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.

There's more at the link.

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