The rationale for today’s easy money policies is pretty straightforward: Falling interest rates and rising government deficits will counteract the drag of excessive debts taken on in previous stimulus programs and asset bubbles, enabling the developed world to create wealth faster than it takes on new debt. The result: a steady decline in debt/GDP to levels that allow the current system to survive without wrenching changes.
That’s a seductive, free-lunchy kind of idea — if it actually worked. But as the following chart of historical US GDP growth illustrates, as we’ve taken on more and more debt, each successive stimulus program has generated less and less growth. Compare the past few years to the rip-roaring recoveries of the 1960s through 1990s and it’s clear that whatever mechanism once converted easy money into greater wealth is no longer operating.
And note that the 2% recent growth on the above chart doesn’t include the revision of Q4 2015 growth to only 1.4%, and the Atlanta Fed’s GDPNow projection of 0.4% growth for 2016’s first quarter.
It’s the same story pretty much everywhere else. Japan, for instance:
Now the question becomes, how does the US and the rest of the world “grow out of its debt” if it can’t grow at all? Won’t the steady accretion of debt at every level of every society go parabolic in a zero-growth world? The answer is that mathematically speaking, this appears to be unavoidable.
So what will we do? More of the same of course:
OECD Calls for Urgent Increase in Government Spending
(Wall Street Journal) – Governments in the U.S., Europe and elsewhere should take urgent and collective steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said Thursday.
In its most forceful call to action since the financial crisis, the OECD said the global economy was suffering from a weakness of demand that couldn’t be remedied through stimulus from central banks alone.
Releasing its first economic forecasts of 2016, it urged governments able to borrow at very low interest rates to boost spending on infrastructure. The OECD said that if governments worked together, fresh borrowing could have such a positive impact on growth that it would reduce rather than increase their debts relative to economic output.
OECD chief economist Catherine Mann told The Wall Street Journal that without such action, governments wouldn’t be able to honor their pledges to deliver a better life for young people, adequate pensions and health care for the elderly, and the returns anticipated by investors.
“The economic performance generated by today’s set of policies is insufficient to make good on these commitments,” Ms. Mann said, who has worked at the U.S. Federal Reserve and the Council of Economic Advisers. “Those commitments will not be met unless there is a change in policy stance.”
“Governments in many countries are currently able to borrow for long periods at very low interest rates, increasing fiscal space,” the OECD said. “Many countries have room for fiscal expansion to strengthen demand. This should focus on policies with strong short-run benefits and that also contribute to long-term growth. A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path.”
I’ve been studying the history of monetary policy in the US lately and I’ve been intrigued with the rational for the “confiscation” of gold (i.e., forced selling of said gold to the Treasury at the then prevailing price of $20.67/oz) from citizens and corporations in 1933 (and the subsequent re-pricing of gold to $35/oz.) From what I can tell, FDR/”the government”/TPTB didn’t want those who owned gold to receive a windfall profit from the re-pricing scheme, so they confiscated it first. An alternative explanation is that the government itself wanted to receive the windfall, the idea being that if the government hypothetically sold it’s newly acquired gold it would have a lot more dollars than before the re-pricing.
Whatever the reason, I think the current situation is analogous to that but regarding debt instead of assets. People and corporations and governments have a lot of debt – but not everybody does, and not everybody has the same amount. The political problem is that if those debts are forgiven, those who have the most debt would gain the most. That would be seem perverse to most people (at least I hope.) However, if existing debt is not eliminated in some way then the system is going to implode because an inordinate percentage of incomes/revenues are being spent on debt servicing instead of consumption and investment, which is why the old priming scheme is hitting the wall.
Therefore, one solution to this dilemma is to not necessarily “forgive” existing debt directly, but to give each and every “citizen” (or taxpayer, or whatever) a tranche of unbacked “money”/currency but in such a way as those with debt must pay off their debt before using their windfall for consumption or investment. That way everyone would gain the same thing but in different ways. Those without debt would have new cash to play with, and those who have debt would then have less and maybe even some extra free cash left over to spend as desired. The fact that the money given is “unbacked” simply means the money is “printed” without requiring a Treasury bond in exchange. Existing Treasury bond holders would be paid back at par. That is one theoretically possible way to reset the monetary system.
Ok where to start. First I am only a lowly controls engineer that possibly does not understand any of this stuff. However, my belief is that the FDR gold purchase and reprice was the only to devalue the currency and therefore make US goods less expensive in the world to try and restart trade. Problem was this set off a currency war and just made things worse not better.
