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.
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “Deficit Spending is Not the Answer”
Most read in the last 20 days:
- Alan “Bubbles” Greenspan Returns to Gold
Faking It Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961 He was in it for the power and the glory... Alan Greenspan gets presidential bling...
- The Gold Situation
A Growing Bullish Chorus – With Somewhat Muted Enthusiasm A few days ago a well-known mainstream investment house (which shall remain nameless) informed the world that it now expects the gold price to reach “$1,500 by early 2017”. Our first thought was: “Now they tell us!”. You won't be surprised to learn that the same house not too long ago had its eyes firmly fixed in the opposite direction. Da bling be goin' somewhere, fellow rastas and homies! Photo via...
- End of an Era: The Rise and Fall of the Petrodollar System
The Transition “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
- European Banks and Europe's Never-Ending Crisis
Landfall of a “Told You So” Moment... Late last year and early this year, we wrote extensively about the problems we thought were coming down the pike for European banks. Very little attention was paid to the topic at the time, but we felt it was a typical example of a “gray swan” - a problem everybody knows about on some level, but naively thinks won't erupt if only it is studiously ignored. This actually worked for a while, but as Clouseau would say: “Not...
- Writing on the Wall
Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so. It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
- Gold – Eerie Pattern Repetition Revisited
Gold Continues to Mimic the 1970s Ask and ye shall receive... we promised we would update the comparison chart we last showed in late November in an article that kind of insinuated that it might be a good time to buy gold and gold stocks (see: “Gold and Gold Stocks – It Gets Even More Interesting” for the details). We are hereby delivering on that promise. A Lydian gold stater from the time of the famously rich King Croesus, approx. 570 BC. It seems they already had this...
- The Central Planning Virus Mutates
Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination. A...
- Destination Mars
Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks. If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical. But, in certain economies, this is now standard operating procedure. The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
- Fat People for Trump!
Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot. The protest vote attractor with the funny hair. Image credit: Liberty Maniacs Trigger warning: In the following ramble, we make fun of...
- America Has Become a “Parasitocracy”
Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to. Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
- Planet Debt
Low Interest Rate Persons She is a low-interest-rate person. She has always been a low-interest-rate person. And I must be honest. I am a low-interest-rate person. If we raise interest rates, and if the dollar starts getting too strong, we’re going to have some very major problems. — Donald Trump Two low interest rate persons! The Trumpsumptive president (Donald the Tremendous) can be seen here indicating the approximate size of the interest rate that will...
- Long Term Market Perspectives
Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world. Ye olde bristlecone Photo credit: Kosta Konstantinidis You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...