The Lost Secret to U.S. Growth

Year-over-year federal revenues have declined 1%.

Yet year-over-year federal expenditures have increased 36%.

This we learn from the Bipartisan Policy Center, so-called.

And so the Empire of Debt plunges deeper into debt’s abysmal black depths. It will never surface of course.

We find it instructive that the German word for debt — schuld — is a synonym for guilt.

Debt equals guilt, guilt equals debt.

It implies that a man in debt is under a sort of moral indictment. Something within his liver and lights whispers that he has sinned.

It is nagging and hectoring angel perched upon his shoulder.

It comes as no surprise then that the German government — by edict of law — requires balanced budgets.

Intake and outlays must come into unity, or very nearly so.

Debt Is Virtue?

Contrast the German example with the American example. Debt does not equal guilt… but rather something approaching the opposite.

Debt represents a high virtue — a very pillar of national power. Did not Alexander Hamilton himself thunder in defense of a national debt?

A modest national debt may pose little to no hindrance. In certain instances it may even yield sweet fruit.

But when a nation’s debt-to-GDP ratio rises to a delirious 125%?

It yields neither fruit nor wine — but vinegar. It represents an active malignancy.

The nation is too fettered up by debt to push along economically.

That economy may not collapse in the grand manner but instead gutter along, down with a sort of permanent influenza, with a general and bone-deep malaise.

We have just described the economy of the United States — in our telling at least.

The True Source of Prosperity

What is the source of enduring prosperity? As we have argued before:


“Productivity growth over the last 350-plus years,” says Michael Lebowitz of Real Inve​stment Advice, “is what allowed America to grow from a colonial outpost into the world’s largest and most prosperous economic power.”

American productivity growth averaged 4–6% for the 30 years post-WWII.

But average productivity has languished between 0–2% since 1980.

Meantime, labor productivity averaged 3.2% annual growth from World War II to the end of the 20th century.

And since 2011: Under 1%.

What might account for America’s receding productivity growth? Might it relate to old Nixon’s murder of the gold standard in 1971?

Less Gold, Less Productivity?

The gold standard, though a mere husk in its dying days, enforced an honesty.

A nation that consumed more than it produced would eventually deplete its gold stocks.

The fiat dollar removed all checks.

America no longer had to produce in exchange for goods… or fear for its gold.

Thus the Federal Reserve spat upon its hands, rolled its sleeves and set to fantastic and prodigious work. Lebowitz:

The stagnation of productivity growth started in the early 1970s. To be precise it was the result, in part, of the removal of the gold standard and the resulting freedom the Fed was granted to foster more debt… over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.

“Unfortunately, productivity requires work, time and sacrifice,” he adds.

It is true. It does. Alas, the slow grind of productivity yielded to the lure of the fast buck.

But the free lunch has no existence. Debt comes affixed to a price tag.

Stealing From the Future

A debt-based economy steals from the future to satisfy today’s wants. It brings tomorrow’s consumption forward to today, that is to say… and leaves the future empty.

Daily Reckoning contributor Charles Hugh Smith:

Debt has one primary dynamic: Borrowing money to consume something in the present brings forward consumption and income…

If we choose to consume now, we have less income to save for future consumption or investments. If we sacrifice consumption today, we have more money in the future for consumption or investing…

Those who brought their consumption forward can no longer add to present consumption, as their future income is already spoken for.

We dare say we have entered that empty-cupboard and bankrupted future. It is currently the present.

Debt has been used to gratify today’s wants. It has been devoted largely to consumption — not productive investment.

Fifty years ago, $1 of watery debt yielded perhaps $4 of economic wine.

And today?

Every borrowed dollar since 2008 may have yielded under 40 cents.

That is, today’s borrowed buck yields perhaps 1,000% less wine than 50 years ago.

It has ceased to be wine. It is vinegar. We gulp not wine but vinegar.

Where Will Productivity Come From?

“If debt were used for productive activities,” concludes the abovesaid Lebowitz, “economic growth would have risen faster than debt outstanding.”

Obviously… it has not. Here is the sting in the tail:

“Given the finite ability to service debt outstanding,” Lebovitz concludes… “future economic growth, if we are to have it, will need to be based largely on gains in productivity.”

But from where? We do not know.

Perhaps major leaps in technology can make the shortage good. Robotics, Artificial Intelligence and related wonders may furnish the difference.

We imagine it is possible. There is justice in this argument.

Yet as the tiger is chained to its stripes… we are chained to our skepticism.

We are not entirely confident in the technological savior.

Yet at this point a larger question presents itself…

America vs. Athens

Is it in the nature of democracies such as the United States to run down the nation’s finances… to attempt to lunch free of charge?

Perhaps it is not democracy as such to blame. Perhaps it is instead the character of a particular people.

Ancient Athens — by most rights a democracy — amassed a vast public treasury in its Golden Age.

That treasury remained unmolested until wartime, even though it was there for the asking.

The citizens of Athens were free to vote themselves it. Yet they did not.

Author Freeman Tilden, from his neglected 1935 masterwork A World in Debt:

At one time the Athenians had in their citadel more than 10,000 talents of silver [roughly $165 million in 2016 Dollars]; and what is more significant, they did not tap the resources until forced by the necessity of war.

Tilden cited 18th-century British philosopher David Hume, on the Athenian character:

What an ambitious and high-spirited people was this, to collect and keep in their treasury a sum which it was every day in the power of the citizens, by a single vote, to distribute among themselves!

Nor did Athens take to the swindle when it was in a bad way. It did not clip its coins. It did not debase its currency. Tilden:

The most brilliant democrats that ever lived, the Athenians, made tragic mistakes of policy… But with all their blunders, the Athenians never, as free men, indulged in the final madness of debasing their currency: They never became swindlers… Athens rose in trade by means of establishing good credit and by safeguarding the honor of her coin. In the most terrible years of her history, when the treasury was empty… she was indeed obliged to strike emergency coins of gold and bronze, but never consented to debase her coinage.

Has the United States safeguarded the honor of its coin? We might mention that:

The United States Dollar has shed some 95% of its value since the Federal Reserve went on duty in 1913.

Yet out of respect for the nation’s monetary authority and the high dignity of its office… we shall refrain.

“A Republic — If You Can Keep It”

Were the ancients hammered from nobler metal than us moderns? Had they greater virtue?

Mr. Ben Franklin was present when the Constitutional Convention concluded in September 1787.

Upon his departure from the old Pennsylvania State House, the fellow was supposedly accosted by a grand Philadelphia belle.

Legend claims she asked old Ben whether the assembled had bequeathed the people a monarchy — or a republic.

“A republic, Madam,” came his reply – “if you can keep it.”

Have we?

The Daily Reckoning