On the issue of QE for the people that you have outlined above, my problem is it appears to reward those that have been irresponsible and to punish those that have been responsible and I believe that is how we got into this mess in the first place. We need to find a way to make people more responsible and that will not be easy with all the rewards that exist already for irresponsible behavior.
First of all, I don’t disagree that trade issues were a consideration too, but my question relates to why gold was confiscated at all, especially in that case. The revaluation could have occurred without confiscation, so why did they do that?
Secondly, I agree with your concern about benefiting the irresponsible as I tried to explain. If each citizen/taxpayer/etc. receives the same quantity of “free” money then everyone benefits equally, but the debtors have to use their windfall to pay off their debts first and only use whatever remains (if anything) for consumption or savings/investments. Those who have little or no debt effectively get a proportionally higher windfall, effectively rewarding the more responsible with more “free” cash to use as they wish.
Thanks for asking.
There another, rather old fashioned way to relieve the burden of debt.
How about we let the people / companies / governments who borrowed money they couldn’t afford to repay default / declare bankruptcy. And how about we let the people who were imprudent enough to lend to them take it in the shorts?
Crazy idea, I know. Because that would take down the banks and dissolve this rotten, artificially propped up sham of a financial system into mush.
Hey, it’s gonna happen sooner or later.
I’m all FOR the banks getting wiped out. They NEED to be wiped out . The thing that would concern me if nature were left to take her course is that the Pension Funds, Insurance Companies, individual savers and other relative innocents who loaned money in good faith who would get screwed. But, if you dance will the devil, what do you expect?
Not that I’m looking forward to living through the disruptions a meltdown of the system would create in my life and the lives of just about everybody else in the country, but these ridiculous “free-lunchy” schemes aren’t going to fix anything. More “free money” means the currency gets debased even further and savers and pensioners get screwed even more royally while the reckless and criminal get rescued,
There’s a reason why John calls this site Dollar Collapse.
Oh, I agree. I’m not necessarily in favor of what I described, I just think it’s a possibility. “Unfortunately” the PTB aren’t going to let things go. I think they’re going to do everything they can think of until they lose control.
Got it. And I agree. What “should” happen has no chance of happening. They won’t let things go.
What a mess.
Taxes need to be reduced – this would increase liquidity – this would then increase the velocity of spending – with increased spending economy would grow slowly – the governments should be strict with their spending and avoid taking bank loans and introduce the public banking system – do not depend on private banks at all as they act as paradises through their interest rates and derivatives systems – let all states and local authorities have their own public banking system with low interest rates – Tax cuts means cutting highway tolls reducing consumers price and gas prices etc that may affect government revenue – this may cause deflation but this is fine at the present time and there is no choice anyway – with increased liquidity and increased spending growth would emerge slowly and as the growth emerges slowly taxes can then be gradually increased to increase the government revenue and this would end up in a win -win situation for the growth within the country as well as increased taxation for the government over a period of time – avoid taking foreign out of jurisdiction loans and concentrate on domestic growth of the economy — to pay fixed government expenses like pensions Etc the currency may to be gradually debased , Capital control may have to be introduced to stop temporarily capital outflow – good governance and transparency and accountability need to be exercised at all levels -cheers
when you don’t produce any thing just changing service mechanism doesn’t increase GDP. One must understand what the real GDP is. US has been in recession in terms of real GDP since 90s. 1-2 % are bogus numbers. All this is due to central bank helicopter money which doesn’t produces any thing. since 2008 QE and now 0% interest rate are killing real GDP.
Krugmanomics
Once IMF’s SDR bond bailouts kick in and get levered up globally, we’ll be looking at total global debts well over few year ago $199 trillion estimates. What could go wrong? -> http://bit.ly/DebtsMustAtone
At least global debt won’t be $200 trillion!
Infinite growth on a finite planet, what could possibly go wrong?
http://olduvai.com
Steve- I can connect with olduvai.ca, but olduvai.com takes me to a page at my isp provider… Matt
Blasted spellcheck….
Thanks for the heads-up.
Just have the media report it and its as good as real. Anyone saying otherwise is peddling fiction.
I’m surprised Malthus’s name hasn’t been resurrected lately. For most of the twentieth century it was supposed to be a sign of ignorance and limited thinking to claim limitations on anything, after the 18th century economist Thomas Malthus predicted a limit to world population growth based on limitations in food production. “Obviously” that obvious dumb-ass has been wrong (so far) so nobody wants to think like that any more.
Let’s see… the answer is…
(wait for it)
…NO.
Satyajit Das just wrote a book saying we can’t grow our way out. I’ll bet on his analysis before our Roving Gnome Janet any day of the week.
Kicking the can down the road to hell.