UPDATE: Holman Jenkins has a concise and insightful follow-up on this story in the WSJ.

The economics and political communities have recently gone bonkers arguing over details of a study that concluded economic growth declines as national debt reaches 90 percent of annual Gross Domestic Product (GDP). An acknowledged math error in the analysis is being used by Keynesians (borrowers and spenders) to undermine the credibility of the study. John Mauldin wrote a useful summary here.

I think something is missing in this supposed controversy, that being both common sense and reality.

Any analysis about the relationship between national debt and GDP is meaningless in the absence of accountability for the use of the debt and the means of paying it off.

If we borrow money to build a bridge that carries freight for 100 years faster than could be done in the absence of the bridge we have a winner. The carrying cost of the debt is expected to be more than offset over time by the efficiency (GDP growth) offered by the bridge. The same argument is made in support of the 1980′s military buildup credited with causing the Soviet Union to evaporate, leading to a very real peace dividend in the 1990′s as military spending contracted while the US economy grew like a daisy in Spring and the nation had annual budget surpluses from 1998 through 2001..

Borrowing money to expand food stamps to 20 million more people (which has been done) has saddled current and future productive citizens with the burden of principle and interest for the term of the borrowing in exchange for current consumption for those 20 million more people without any possibility of long term improvement in economic efficiency (GDP growth). Money borrowed to pay for the expansion of food stamp recipients comes from the private economy (or is created out of thin air and given a fancy name) but needs to be repaid with the product of productive enterprise in the form of future taxes that will be taken out of the private economy later. Any GDP impact of expanded food stamp consumption now is necessarily reversed upon taxation of productive endeavor to pay off the borrowing later.

This reality leaves us with anticipation of the BANG!, that being the point at which the level of debt and its use to fund current consumption on the backs of a dwindling supply of current and future productive citizens undermines the credibility of the currency to the point where the lenders go away, charge higher rates of interest, or simply don’t exist because they have put themselves in the same position.

What is it again that underlies the assured value of sovereign debt? Nothing much.

Regards, Pete Weldon
americanstance.org

The world wide focus on banks and related government regulation is only relevant to the extent governments lie, borrow beyond their current income, and print money. This focus results from government fabricated value undermining confidence in value actually earned from work and free exchange.

Understand clearly that bank regulations and government money printing have nothing really to do with human interchange (the fundamental force driving economics) and everything to do with the politics of satisfying constituents dependent on various forms of welfare (from corporate cronyism to food stamps).

Here is a juxtaposition worth consideration.

If you put your life savings in a Cyprus bank in 2008 you would have earned a modest amount of interest, now had at least 40% of your “uninsured” deposits confiscated by a European Union regulator to repay the pain caused by your Cyprus bank “investing” your deposits in supposedly “safe” Greek bonds, whose value was earlier propped up by the fact that the Greek government outright lied about their finances while the European Union regulator now confiscating your money forgot to check. Read that again.

You would have been better off putting your money in LVMH Moet Hennessy Louis Vuitton (MC.PA), a company that sells arguably frivolous and overpriced merchandize to people who value status more than substance. One could argue that LVMH is the most risky of investments because the stuff it sells is not essential or even needed, yet, the common stock of the company has grown from $85 USD per share in April 2007 to over $133 USD per share in April 2013 (an 8% annual return) and currently pays a 2.2% annual dividend. LVMH is not regulated by anything other than its credibility with its customers.

Hmmmm…..

Now, if you live in the United States you can certainly put your savings in a bank, but keep in mind that Mr. Bernanke’s assurances that your money is “insured” is based solely on his ability to inflate the money supply while he pays you nothing for incurring the risk (or is it a certainty?) that he is devaluing your savings by doing so. So where do you put your money when the government prints $85 billion a month in new money (now over $3 trillion in money printing) used to purchase bonds in the open market for the known purpose of manipulating interest rates in an effort to force private savers to take risk? This is a circular game that compounds and delays the consequences of the uncertainty engendered by the policy.

Herein lies the social justification for a strong currency. A currency that has a proven reputation for holding its value exactly because the government issuing the currency does not lie, does not borrow beyond its means, and does not print money stabilizes the value of private savings and increases trust needed to justify private risk taking, thereby creating jobs and opportunity for those willing to work.

Regards, Pete Weldon
americanstance.org