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:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...