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US debt crisis makes Europe look like picnic
By Shawn A. Mesaros |
September 10, 2012, Monday
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WHEN I borrow money as a private citizen, the bank charges an interest rate that is perhaps relevant. It is a rate that likely matches the expected "work product or profit" expected from my endeavor, with a cushion added for safety.
This is called "money creation" since the borrowings did not exist before.
This "new money" buys maybe productivity and I get a return on that productivity. When that debt is repaid, I am destroying money by removing it from the system and repaying my principal.
The government borrows heavily in recession, saying that this activity is good for the country, that it saves jobs, etc.
And yet after the recession, the debt is not repaid and somehow this "productive pursuit" was good for America.
What we see here is that the more spending that is not repaid, the greater the amount required the next time.
In fact, the current scenario is much worse since while Americans deleverage or are at least supposedly attempting to deleverage, we have a government that is going the other way, and at light speed.
Printing money
Why would this happen?
Repayment of principal and reduced borrowing destroys money, so the government, in an effort to keep prices higher and create the fiction of well-being, prints a boatload more money to match the repayment of principal elsewhere, and make up for the loss of economic activity through sheer printing of money for itself.
This policy doesn't actually help America, as it has been sold for so many decades. It primes the pump for future elections, and yet one must continue to consider the biology of this grand money experiment inflicted on the American People.
If repayment of principal is then considered the destruction of money in the banking system, and if that repayment is considered good for each individual American, then what in the name of sanity is the government doing permanently racking up trillions of dollars in debt?
Especially when the American People are choosing to deleverage and save money, and when there's a clear inability of the American taxpayer to actually repay the principal on the debt that the government has foisted up the American public?
Recessionary spending should be called what it truly is - a permanent tax on the system as a whole. Not some "transitory thing" like a home loan that is paid off, or a small student loan to help someone get through college. These kinds of debts are "retired" through productive pursuits, and then typically, in a stable society, not normally re-created in the same form.
Politicians would say that "recessionary spending enhances the effectiveness of government" to which I would counter that "recessionary spending effectively pillages the sacred altar of individual sovereignty which all Americans view as a birthright, as Americans."
Illusion of benevolence
And yet sadly, with each successive economic cycle, each successive (and greater) borrowing binge, that "historic" view of individual sovereignty as an American is probably going the way of the idea of "gold as money," which from 1981 to 1994 was in decline, only to outperform almost all major asset classes for the next 18 years.
Recessionary spending creates the illusion of government as effective, politicians as benevolent, leadership as visionary, for what? Four years?
I can spend someone else's money for four years and look like a genius as well, but then I get to leave office with a lifetime pension paid for by the electorate! Wait. You can't make this stuff up. It's true.
At the rate of ludicrous borrowing and spending, America does not have 18 years to figure out the path of truth (and borrowing) again. All sovereignty is extinguished when you cannot pay the debt you have created.
Ask Europe, try calling them on the phone to ask what happened, but their telephone lines have been disconnected for failure to pay. Government creation of prosperity through borrowing on behalf of their taxpayers is a centuries old, well-tested falsehood.
So long as there's more per capita borrowing in America, the per capita productivity when measured in US dollars is going to rise, as is the GDP since it is targeted by the Federal Reserve Bank.
If America ever repaid the debt, the money supply would contract violently due to the sheer quantity of debt outstanding.
What that means is that productivity would have to be gauged by actual return on capital employed and this ideal is completely lost in the current Keynsean Neoclassical School of economics.
GDP cannot rise if the government pays off the debt, any more than money is created when I pay off my personal debts.
This epic contraction in the money supply (at the consumer level) through prudent repayment of debt is what the current administrations trying to avoid at all costs.
It means that America would be forced to own up to the fact that a non-industrialized economy relying on consumerism vs production (for GDP growth) cannot effectively and productively absorb capital, so the only way to RIG the system is to continue borrowing and spending so that productivity has the appearance of growth.
Shawn A. Mesaros is managing director of Pacific Asset Management.
This is called "money creation" since the borrowings did not exist before.
This "new money" buys maybe productivity and I get a return on that productivity. When that debt is repaid, I am destroying money by removing it from the system and repaying my principal.
The government borrows heavily in recession, saying that this activity is good for the country, that it saves jobs, etc.
And yet after the recession, the debt is not repaid and somehow this "productive pursuit" was good for America.
What we see here is that the more spending that is not repaid, the greater the amount required the next time.
In fact, the current scenario is much worse since while Americans deleverage or are at least supposedly attempting to deleverage, we have a government that is going the other way, and at light speed.
Printing money
Why would this happen?
Repayment of principal and reduced borrowing destroys money, so the government, in an effort to keep prices higher and create the fiction of well-being, prints a boatload more money to match the repayment of principal elsewhere, and make up for the loss of economic activity through sheer printing of money for itself.
This policy doesn't actually help America, as it has been sold for so many decades. It primes the pump for future elections, and yet one must continue to consider the biology of this grand money experiment inflicted on the American People.
If repayment of principal is then considered the destruction of money in the banking system, and if that repayment is considered good for each individual American, then what in the name of sanity is the government doing permanently racking up trillions of dollars in debt?
Especially when the American People are choosing to deleverage and save money, and when there's a clear inability of the American taxpayer to actually repay the principal on the debt that the government has foisted up the American public?
Recessionary spending should be called what it truly is - a permanent tax on the system as a whole. Not some "transitory thing" like a home loan that is paid off, or a small student loan to help someone get through college. These kinds of debts are "retired" through productive pursuits, and then typically, in a stable society, not normally re-created in the same form.
Politicians would say that "recessionary spending enhances the effectiveness of government" to which I would counter that "recessionary spending effectively pillages the sacred altar of individual sovereignty which all Americans view as a birthright, as Americans."
Illusion of benevolence
And yet sadly, with each successive economic cycle, each successive (and greater) borrowing binge, that "historic" view of individual sovereignty as an American is probably going the way of the idea of "gold as money," which from 1981 to 1994 was in decline, only to outperform almost all major asset classes for the next 18 years.
Recessionary spending creates the illusion of government as effective, politicians as benevolent, leadership as visionary, for what? Four years?
I can spend someone else's money for four years and look like a genius as well, but then I get to leave office with a lifetime pension paid for by the electorate! Wait. You can't make this stuff up. It's true.
At the rate of ludicrous borrowing and spending, America does not have 18 years to figure out the path of truth (and borrowing) again. All sovereignty is extinguished when you cannot pay the debt you have created.
Ask Europe, try calling them on the phone to ask what happened, but their telephone lines have been disconnected for failure to pay. Government creation of prosperity through borrowing on behalf of their taxpayers is a centuries old, well-tested falsehood.
So long as there's more per capita borrowing in America, the per capita productivity when measured in US dollars is going to rise, as is the GDP since it is targeted by the Federal Reserve Bank.
If America ever repaid the debt, the money supply would contract violently due to the sheer quantity of debt outstanding.
What that means is that productivity would have to be gauged by actual return on capital employed and this ideal is completely lost in the current Keynsean Neoclassical School of economics.
GDP cannot rise if the government pays off the debt, any more than money is created when I pay off my personal debts.
This epic contraction in the money supply (at the consumer level) through prudent repayment of debt is what the current administrations trying to avoid at all costs.
It means that America would be forced to own up to the fact that a non-industrialized economy relying on consumerism vs production (for GDP growth) cannot effectively and productively absorb capital, so the only way to RIG the system is to continue borrowing and spending so that productivity has the appearance of growth.
Shawn A. Mesaros is managing director of Pacific Asset Management.
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