Tag: Federal debt GDP

–Surprise: Federal deficit growth precedes GDP growth by 1-2 years

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:

graph

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.

Grtaph 2
      grraph 1

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%       ↑
=================================
1976-1979 Federal debt fell from 28% to 7%
1976-1980 GDP fell from 12% to 7% **       ↓
=================================
1974-1976 Federal debt rose from -2% to 28%
1975-1976 GDP rose from 8% to 25%       ↑
=================================
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.
————————————————————————————————————————————————

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.”

–Open letter to John Mauldin re. his myths

      John Mauldin is President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. He also is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. He is the author of Thoughts from the Frontline, a blog at Mauldin.
      Recently, Mr. Mauldin wrote an article for his blog, and I wrote to him with a critique, as follows:

5/9/10
Mr. Mauldin:

      This note is sent to you in the spirit of helpfulness. Your article titled “The Center Cannot Hold,” quoting G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli contains several widely quoted, commonly believed myths. For example:

      Myth: “Long before we get to the place where we in the US are paying 20% of our GDP in interest (which would be about 80% of our tax collections, even with much higher tax rates) the bond market, not to mention taxpayers, will revolt. The paper’s authors clearly show that the current course is not sustainable.”
      Fact: Federal borrowing no longer (after 1971) is necessary nor even desirable. See: How to Eliminate Federal Deficits

      Myth: “A higher level of public debt implies that a larger share of society’s resources is permanently being spent servicing the debt. This means that a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases.”
      Fact: Society’s resources do not service federal debt. See: Taxes do not pay for federal spending.

      Myth: “And if government debt crowds out private investment, then there is lower growth.”
      Fact: This also commonly is stated, “Government debt crowds out private borrowing” and government debt crowds out private lending.” There is no mechanism by which federal spending can crowd out investment, borrowing or lending. On the contrary, federal spending adds to the money supply, which stimulates investment, borrowing and lending. See: Why spending stimulates investment

      Myth: “A government cannot run deficits in times of crisis to offset the affects of the crisis, if they already are running large deficits and have a large debt. In effect, fiscal policy is hamstrung.”
      Fact: This is the strangest myth, since running deficits in a time of crisis is exactly what the U.S. government has been doing. It would be true of Greece and the other EU nations, but not of then U.S., Canada, Australia, China and other monetarily sovereign systems. See: Greece’s solution

      Myth: “[…] the current leadership of the Fed knows it cannot print money.”
      Fact: This myth is even stranger than the above “strangest” myth, since printing money is exactly what the Fed does. See: Unsustainable debt.

      Myth: “As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly aging population.”
      Fact: The famous federal debt/GDP ratio is completely meaningless – a classic apples/oranges comparison – that neither describes the health of the economy, nor measures the government’s ability to pay its bills nor has any other meaningful purpose. See: The Debt/GDP ratio

      If you would like to see more common myths about our economy, go to: Common economic myths

Rodger Malcolm Mitchell