Both metals prices and markets rose today briefly on the heels of expanding expectations that Chairsatan* would rush to the rescue with a new round of Quantitative Easing (QE3). When the Fed failed to show its hand early , metals prices dropped sharply . (Facebook, never one to follow the leader, fell to a new low of $25.55, having lost nearly 33% of its initial “value” over a period of three weeks. Wow.)
Europe is in deep, unrecoverable trouble and even supposedly mainstream economists like Paul Krugman have begun to have a few spurting bouts of honesty, causing them to mistakenly speak the truth on our economic misfortunes. Not to be fooled twice, Krugman is now back at his old game of claiming that the current economic problems are a result not of excessive debt, but of too little borrowing. From his NY Times column, Conscience of a Dumbass :
Since Estonia has suddenly become the poster child for austerity defenders — they’re on the euro and they’re booming! — I thought it might be useful to have a picture of what we’re talking about. Here’s real GDP, from Eurostat:
Yes, it does pass for economic triumph considering that Estonia has used the interim to balance their budget and thereby ensure their future success. Rather than engage in nonsense stimulus measures, which place a burden on unborn generations for mediocre short-term gain, Estonia has actually taken the time to remove their own shackles and they did it while sticking with the Euro. The result of this ‘purge’ was to achieve economic growth of nearly 7% – more than three times the growth seen in the United States and Europe over the same period.
The problem with economists like Krugman is that they’re the worst kind of financial drug addicts – the answer is always to spend more, borrow more, “invest” more, and to focus on now. Krugman will continue to call for more borrowing and spending until the next fix arrives, scared to death of having to go through the moderate withdrawal ‘reset’ that Estonia experienced in early 2010 (and which TBP has advocated since its inception). The catch, however, is that this charade simply cannot continue forever, despite Krugman’s iconic, Yale- and MIT-educated, celebutard status among the elite wizards of global economics.
To his credit, the President of Estonia responded to Krugman over Twitter :
To grasp just how serious and prolific the Keynesian mental disorder has become in this country, consider the words of Larry Summers, a former Treasury Secretary and economic adviser to President Obama, as written in a Washington Post piece entitled, “It is time for governments to borrow more :”
The question is not whether the current policy path is acceptable. The question is, what should be done? To come up with a viable solution, consider the remarkable level of interest rates in much of the industrialized world. The U.S. government can borrow in nominal terms at about 0.5 percent for five years, 1.5 percent for 10 years and 2.5 percent for 30 years. Rates are considerably lower in Germany and still lower in Japan…
These low rates on even long maturities mean that markets are offering the opportunity to lock in low long-term borrowing costs. In the United States, for example, the government could commit to borrowing five-year money in five years at a nominal cost of about 2.5 percent and at a real cost very close to zero.
So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position, even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates. They should accelerate any necessary maintenance projects — issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate.
This belief in perpetual debt issuance is, in the face of continual failure, nothing more than a mental disorder. Bernie Madoff went to prison and his son committed suicide over this exact same brand of economic thievery in late 2010 . The difference is that the federal government can run this scam perpetually with no immediate consequences.
Make no mistake, however – the game of continual debt issuance is a Ponzi scheme. New debt is issued to pay the old debt. Period.
The fallacy of “borrowed prosperity” is exactly what has gotten us into this mess in the first place and is the most important reason that Barack Obama must be removed from office come November. If he doesn’t see it by now, he never will, and he will only continue to pound the car further and further into the ditch. The President deserves absolutely no attention whatsoever when it comes to economics because the data to diffuse this farce is publicly available through his own Federal Reserve . Over the period from 1970 to 2012, increases in federal debt have been touted as having a “multiplier” effect on GDP – in other words, borrow to prosper. The Fed data, however, tells a different story:
As debt was increased beginning in the late 1970s as a method of growing “prosperity” out of thin air, GDP rose along with it – however, the effect that increased debt has on GDP has continually fallen and today is just below parity (I have called this “debt effectiveness”). In other words, we are now entering a period in which every dollar of borrowed “wealth” will create less than a dollar of GDP growth. Our borrowing is making us poorer.
The same trend is also seen in which debt effectiveness continues to decline even while interest rates on 10-year Treasury Bonds falls at the same time:
While the U.S. could conceivably borrow a large fortune at historically low interest rates as Larry Summers has suggested (and which Nobel Prize winning profligate Krugman would undoubtedly support), we would be doing so at a loss, even in spite of Summers exception for spending the borrowed money on items which offer a return greater than the cost of the loan (and which would therefore “create” wealth):
This logic suggests that countries regarded as havens that can borrow long term at a very low cost should be rushing to take advantage of the opportunity. This is a view that should be shared by those most alarmed about looming debt crises, because the greater your concern about the ability to borrow in the future, the stronger the case for borrowing for the long term today [face palm].
Any rational business leader would use a moment like this to term out the firm’s debt. Governments in the industrialized world should do so too.
The problem is that when government borrows money, it routinely avoids spending the money on items of future value and instead spends them on things like unemployment insurance, welfare, and food stamps – all things which historically had been provided by family and community, not an all powerful federal government. Borrowing money at low interest rates, spending it on short-term “feel good” crap, and claiming to have become “wealthy” in the process is akin to borrowing a shotgun, shooting yourself in the face, and dragging your ventilated carcass back to the ranch claiming to have “caught a big one.”
In love of liberty,
The Bulletproof Patriot
* Chairsatan is a moniker established by ZeroHedge for Federal Reserve Chairman Ben Bernanke. It is quite fitting considering his principle job requirement is the silent destruction of trillions in current and future wealth. Note – The image of Chairsatan was found on Flickr and is not original to TBP.