Picture Worth a Trillion Words

It is said that a picture is worth a thousand words. Here is a picture that is worth TRILLIONS of words.

The chart shows the incremental GDP related to an additional dollar of debt.  Back in 1966, for example, a new dollar of debt was accompanied by an increase in GDP of ninety cents. The decrease in the effect of new debt on GDP over time is dramatic and linearly downward. We now have reached the point where infusions of new debt appear to lower GDP.

The game of “juicing the economy” has ended. The government is near the end of the “pretend and extend” strategy.

Years of government interventions have created massive distortions and unmanageable levels of debt. The economy has reached its breaking point. Stimulus no longer works, whether it be fiscal or monetary. The credit bubble created is massive. The following chart goes back to the early 1920s, showing total debt and a percentage of GDP. This one chart shows all that one needs to know.

As seen, the distoritions today are substantially worse than what caused the Great Depression. An economic disaster of epic proportions has been created. There is no way it can be avoided. The economy must be left alone! It must be allowed to correct the imbalances. It appears that society is carrying three times the amount of debt that is normal. That suggests that deleveraging to the tune of $25 Trillion must occur for the economy to return to normal.

Additional governmental attempts to “solve” the problem may succeed at deferring it a bit longer, but we are out of time, resources and solutions. Anything done now will only make the ultimate correction worse and more painful.

The death throes of Keynesianism have arrived. As the process plays out, it will not be comfortable or perhaps even safe. Yet there is nothing that can be done to escape the inevitable end. The damage was created over many decades.  What most thought were “good times” was really just a prelude for the coming disaster.

Ludwig von Mises warned of what must happen. Here are a few quotations from him that are pertinent to our current condition:

Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration.

In the long run we are all dead. But unfortunately nearly all of us outlive the short run. We are destined to spend decades paying for the easy money orgy of a few years.

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world.

The worst evils which mankind has ever had to endure were inflicted by bad governments. The state can be and has often been in the course of history the main source of mischief and disaster.

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