The Growing Chorus for Fiscal Stimulus
Central bankers and monetary adherents the world over are united in the common grouse that fiscal policy is lacking. Grander programs of direct stimulation are needed, they grumble. Monetary policy alone won’t cut the mustard, they gripe.
Global debt-to-GDP ratios (excl. financial debt). Obviously, it is not enough. More debt is needed, so we may “stimulate” ourselves back to prosperity.
Hardly a week goes by where the monetary side of the house isn’t heaving grievances at the fiscal side of the house. The government spenders aren’t doing their part to boost the GDP, proclaim the money printers. Greater outlays and ‘structural reforms’ are needed to spur aggregate demand, they moan.
For example, last month, just prior to the G20 gala, the Organization for Economic Cooperation and Development (OECD) asserted that “Getting back to healthy and inclusive growth calls for urgent policy response, drawing on monetary, fiscal, and structural policies working together.”
The OECD report also stated that “The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation.”
The Chateau de la Muette in Paris – this magnificent building that once housed members of France’s nobility nowadays ironically serves as the headquarters of the socialistic central planning bureaucracy known as the OECD. This parasitic carbuncle is high up on the list of globalist institutions that must be considered an extreme threat to economic freedom and progress.
Photo via oecd.org
Several weeks later, on March 10, European Central Bank President Mario Draghi offered a similar refrain. At the ECB press conference Draghi remarked that “all [Eurozone] countries should strive for a more growth-friendly composition of fiscal policies.”
Then, wouldn’t you know it, former Fed Chairman Ben Bernanke also added his alto vocals to the chorus. Last week, in his Brookings Institution blog, he wrote:
“There are signs that monetary policy in the United States and other industrial countries is reaching its limits, which makes it even more important that the collective response to a slowdown involve other policies—particularly fiscal policy.”
Fiscal policy and structural reforms, if you were unclear on this point, is policy parlance for greater deficit spending. This, in short, means using credit cards to fund government expenditures.
According to the central bankers, their issuance of cheap credit keeps getting log-jammed at commercial banks. They want the government to unclog the jam. They want greater deficit spending to pump money into the economy via road and bridge projects, bullet trains, football coliseums, and vast concrete waterways.
If that doesn’t cut it, outright helicopter money drops, such as direct checks to the public from the Treasury, would be the prescribed fix. The logic behind the calls for fiscal stimulus is quite simple. By borrowing from the future, and spending today, the government should be able to boost GDP growth. Of course, this also increases public debt levels.
But don’t worry say the economic planners – echoing Dick Cheney – deficits don’t matter. You can have your cake and you can eat it too. A sustainable lift in growth, claim the experts, would also allow governments to benefit from higher tax revenues. What’s more, these higher tax revenues will then be used to reduce deficits and debt.
Do you see how this unclever logic works? Somehow, the deficits would be self-financing. Somehow, the government will be able to spend its way to economic prosperity.
Deficit Spending is Not the Answer
Indeed, this sounds like a great policy strategy…if only it were true. Unfortunately, there aren’t any examples we are aware of where increases in government debt have produced an economic boom that allowed the government to grow its way out of debt. The debt never goes away; rather, it accumulates and is ultimately repudiated through default or inflation.
Still the mad monetary policy zealots believe more deficit spending will make the economy whole again. They claim government spending has been too austere. Yet the idea that fiscal policy has been lacking is absurd.
Here in the United States the national debt has topped $19 trillion. That’s about double what the debt was 10-years ago. For the 2016 fiscal year alone, the projected deficit is $616 billion. While this is down from the trillion dollar annual deficits run between 2009 and 2012, at 3.3 percent of estimated GDP, it is hardly austere.
The federal debtberg. Ronald Reagan’s deficits were once considered obscene. Soon one will need a microscope to even see them on this chart. Of course, deficits don’t matter – until they do – click to enlarge.
Similarly, many nations of the European Union are running deficits that are extremely reckless. For instance, the stability growth pact rules of the EU require countries to limit their deficit spending to 3 percent of GDP. According to Bloomberg, five of the 28 EU countries are expected to violate this rule this year and three more will be right at the threshold.
Certainly, this is down from the 22 counties in violation in 2010. But, nonetheless, deficit spending is still running rampant. Just ask Japan. Their 2016 deficit is 6 percent of GDP.
The point is, central bankers are eager to share the blame for their failed policies. Calls for greater deficit spending ate thought to help distract from their ineptitude. Nonetheless, it is complete gibberish…deficit spending is not the answer.
What happened to sound money, balanced budgets, paying as you go, and saving for a rainy day? These sensible ideas went out of style three generations ago. We suspect they will make a comeback at some point…whether the economic planners want them to or not.
Charts by RBS/BIS, St. Louis Fed
Chart and image captions by PT
M N. Gordon is the editor and publisher of the Economic Prism.
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “Deficit Spending is Not the Answer”
Most read in the last 20 days:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- Silver Speculators Gone Wild – Precious Metals Supply and Demand
Silver Gets Frisky Last week, the prices of the metals had been up Sunday night but were slowly sliding all week — until Friday at 7:00am Arizona time (14:00 in London). Then the price of silver took off like a silver-speculator-fueled-rocket. It went from $16.68 to $17.25, or 3.4% in two hours. March Silver, 30 min. candles. Someone certainly piled in last Friday... - click to enlarge. What does it mean? We don’t know. We would bet an ounce of fine gold against a...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...