Brushfire of Freedom
The Irritable Pundit
Hello all!
The current and planned level of government spend is going to hurt -- and hurt bad. In fact, "stimulus spending" is going to hurt worse long-term than the recession will short-term. These are facts, indisputable and bare, yet rarely understood.
I've explained why multiple times, but the numbers are too large and when they get beyond a certain scale they are hard to intuitively grasp (as in a previous post on swine flu ). So, I must reduce the discussion to something more easily grasped. Oddly enough, reducing the complex to the simple is more difficult, but for the edification of all I will attempt to do so, as we can not afford to let time and bitter experience be our guides. To quote Louis Hector Berlioz, "Time is a great teacher, but unfortunately it kills all its pupils."
First, a guide and basic education as to the method used in this attempt, "colorful bars without pesky numbers". The reason I am doing so is because the TV talking heads do not understand half of it on a good day, and the economists who do understand rarely are able to explain in the 15 second alloted sound-bite. In fact the constant noise and arguing of this percentage or that percentage frankly turns off most people and confuses the rest until no one has a clue what is actually going on. This allows for a potential BS factor that is staggering. The critical numerical needle slips by you in a haystack of shouted derivatives and potential future indexes.
Quickly though, a few caveats:
1) Yes, the below bar charts are a gross, almost criminal, simplification (though if described as percentages they are not terribly far off))
2) I am well aware that the %s change year to year, and that consumer confidence plays a factor but that you have to use an assumption set that... blah blah blah.
Arguing those points is why people tune out, and we can't afford that any longer. Think of this as the big picture, OK champ? But if you still want to argue:
1) drink a gallon of gatorade
2) think about waterfalls for an hour
3) hang a rope from the ceiling and empty your bladder
4) note: the preferred direction is up
You are cordially invited to give it your best shot every-time you feel like arguing some minor mathematical median.
Why yes, I do live up to my blogging name! How nice of you to notice!
So, lets take a question that is asked every now and then by astute observers just to get used to the process. "How did the US economy grow past and lap the once-leading Europeans?" Simple, in the US, the government was not sucking all the available cash from private enterprise. This allowed a greater percentage of capital to be put towards risk, which allows for growth (government spending does not create growth). So lets look at the GDP of the US and the EU and the effects of government spending on each. For those unsure about the GDP (Gross Domestic Product) think of it as wealth/value output, created or generated, in any given year. In other words, while it isn't all liquid (cash), think of GDP as the annual salary of a nation.
Figure 1
Figure 2
Figure 3
Figure 4
Now, without a single number used, can you grasp why the US economy outpaced the European? You can? Well done!
Let me be clear (sorry, couldn't resist), wealth is not a zero-sum game (outside of socialist dogma), there is only so much produced in any given year (think: cash flow). However, the private sector has reserves saved from previous years. This is critical as that wealth is consolidated in order to fund growth via loaning and guaranteeing larger sums than would otherwise be available in any single given year. This dear friends is a bank, or investment firm. But the key point here is that lendable money is static to the point at which you borrow -- in other words, there is only so much available at any one time.
So what happens when a government spends billions more than it has, but is either temporarily in a cash-crunch or wants to hide the impact from current (and perhaps retributive) voters? Simple, deficit spending, also known as "Buy it now! Pay later!"
Now to be fair, borrowing money to pay for things you can not afford in cash is fine so long as:
1) you have a reasonable expectation that you WILL be able to afford it long term
2) the interest is something you can handle, and
3) so long as you do not borrow too much, and can still pay day-to-day living expenses and the like.
Nothing wrong with it, you bought your house like that after all.
But what happens if you borrow too much? Well, banks won't give you a low-interest loan anymore will they? Hmmm, Nope. And the credit cards in your wallet suddenly change to very high interest rates. What if you then max those cards anyway? Long term you are in a world of hurt as you may never get out of debt. What if you were insane and still wanted to borrow more? Not much left other than IOUs to loan sharks. Eventually even they will refuse and demand the money ...NOW. Just so you know, at a government level, such borrowing is done via treasury bonds and debt obligations of various forms.
On to the present situation. What Obama has done is spend so massively (unfunded/unpaid for), with money we do not have and truthfully do not expect to have anytime in the near or distant future, that there is no way to pay for it short of massive taxation for decades. The interest rate will be so high and sums borrowed are so massive that paying the interest alone each month will be devastating.
That black line is the amount your children and grandchildren will have to pay for the pork we are getting today, and it will get bigger and bigger each year. For the record, America's loan shark is known as China. Sleep well.
"But wait IP! Can't we, you know, grow our way out of this?"
The only way to grow enough to do so would be to increase the capital actually available for growth. That is, to increase the amount of cash in the hands of citizens so they, the engine of growth, can risk and win gains (please refer to the first few graphs). That would require us to cut taxes. But that is the exact opposite of Obama's plans. As taxes have to be raised (on our children) to pay for the stimulus and all of his spending increases. Hence the point about the stimulus being more devastating to us in the long-run than it could possibly be helpful in the short-term (even if it were not just pork). I should also point out that, as the long term capital markets have only a limited amount of cash to loan at any one time, the government taking more out limits the amount available for private enterprise to pay for new factories and jobs. You know, slowing that whole pesky "growth" thing yet again.
Now, does everyone get it? Do you understand the basic problem?
Good! My work here is done, for another week anyway.
By the way, because of the cash taken out of the capital markets, the plans for Cap and trade and the government take-over of healthcare will be as lethal to long-term growth as Obama's plans are for seniors. If you read and grasped the above you should now understand why without another graph. But just in case:
I could of course mathematically breakdown the amount we are screwed (# of promises x (BS⌃n/copulation index) *(√ amount stolen)), but I promised no numbers.
Cheers!
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