## Wednesday, June 24, 2015

### The catastrophic reality of our economic situation

I've been arguing for years that our economic situation is simply unsustainable.  Years of deficit spending and massive government borrowing have left almost all the nations of the world in a parlous situation.  The USA is being sheltered to a certain extent, at present, from economic storms because while it's in a bad way, other major nations are in an even worse condition, so money is flowing to the apparent 'safe haven' of the dollar.  It's not safe at all.

Karl Denninger has just pointed out the obvious yet again.  He's done so many times before, but it looks like few, if any, people are listening.  It bears repeating, because what he says (and what I've been emphasizing) isn't a matter of opinion.  It's mathematical inevitability, pure and simple.

There is no means by which you can run an indefinite deficit.  It cannot be done, as that is an exponential series.  All exponential series that have a growth rate greater than 1.0 (that is, any positive growth rate), over sufficient time, end in disaster.

Always.

Every time.

You need to prove this to yourself.  Use Excel, Google's free "on the net" spreadsheet, whatever.  It takes a literal 2 minutes to construct a spreadsheet such as this:

A1 (first cell) = 1.0

A2 (second cell) = \$A1 * 1.03  (3% growth)

Then copy A2 and paste it down the line for a few hundred cells.

Now graph that.

Notice that for any value in B1 over 1.0, no matter how small, the graph eventually does the same thing -- it runs away from you in an uncontrolled upward explosion.

. . .

This is the reality of deficit spending, it is the reality of claimed "infinite" GDP growth, it is the reality of inflation that is allowed to occur at any positive rate, it is the reality of health care expense expansion, home price expansion, stock price expansion and so on.

It never ends any other way because it mathematically can't end any other way.  Before it ends this way each and every time someone figures it out and the market collapses.  This is the definition of a bubble and it is why they always pop.

Any exponential increase in spending and/or borrowing, no matter how big or how small the exponent may be, must inevitably end up with the same result over time.

We're borrowing hundreds of billions of dollars each year to fund our government's deficit spending.  Those supporting this practice argue that if we didn't, 'entitlements' like welfare, Medicare and Medicaid, etc. could not be funded.  They ignore the reality that sooner or later, the 'borrowing bubble' must inevitably burst - and then we won't be able to afford to fund those things at all.  We face a simple choice.  Live within our means now . . . or go bankrupt.

(Click each of the graphs above to be taken to their source pages for more information, if you wish.)

Compare the curve in the last graph above to Mr. Denninger's example of an exponential curve.

See the resemblance?

That's mathematics.

That's reality.

Yet I see no way on earth that our politicians (of either party) will do anything to actually govern according to that reality, because they don't care about reality.  They care only about being re-elected and retaining their positions of power.  They're all kicking the fiscal can down the road, in the hope that by the time that becomes impossible, they'll have retired and be enjoying their fat-cat pensions and all the money they made while in office.

We're the ones who'll be left carrying the can.

Peter

Divemedic said...

It's even worse than your sources indicate. The graph that shows a budget surplus in the 90's? That is the biggest lie of the Clinton Presidency. The only way that anyone can claim that there was a balanced budget under Clinton is to ignore the fact that the government raided the Social Security trust fund to balance the budget. They claim that since SS is "off budget" money, that it doesn't count.

Google the term "debt to the penny" and use the tool to lookup the debt during the Clinton years, and you will see that the National Debt went up every single year he was in office.When it is claimed that Clinton paid down the national debt, that is patently false, the national debt went up every single year. What Clinton did do was pay down the public debt--notice that the claimed surplus is relatively close to the decrease in the public debt for those years. But he paid down the public debt by borrowing far more money in the form of intragovernmental holdings (mostly Social Security).

It isn't just one party. Ford, Clinton, and Carter each oversaw a 150% increase in the debt. Reagan, and both of the Bush presidents were responsible for the oversight of a doubling of the debt. Obama will likely double it as well (\$10.6 trillion when he started, and \$18.1 trillion now, despite the fact that the Fed is monetizing the heck out of the debt)

Eaton Rapids Joe said...

Most people expect the future to be a smooth continuation of the past. It is akin to driving while looking in the rear-view mirror of the vehicle.

The Thanksgiving Turkey never has more proof of the eternal benevolence of the farmer than on the Wednesday before Thanksgiving.

Depending on their age, those who do not study history feel betrayed when the unfolding of events deviates from the dominant pattern of the past 15-to-50 years.

Math is a beautiful thing. It gives us a larger lens than our own personal history.

Da Curly Wolf said...

yep it's coming time to pay the piper, and we ain't got nothing but lint in our pockets.

Da Curly Wolf said...

hmm put it another way that gets me in trouble and people hate me for.
Money is only worth what it is because of belief. Because the government tells us so. Soooo.. What happens when people no longer believe?

Tal Hartsfeld said...

Da Curly Wolf:
You are ever-so-right!
Money and the financial institutions are ALL essentially artificial man-made concoctions, all brought to "life" and kept "alive" by imagery and collective agreement.

Uncle Lar said...

But when they took the funds out of the Social Security trust they replaced them with good solid government bonds backed by the full faith and credit of the US government.
Actually typed that with a straight face.
Congress simply could not stand the thought of all that lovely money just sitting there so they did a bait and switch. I liken it to parents raiding their kid's college fund for money to buy beer and smokes and leaving paper IOUs in place of cash.
The other scary detail that never gets mentioned is that up until 2013 Social Security ran a surplus. In that year we hit the break point where more goes out than comes in. So some of those US promissory notes have to be cashed it just to pay the bills. The money to do that comes from the yearly federal budget.
And that is how the one time cash cow has suddenly turned into a liability

Unknown said...

If it wasn't for runaway inflation this fake government would already be broke. Only the devaluation of the Dollar lets these retards keep borrowing more money. Either they go broke or you do. There is no other way. The idea that giving bums money for alcohol and whores to breed more criminals is an investment is such a Big Lie that even Lenin would be embarrassed. Investment? In what? That police state they want is going to blow up in their face. Nobody is going to be able to fix this now.

Rolf said...

You have it all wrong.

Yes it blows up eventually. But politicians only have to get elected in 2, 4, or 6 year chunks. Anything past that is, to their calculations, utterly irrelevant. Anyone getting on late in the curve can (with some justification) blame his predecessors, and he just needs more time and money to fix the problem.

Our political system, our tax system, and our education system ALL have a very high stress on very short-term thinking. The future is the weekend, next month, the end of the fiscal quarter or semester or next election cycle. anything else simply doesn't matter to them.

That fact that it blows up eventually is as meaningless to a pol or the average guy in the street as decades are to a toddler.

"Eventually" is semantically equivalent to "not within my give-a-shit time horizon."