The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
GDP growth has many causes. One of these causes is federal deficit growth. (By law, federal debt growth = federal deficits, so while the following graphs literally show federal debt growth, they indicate deficit growth).
The following graphs show debt growth and GDP growth 1971 – 2010 PGS (post gold standard). First, here is a graph showing federal debt and GDP growth:
Then, I split the data in two, and offset the graphs. By drawing vertical lines between the two graphs, you will see an interesting effect: Federal debt growth and declines precede GDP growth and declines by about 1-2 years. There are short term exceptions to this — as I said, GDP growth is subject to many causes — but over the past 40 years the “rule” has held remarkably well, and the 1-2 year period is exactly what one would expect in a cause/effect relationship between federal debt growth and GDP growth.
Annual % change:
2007-2009 Federal debt rose from 3% to 33%
2009-2010 GDP rose from -3% to 33% ↑
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2004-2007 Federal debt fell from 15% to 3%
2006-2009 GDP fell from 6% to -3% ↓
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2001-2004 Federal debt rose from -11% to 15%
2002-2005 GDP rose from 2% to 6% ↑
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1993-2001 Federal debt fell from 12% to -11%
1994-2002 GDP fell from fell from 6.5% to 2% ↓
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1983-1990 Federal debt fell from 28% to 7%
1984-1991 GDP fell from 12.5% to 3% ↓
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1979-1981 Federal debt rose from 5%-15%
1980-1982 GDP rose from 7% to 14% ↑
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1976-1979 Federal debt fell from 28% to 7%
1976-1980 GDP fell from 12% to 7% ** ↓
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1974-1976 Federal debt rose from -2% to 28%
1975-1976 GDP rose from 8% to 25% ↑
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1972-1974 Federal debt fell from 10% to -1%
1973-1975 GDP fell from 12% to 8% ↓
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1971-1972 Federal debt rose from 1% to 10%
1972-1973 GDP rose from 8% to 12% ↑
**During this period, GDP rose as high as 14% before falling, while debt continued to fall the entire period.
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The reason for this series of coincidences is outlined at Introduction, but briefly: Money feeds an economy. A growing economy requires a growing supply of money, and deficits are the federal government’s method for adding money to the economy. Whenever the economy is starved for money, we have a recession. When the economy is “well-fed” with money, we have healthy growth.
Yes, it is possible to “overfeed” the economy, in which case we will have inflation. But currently we are nowhere near that point. Economically speaking, we are much closer to starvation than to obesity. In fact, during the past 40 years PGS, our economy never has been obese. It has vacillated between hungry for money and serious starvation.
For a consistently growing GDP, it is necessary not only for debt to grow, but debt must grow by an increasing percentage. For this reason, calls for debt reduction, deficit reduction, balanced budget, etc., are suicidal for the economy.
Discuss these data with your political representatives and your favorite media writers. Although breaking through the intuition-based bias against federal debt is difficult, the only hope is to continue to present fact after fact after fact, until even the most cement-brained debt-hawk finally concedes.
Good luck. The future of America depends on it.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”
#Monetary Sovereignty - Mitchell 
Rodger,
I did the UK one at the weekend.
http://www.3spoken.co.uk/2010/11/uk-national-debt-compared-with-gdp-1975.html
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Thanks, Neil,
My eye sees a similar pattern. What do you think?
Actually, I’m surprised it’s as close as it looks to be. The UK is monetarily sovereign, but being a member of the EU, it deals with issues that could blur the pattern.
There is one similarity between the UK and the US: Neither country seems to realize it’s monetarily sovereign.
Rodger Malcolm Mitchell
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I made it about 18 months lag. Interesting that you found the same.
The only missing wobble is the 2001 recession which barely shows, even though manufacturing output fell 5% in the subsequent two year period.
That was when our Chancellor allowed house price and associated equity withdrawal to go bananas. (Our housing system is supply constrained – which is where it differs from the US. No oversupply here.)
At the same time he removed the public sector spending limits on the economy. Classic deficit spending on two fronts – with both the Household and Government sectors spending at full steam and the Household sector running up a colossal deficit.
And that came to a crashing halt when the Household sector (and the Financial sector it has boosted) ran out of ammunition in spectacular fashion.
So that’s good evidence there of what works and what doesn’t.
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Neil,
In the U.S., recessions repeatedly occur after several years of declining deficit growth (See the 2nd graph.) This indicates that not only is deficit growth necessary for a growing economy, but the deficit growth rate must increase.
Add to this the fact that depressions tend to follow surpluses, and the debt-hawk theories become untenable.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
Housing was a “bubble.” It depended on ever-increasing prices. But it was a bubble that could have continued indefinitely, had it not run out of federal stimulus money. After all, it continued for 60 years. Monetary Sovereignty predicts all this.
Rodger Malcolm Mitchell
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