Courtesy of Michael Panzner of Financial Armageddon
In "On Borrowed Time," Barron's columnist Randall Forsyth further undermines the notion that persistent public profligacy can solve our problems:
Heavy debt loads slow the U.S. economy now and pose threat to the future.
Can a stimulant become a depressant? As with alcohol, government borrowing and spending initially can give a boost, but later becomes a drag. America has hit the downside of that progression.
So says Lacy H. Hunt, chief economist of Hoisington Investment Management (whose eponymous head, Van R. Hoisington, recently was interviewed in the print edition of Barron's.) The deficits that had aimed to stave off a rerun of the Great Depression after the 2008 financial crisis now are having a depressing effect on the U.S. economy, Hunt contends.
Many mainstream "analysts" would argue otherwise. In their view, even though the economy has yet to recover in any meaningful sense of the word, it's only a matter of time before the torrent of debt-financed pump-priming yields the intended results. Moreover, some would undoubtedly claim that the twitches of activity we've seen in the auto sector, for example, and in other areas of the economy are a sign that Keynesianism is working. Unfortunately, those views don't quite square with reality. In fact, writes Forsyth,
the opposite is happening. The multiplier from government spending is no better than zero, Hunt says on the basis of econometric evidence. If the economy is "shocked" with a deficit, gross domestic product will get a lift for three-to-five quarters. After 12 quarters, however, the original stimulus is spent, literally and figuratively. But the debt that was incurred to finance the spending remains, and has to be repaid, with interest. That requires a shift of assets from the private sector to the public sector.
Japan provides an example of this process. That nation's government debt has expanded during its "lost decades" to 200% of GDP from 50%. Meanwhile, nominal GDP in yen terms is basically unchanged. In other words, Japan's debt has quadrupled but has nothing to show for it — except higher interest costs, which has to come out of the private sector.
Hunt cites the now-familiar conclusion that debt-to-GDP ratios over 90% retard growth from economists Kenneth Rogoff and Carmen Reinhart, authors of the popular This Time is Different: Eight Centuries of Financial Folly, who also presented that conclusion in a 2010 National Bureau of Economic Research working paper, Growth in the Time of Debt.
Hunt also points to an even more exhaustive study on the effects of debt from Stephen G. Cecchetti, M. S Mohanty and Fabrizio Zampolli from the Bank for International Settlements, presented at the Federal Reserve's Jackson Hole confab last year, The Real Effects of Debt , which takes into account the retarding effect of not only government but also corporate and household debt. Those imply "that the debt problems facing advanced economies are even worse than we thought," especially when unfunded future liabilities in the form of promises given by governments in retirement and medical benefits are counted.
Of course, if ivory-tower instilled dogma suggests something different, it's OK to ignore reality — right?
