Public Debt=Lower Growth

The chart below should not be surprising to anyone who understands economics. But it needs a bit of explanation. It is not debt itself that produces low growth rates. It is what the debt is used to finance that creates low growth. You would not see this same relationship with regard to corporate debt. That's because private debt is usually incurred to finance economically productive projects. Public debt is usually used to finance economically UNproductive projects -- like transferring money to less productive people and "green" projects that have negative ROIs. 

The Myth of Stimulus Spending

Edmund Phelps. Nobel Laureate in economics, debunks the Keynesian notion that "fiscal stimulus" helps economies recover form recessions. If that were the case, countries that had larger debt (stimulus) would have recovered faster than those that implemented dreaded "austerity" budgets such as Spain, Portugal and France. Big deficits did not speed up recoveries. In fact, the relationship is negative, suggesting fiscal profligacy led to contraction and fiscal responsibility would have been better.

Yet, the next time we have a recession, count on the willfully ignorant in government and the media to call for more "stimulus".

If Everyone Spent Like the Government

If you're having trouble relating to the huge numbers involved in government budgets, this chart might put it in perspective. The only thing that's misleading about this is that no lender would increase your credit line every year if you had $300,000 in unsecured debt. They would tell you to be responsible with your spending and learn to live within your means.

Why It's Not Realistic to "Grow Your Way Out of Debt"

You've heard it said often. It also seems to be the premise of the Federal Reserve's "quantitative easing". Debt is not all that onerous if you can grow your way out of it. This is actually a true statement. But is this a plan for the US economy or just a wish?

Total debt in the US -- government, corporate and private -- is $58 trillion.

Total GDP in the US is $18 trillion, but $6 of that is government spending -- taking money from the production of the private sector and spending it on  non-productive activities like transfer payments to Social Security and Medicare. So the part of the economy that actually produces value is about $12 trillion.

Assuming an annual interest of 2%, even if you could restrain annual debt increases to 3% of GDP a year, the productive part of the economy would have to grow at 5% just to stay even. When was the last time you saw the economy grow that fast for more than a quarter?

Now imagine that interest rates jumped to, say, 5% (the ten year treasury was at 5% in 2002). At that level almost a quarter of private sector GDP would have to be devoted to debt service to break even. Hardly likely. So it's pretty easy to see why the Federal Reserve keeps backing off its promise to reduce its funding and allow interest rates to rise. Where (and how) does all this end? 

Not Headed For Greece?

Below is a chart that sums up all of the present value of all government obligations expressed as a percentage of the country's GDP. Not just the current debt obligation, but all the unfunded promises the country has made for pensions and healthcare. As you're watching what is unfolding in Greece, take notes.