only progressed from US$6Trillion to US$14Trillion? This is simple arithmetic that even modest merchants use to judge the viability of their shops. But above all, for anyone that wants to see it, this is an economy that has been aggressively stimulated for many, many years and yet the main stream political/economic elite is calling for more stimulus (much more if your name is Krugman, somewhere in the realm of blue-yonder more). Recall here the definition of insanity.

As I outline in the post below, other than a lag in time there is no difference between government and private debt. Eventually both the interest and principle must be paid through taxes. Pay today or pay tomorrow but pay we must because government has no money of its own. Government’s only income comes from you and me. So that in a situation where both government and individuals are taking on increasing amounts of debt, you must perforce reach a mathematical limit beyond which underlying economic activity no longer suffices to service the debt (notice in this regard the various nations, states and municipalities that are circling the fiscal drain as we speak). At this point, taking on further debt in an attempt to stimulate economic expansion is sheer madness.

But of course. Though mad it might be, deficit spending is populist and politically expedient. So deficit it is for as long as we can maintain some degree of social expenditure. But gradually as the social promises our leaders handed out over the past half century must necessarily be curtailed, social unrest will follow till revolution enters the realm of the probable. At that point our “leaders” will plunge us in a world war.


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