GDP (Gross Domestic Ponzi)
- Thread starter peilthetraveler
- Start date
M
morganist
it has been going on since raegan and thatcher. it is called a highly expansionary model.
Quote from Misthos:
Seems to me that the ponzification of the US economy began in earnest in the early 1980s.
Lots of folks reflect back on the Ronald Reagan years as "the great days" in the US economy.
Fact:
1. Reagan accelerated deficits for military spending which goosed GDP...
2. In 1982, The Fed "mashed the gas" with the money pump.. and hasn't let up even yet.
Just as with a person who is managing his debt, but then begins to "spend like a drunken sailor" and charging it. At first, it all feels great. All the seemingly free stuff and the debt load is manageable. But at some point the debt escalates out of countrol....
Unless we change our ways, America will be like Greece in the not too distant future.... and then like Rome.
Martin - I think the question is not whether the gov't can fund itself, but how. There are three ways for gov't to fund itself at the current spending levels:
1) Raise taxes by ~2T to cover the deficit.
2) Borrow from China.
and/or
3) Have the Fed print dollars.
Which of these is a good long term solution in your opinion?
Quote from Misthos:
I agree with peil.... wow that was hard to type.
Anyway, for all the kool-aid drinkers out there, how can this paradigm continue:
Seems to me that the ponzification of the US economy began in earnest in the early 1980s. Kind of troubling, if you ask me, that every year more debt is required to create a dollar of gdp growth. I have posted this chart in different forms many times. I have yet to hear a good explanation as to how this will end well, or if it is normal.
That's bottom line.
After annual GDP growth is considered, there's a huge shortfall in cash to pay down principle and interest from total debt. Huge torrents of liquidity (debt) are injected to shore up the system, which pushes back D-Day another year, or so.
Even if Public Debt is considered, annual debt service payments are ~400 Billion, at ~2% rates. We'll add another 1-2 Trillion this year and next. What happens when Bonds sell off and the cost to refinance goes up to 4%? An effective DOUBLING in interest payments ? Interest payments will gobble up 35% OF FEDERAL REVENUES (2.5 Trillion).
What happens to the massive shortfall in Social Security, Medicare, Welfare, Healthcare, then? More tax-hikes? Or debasement?
People don't get it. We're at the end of this debt-money system. I agree 1000%, Mithos.
This is why Schiff is calling for a dollar collapse. The easiest way out, politically, is to monetize the debt and inflate America out of Her obligations. Foreign investors sell-off US Treasuries, the FED will rescue, hold 80% of the bond market, artificially suppress rates, and the USD will collapse. Massive inflation then follows, for a short-time.
Then its pure Depressionary-level deflation. Or worse.
Asset growth since the 70's, as the graphic depicts, has been 90% money supply growth (read: debt). Real estate and stock values inflated by relentless printing.
The whole ponzi scheme collapses when new debt taken can't support old prices. That happens when the currency sells off and consumer incomes get halved by skyrocketing inflation. Debt at old levels will simply be unaffordable, and then everything will collapse hard. Worse than the Great Depression.
We need credit destruction because debt at these levels is unaffordable. Prolonging it just ensures the currency gets destroyed, too, instead of 10 years of painful contraction.
Europe and Japan could happen at the same time. Everybody except China could come down hard.
The most basic analogy is when an individual declares bankruptcy. Debt service overwhelms personal income and there's no money left to pay off the mortgage or put food on the table. That's America, in a nutshell. Obama, is just hastening our demise with Cap-and-Trade and Healthcare. Cap and Trade is a huge tax. We'll see what comes out of Copenhagen. Its really just knife in the gut of cancer patient.
UMMMM, *HELLO* Its the CONCEPT of GDP is what's wrong, let alone how they cheat it. They are including CONSUMPTION by CONSUMERS. What's important is PRODUCING THINGS that get SOLD, not how much consumers can go into debt buying crap they can't afford.
Here's my view (in response to Misthos, primarily), which I expect y'all to disagree with...
You are confounding two independent concepts: debt and GDP. Short-term correlation between the two doesn't imply causation. Accumulation/destruction of debt, in my view, is a cyclical phenomenon that contributes to the boom/bust economic dynamics. Trend GDP growth, if you look at the US from the 1700s to the present, is NOT a cyclical phenomenon and has to do with actual increases in productivity etc.
In regards to how this applies to the present-day situation the US finds itself in, far be it from me to suggest that it's all rosy. All I am saying is that the situation warrants a balanced view. It's not like we've never seen cases of countries growing themselves out of massive amounts of debt. One such example is Britain after both the Napoleonic Wars (260% debt/GDP in 1820) and World War II (arnd 200%). Whether the US can pull it off is another, political, matter entirely.
You are confounding two independent concepts: debt and GDP. Short-term correlation between the two doesn't imply causation. Accumulation/destruction of debt, in my view, is a cyclical phenomenon that contributes to the boom/bust economic dynamics. Trend GDP growth, if you look at the US from the 1700s to the present, is NOT a cyclical phenomenon and has to do with actual increases in productivity etc.
In regards to how this applies to the present-day situation the US finds itself in, far be it from me to suggest that it's all rosy. All I am saying is that the situation warrants a balanced view. It's not like we've never seen cases of countries growing themselves out of massive amounts of debt. One such example is Britain after both the Napoleonic Wars (260% debt/GDP in 1820) and World War II (arnd 200%). Whether the US can pull it off is another, political, matter entirely.
Short term correlation? The chart covers a 60 year time period. Look at the chart again, and you will see that the decade following 1971 (closing of the gold window) is where the debt to GDP diverge dramatically. 1971, in my view, is a watershed moment in US history. The economy thereafter, fundamentally changed.
so...
If we allow the debt level to decrease - will there be a corresponding decrease in GDP?
In my view yes - and significantly so - because there IS causation. Understand that with de-industrialization, an increasingly significant debt-based service economy has been fueling GDP growth. This service sector is reliant on asset classes attaining higher valuations - in perpetuity. Such valuations can only increase with money supply. And being that ours is a fiat money/fractional reserve lending world - the fractional lending/money printing game must continue... Should the private sector flounder (it has) Big Gov't will take over and create debt/money (it is) to prop up asset values. But how long can Big Gov't do this?
Productivity increases as well as global wage arbitrage lowered the costs of consumer goods and food which, in turn, lowered inflation, thus freeing the central bankers to continue to inflate asset classes with little inflationary cost to society. In such a scenario, the FIRE Economy grows, as does consumption - and both provide a cosmetic boost to GDP - all the while reliant on the maintenance of bubbles - asset valuations.
That paradigm is collapsing now. Productivity increases as well as global wage arbitrage have stiffled wages and thus consumption, and there is a corresponding drop in gov't revenues as a result. Such decreases in incomes have a disastrous effect on the servicing of debt, and ultimately, asset valuations.
This time it is different.
What can the damage ultimately be? That's tough to measure, we don't know how much of the service sector is artificially propped up, and how much is actually needed. But here's a good visual:
source: http://blogs.wsj.com/economics/2009/04/28/nations-goods-producing-sector-continues-to-shrink/