Monty Pelerin's World

Albert Einstein defined insanity as doing the same thing over and over and expecting a different result. By that definition, clearly our economic policymakers in Washington belong in the little rooms with padded walls.

Karl Denninger discusses below the use of debt as a means to bolster GDP. There is not a sign of evidence to support government’s belief/actions. If that is truly government’s objective, then surely insanity is a difficult conclusion to avoid.

But there are other motives, unstated but possibly driving government behavior. My guess is that the primary purpose of government over much of the past thirty years was to grow bigger and more powerful. More recently, growing government has likely been displaced by saving government from bankruptcy. Debt is now needed to enable government to continue paying its bills. Either of these hypotheses is consistent with the data and likely more plausible than insanity. Perhaps there are other motivations that could be at work.

Denninger does not speculate regarding motives and just presents the devastating data:

You’d think that after more than fifty years people would wake the hell up and smell the coffee.

What is this chart?  Why, the history of our idiocy.  It’s quite simple; this is the multiple that each dollar of debt (anywhere in the economy) has returned in GDP looked at on a quarter-on-quarter basis, net of the debt increase itself.  That is, if the multiple is “1″ then for each dollar of debt added to the economy there was one dollar of output in the form of GDP added as well during the same period of time.  If it’s “0″ then the debt itself produced no additional output, but did fund itself.  If it’s negative, well, into the black hole you go.  Since this is a quarterly number it’s quite noisy but there’s no mistaking what it tells you.

If you pay attention you’ll note that since 1980 this has never been positive – not even for one quarter – and it was only rarely positive before that time!

Why is this important?  Because it underlies the idiocy of everything we’re attempting at the present time with our economic policy.  It underlies every claim about “getting lending going to small businesses” and “getting lending going to consumers.”

Lending – that is, the increase in debt - is not additive to GDP, it is subtractive!

This is the exact opposite of what is trumpeted on CNBS every day, it is the opposite of what our President has said, it is the opposite of what Congress has claimed is their goal in their regulatory zeal and it is the opposite of what is taught in our edifices of “higher education“.

But this – directly from The Fed’s and BEA’s own numbers – says that all of those “economic theories” are in fact crap.  They are in fact knowing lies in the face of what is nearly sixty years of unbroken statisticalfact.

Your challenge is to calibrate the policies and expected outcomes of our government’s policy, the ECB’s and EU’s policy, and other government policy and pronouncement against this statistical and irrefutable fact and then figure out the likely outcome of once again doing the same thing we’ve done over the last thirty unbroken years.

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