by Brian Maher, via Silver Doctors:
“how much more debt the American Republic can absorb before the entire business turns sour. The national debt has…”
Saturday last we offended the pieties.
We reckoned that democracies — being shortsighted — tend toward vast accumulations of debt.
In response, reader Tom B. dealt with us as follows:
The committed ignorance of pseudointellectual arrogance and their refusal to take an economics class on the uses of the FIAT dollar is stunning! It’s the reason Warren Buffet [sic] smiles every time “financial experts” demagogue debt!
Congrats, Daily Reckoning, you’re consistently ignorant!
It is with high honor that we accept Tom’s congratulations.
True consistency is a rare feat in this world… even if consistently ignorant.
Thus we wear the garland proudly and — if you’ll forgive the expression — we are in our reader’s debt.
Of course, we do not question the utility of the fiat dollar… or of debt.
As our co-founders Bill Bonner and Addison Wiggin argued in their best-selling Empire of Debt, the United States built an entire empire upon it.
Only a debt-backed system of fiat money could finance the great wars, the great social improvements… and the greater economic booms.
Fiat money was made for public service.
It is civic-minded. It has a heart. It does what it’s told.
Whatever war, whatever boondoggle, whatever swindle it is ordered to get behind… it will get behind.
“Whatever you need, I’m here for you,” it seems to say.
And fiat money willingly sacrifices its value for the greater good.
The dollar has lost some 80% of its value since Nixon severed its final linkage to gold.
Gold, conversely… is as public-minded as a cat.
The greater good is beyond its care. It lacks all human compassion. It moves at its own leisurely pace.
And it is remarkably unsuited for war.
“You go over there,” gold tells the fiat dollar. “I’ll stay here.”
And unlike its self-sacrificial fiat counterpart… gold guards its value with vengeance.
Its limited quantity, therefore, forms a natural brake upon credit.
And as the right-thinkers tell us, credit must continually expand to “grease the wheels of industry.”
In summary, explain Messieurs Bonner and Wiggin:
The trouble with gold is that it turns its back on world improvers, empire builders and do-gooders… The nice thing about gold is that it is so unresponsive. It neither laughs nor applauds.
Nor do we laugh, nor applaud.
Or do much of anything else.
We simply watch — stupefied — and wonder.
We wonder, for example, how much more debt the American Republic can absorb before the entire business turns sour.
The national debt has nearly doubled since 2010. It presently rises above $21 trillion.
Total U.S. public and private debt runs to some $68 trillion.
Has productivity kept pace?
Alas… it has not:
Real U.S. GDP growth has averaged 2.16% since the end of the Great Recession — far beneath the typical 4.3% post-recession average since WWII.
Real GDP has also endured a record 11 consecutive years without 3% growth.
It is working on 12.
A dollar of debt just doesn’t do the duty it once did… when debt was but a trifle.
Assume, if you can somehow, an economy unburdened by crushing debt.
In this economy the miracle multiplier of debt could make a case for itself.
One dollar of debt might transform the cup of water into the quart of wine.
But the debt begins to mount… and each new drop of water yields less and less wine.
Ultimately comes the point when water not only yields no wine… it actually starts turning the whole business to vinegar.
Economists Carmen Reinhart and Kenneth Rogoff have shown that annual economic growth falls 2% per year when the debt-to-GDP reaches 60%.
When it hits 90%… they conclude one dollar of debt yields less than one dollar of output.
Debt no longer lifts… but drags.
What is America’s current debt-to-GDP ratio?