“Stop Worrying and Love The Deficit”

The prettiest plums dangle tantalizingly before us…

Universal Medicare, a Green New Deal, tuitionless college, guaranteed employment at a minimum $15 per — all are within grasp.

Cowardly Democrats need only summon their courage… and seize them.

This we learn from progressive Marshall Auerback, scribbling piously in The Nation.

From “Why Democrats Need To Stop Worrying And Love The Deficit”:

Delivering on big progressive ideas like Medicare for All and the Green New Deal will never happen until Democrats get over their fear of red ink.

This fellow continues in the same sweet, soaring… and foolish melody:

Progressives could do worse than embrace the sentiment… that “extremism in the defense of liberty is no vice, and…moderation in the pursuit of justice is no virtue”… progressives should be mindful that deficit spending in the pursuit of a prosperous economy that works for all is no vice, and fiscal moderation in the pursuit of social justice is clearly no virtue.

Here, in one gorgeous paragraph, we find the distilled hopes and dreams of our world…

The Modern Pursuit of Alchemy

These hopes and dreams are:

That the alchemy of lead into gold is real, that the print press unchains prosperity…

That the free lunch has actual existence and that Say’s law — that supply creates its own demand — does not.

In words other, that something can truly be gotten from nothing.

1,000 times slain, strangled, murdered, lowered six feet down… 1,001 times this gorgeous fiction has risen six feet up, alive.

And why not?

What is more tempting than heaven without hell, pleasure without pain, wealth without work?

Indeed, what is more tempting than something for nothing?

Individuals, business and governments, all hear the siren’s beautiful cry.

But none is driven madder — none is lured so unerringly to the rocks — than the government of the United States…

De‌bt Binds Most Governments

All governments incline naturally to de‌bt, as all governments incline naturally to roguery and rascality.

But most governments are limited in the amount of de‌bt they can pile up… and thus limited in the swinishness they can get up to.

That is because extreme inde‌btedness would ultimately bring creditors down upon them.

These creditors would question these governments’ ability to make good on their de‌bts.

Interest rates would soar. And the cost of de‌bt would weigh upon the issuing government… as a millstone around the neck weighs upon the posture.

These governments cannot print their way out without sinking their own currencies. Hence they are boxed in.

But the United States government is unlike most governments. For it enjoys the “exorbitant privilege”…

A License to Print Nearly Unlimited Money

The United States fields the world’s premier reserve currency. And the world runs a bottomless appetite for its dollars.

Up to 80% of all international trade is invoiced in dollars. And nearly 40% of the world’s de‌bt is issued in these same dollars.

The United States can therefore run the presses at a clip truly astonishing, without fear of overissue.

And despite America’s heroic go at the print press, its debt has scarcely cost less.

Current yields on its 10-year Treasury bond scrape along under 2%. Yields on its 30-year Treasury run barely higher.

De‌bt has therefore proven a painless gain, a windfall, a wholesale blessing.

Tally the advantages de‌bt offers the United States government…

And it can no more resist de‌bt’s pull than a cat can resist catnip, a bee can resist honey… or a moth can resist the flames.

Toward these flames the United States is likely going. Here is the largest trouble with its de‌bt:

It is largely unproductive.

Keynes’ Warning

John Maynard Keynes put the theory of deficit spending into general circulation. The magic of deficit spending can revive the animal spirits… and set the idle machinery of industry whirring.

But deficit spending was not an open-ended warrant for government extravagance.

As Mr. Lance Roberts of Real Inves‌tment Advice reminds us, Keynes placed a hard condition upon it…

Keynes insisted each dollar of de‌bt give off an economic bang.

That is, Keynes wagged his finger… and insisted that each dollar of de‌bt yield a positive return on investment.


John Maynard Keynes’ was correct in his theory that in order for government “deficit” spending to be effective, the “payback” from investments being made through de‌bt must yield a higher rate of return than the de‌bt used to fund it.

But the vast majority of United States government spending fails Lord Keynes’ exacting test.

“Country A” vs. “Country B”

The United States government appeared before the cre‌dit markets last year, held out its hat … and borrowed $986 billion to make its funding shortage good.

But the lion’s take of these borrowings went to “social welfare” and to service existing de‌bt.

That is, it went largely to non-productive uses. And so it brought down… rather than lifted up.

Here Roberts cites Woody Brock’s American Gridlock:

Country A spends $4 Trillion with receipts of $3 Trillion. This leaves Country A with a $1 Trillion deficit. In order to make up the difference between the spending and the income, the Treasury must issue $1 Trillion in new de‌bt. That new de‌bt is used to cover the excess expenditures but generates no income leaving a future hole that must be filled.

Country B spends $4 Trillion and receives $3 Trillion income. However, the $1 Trillion of excess, which was financed by de‌bt, was invested into projects, infrastructure, that produced a positive rate of return. There is no deficit as the rate of return on the investment funds the “deficit” over time.

The United States is not “Country B.”

And as Roberts reminds us:

As this money is used for servicing de‌bt, entitlements, and welfare, instead of productive endeavors, there is no question that high de‌bt-to-GDP ratios reduce economic prosperity over time. In turn, the Government tries to fix the “economic problem” by adding on more “de‌bt.

Russian Roulette

Evidence indicates any de‌bt-to-GDP ratio above 60% courts risk. Any ratio above 90% plays roulette of the Russian sort.

What is the United States’ de‌bt-to-GDP ratio?


Meantime, real United States GDP growth averaged 4.3% following each post-WWII recession through the end of the century.

Yet since the end of  the Great Recession — after the government piled up trillions of de‌bt — real GDP growth has averaged a mere 2.16%.

Like a tick infinitely and obscenely engorged by blood, the American economy is infinitely and obscenely engorged by de‌bt.

And as this grotesque insect Dracula has little capacity to expand… the American economy has little capacity to expand.

Next comes this question:

How heavily has de‌bt’s dead weight sat upon the American economy?

De‌bt’s Drag on the Economy

Roberts had a go at the numbers:

Another way to view the impact of de‌bt on the economy is to look at what “de‌bt-free” economic growth would be.

For the 30-year period, from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period.

And today?

Today, with the economy expected to grow at just 2% over the long-term, the economic deficit has never been greater. If you subtract the de‌bt, there has not been any organic economic growth since 1990… In other words, without de‌bt, there has been no organic economic growth.

No organic, de‌bt-free growth since 1990 — can you imagine it?

And why should it turn around now?

De‌bt stacks higher and higher. But GDP sinks lower…

2018 growth came it a serviceable 2.9%.

But Morgan Stanley forecasts real U.S. GDP growth will recede to 2.3% this year… and 1.8% in 2020.

Is There a Way Out?

Naturally and of course the Modern Monetary Theory crew has an answer:

To plunge deeper and deeper into de‌bt… on the belief it will bring us higher and higher up.

We believe precisely the opposite.

But is there a way out? Is there a solution to restore genuine American growth?

Tune in tomorrow…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning