Since the 1930’s when President Franklin Delano Roosevelt accepted the economic theories of a Fabian socialist, the U.S. has embarked on an 80 year odyssey known as Keynesianism. And the foundation of this economic model is the use of debt by governments to stimulate economic growth during times of slowdown, or outright recession.
But what Keynes, nor most economists who sit in their ivory towers fail to consider is the variable of human ethics, morality, and avarice which can take a workable and practical process and turn it into a tool that leads to destruction and collapse versus the stability it sought ti create as its original intention.
In using debt to stimulate an economy, Keynes himself wrote that this form of artificial stimulus should be used sparingly, and only for a short duration of time… similar to how one would use the battery of another car to jump start your own and allow the dead battery to recharge using its own alternator. But if the battery itself was too far gone, and unable to accept being charged from the car’s own mechanical processes, then an entirely new battery would be required to facilitate the vehicle running smoothly under its own power.
This example of borrowing power from a working automobile to keep a dying one functioning is very appropriate in describing how America’s economy works today. On the one hand you have an old automobile (U.S. economy) that needs to have its battery completely changed out, but the owner (U.S. government) is either too lazy, or is too mechanically inept to change a non-working battery for another. So instead the government co-opts a working automobile to be available to always re-charge their dying battery when it comes to a stop, thus bringing us to to a realization in today’s American economy.
And that realization is that debt borrowing creates the illusion of economic growth, but in reality it is at best a zero-sum game, or at worst a detriment to the entire economy.
Between 1994 and 2008, the government had many good automobiles in its garage to help charge its ‘Cadillac’ and artificially create economic growth by showcasing their vehicle with higher horsepower and longer distances. They did this by lowering interest rates under the former Fed Chairman Alan Greenspan, and increase the money supply so Uncle Sam could deck out his fancy 1960’s Eldorado in a new wave of government expansion. But eventually when you cannibalize too many functional vehicles to allow your flagship to prosper, at a certain point you must look for other sources outside your garage to keep the beast going.
Perhaps using these analogies made my example a little complex, but putting it in direct terms, ever since 1994 when we began to cannibalize America’s productive industry by offshoring companies to Mexico, China, and elsewhere for a quick buck, and lowering interest rates so that consumers and the government would become the primary engines for the economy, a clock began ticking which over the course of the next 20 years would lead to a point of diminishing returns which we have not only now reached, but have passed beyond where all new debt introduced is a zero-sum game.
Last year, real GDP growth came in at 2.4% over 2014, with two quarters falling below 2% according to the Bureau of Economic Analysis.
And at the same time that our GDP rose $594.8 billion for the entirety of 2015, government debt rose $439 billion through September (October 1) when the U.S. closed its books for the last fiscal year. And when you extrapolate that for the remaining three months, you find that government debt for 2015 was approximately $585.3 billion, or almost exactly the amount gained in economic growth for the year.
Zero sum game.
America’s economic reality is that we have borrowed so much now that we can no longer stimulate an economy through the creation of artificial credit, and even worse, we have depleted nearly all available capital that used to be available to rebuild an economy if the insolvent assets were allowed to be dissolved rather than propped up. And like a muscle car from the 70’s, which requires more fuel to drive a single mile than most cars need to drive 10-20, unless we simply junk the car, or in this case the borrowing of debt to keep the system operational, then we will soon find ourselves with only one car left to drive on the road, and it will be sitting in a ditch because there are no more parts left to cannibalize, or energy to steal to keep it running.