In the 21st century, western economies have faced an unsettling challenge: while gross domestic product (GDP) remains subdued, government debt has surged. This paradox has left many traditional economists scratching their heads, struggling to understand the scenario.
In the United States, since the dawn of the new millennium in January 2001, real GDP has risen from approximately $10.5 trillion to $18.6 trillion—a 77 percent increase. Meanwhile, government debt has skyrocketed by nearly 250 percent, leaping from around $5.7 trillion to $19.9 trillion. Clearly, a reckoning is necessary to restore fiscal balance.
During this prolonged period of economic instability, the government’s remedy for reviving the economy has involved borrowing money and spending it. So far, this approach has only succeeded in deepening the financial hole from which the economy must eventually emerge—a feat we doubt will be accomplished.
Essentially, the increase in government debt during this time has yielded diminishing returns. At the beginning of the millennium, the debt-to-GDP ratio was roughly 54 percent; now it exceeds 100 percent.
The notion that borrowing money to spend can effectively foster economic growth has become increasingly ludicrous. Nevertheless, governmental economists persist in promoting these policies, as they find no viable alternatives. Simultaneously, political dynamics may push the U.S. government toward a potential debt default.
Debt Ceiling Dilemmas
This week, the suspension of the Obama administration’s debt ceiling has ended, reestablishing a debt limit of $20.1 trillion. This new ceiling is just above the current debt level, and raising it will likely lead to a protracted Congressional struggle, complete with political theatrics.
There’s a chance that a new deal on the debt ceiling won’t be reached before the Treasury runs out of funds later this summer or early fall. This scenario would leave the U.S. government unable to fulfill its financial obligations. Even if a last-minute agreement is reached, the U.S. government’s reputation could suffer.
In the best-case scenario, a timely resolution would hinder President Trump’s plans to stimulate the economy through infrastructure spending and defense investments. It may also disrupt his tax reduction agenda, potentially igniting a long-overdue panic in the stock market.
Sustaining perpetual economic growth is essential for maintaining our current debt-driven lifestyle. A slight downturn, such as that experienced in 2008, can dramatically affect the lives of millions. Moreover, economic growth must occur at a pace that allows the populace to feel they are reaping the rewards of their labor.
The exact rate of necessary economic growth remains uncertain, but the U.S. economy in the 21st century has struggled to achieve it. A 3 percent annual growth rate would double living standards every 24 years, while a 2 percent growth would take 36 years.
Currently, the average annual rate of real GDP growth in the U.S. has stagnated at 1.78 percent, a stark contrast to the prior 16 years when it averaged 3.43 percent. Alarmingly, it has been 12 years since the U.S. economy achieved a single year of 3 percent GDP growth.
The Consequences of Debt-Fueled Stimulus
John Maynard Keynes, a prominent economist of the 20th century, famously stated, “In the long run, we are all dead.” This sentiment underpins his argument for borrowing from the future to stimulate present economic growth. Instead of waiting for recessions to naturally correct the economy, Keynesian theory promotes proactive interventions via countercyclical stimulus.
However, attempting to spend a nation into prosperity with borrowed funds is fraught with pitfalls. In the short term, an illusion of wealth may be created, but in the long run, that illusion deteriorates, leading to unfavorable consequences.
Recently, during our visit to Mexico City, where we visited family and conducted field research, we sought to uncover what transpires when a government overextends its financial reach and inflates its currency as a means to ease debt burdens. Below is a brief summary of our findings.
Initially, the consequences may seem predictable: the currency gets severely devalued, driving up the prices of nearly everything—especially imports.
Yet, the aftermath reveals subtler effects. The adverse consequences of a weakened currency manifest in asymmetric ways.
A stroll through the historic city center along Avenida Francisco I. Madero between El Zócalo and the Palacio de Bellas Artes offered a façade of consumer prosperity, with throngs of shoppers moving through fashionable boutiques nestled between colonial mansions. Nearby, modern skyscrapers reached towards the sky.
Similarly, we visited El Moro, a renowned churro and chocolate restaurant operating since 1935, where we encountered a line spilling out the door. Patrons were dressed elegantly, and there was little indication of economic hardship.
However, once we ventured beyond the city’s core, the conditions changed dramatically. An endless expanse of deteriorating residential and commercial properties stretched across the Valley of Mexico. These structures, once well-maintained 50 or 60 years ago, now showcase crumbling concrete and exposed rebar.
In contrast to Keynes’ beliefs, countercyclical debt-based stimulus failed to yield enduring improvements in living standards. Instead, it has resulted in stagnant GDP growth alongside rapidly mounting government debt, leading to long-term declines in quality of life.
The reality is that in the long run, we are not all dead. Many continue to endure the repercussions of short-sighted economic strategies.
This truth resonates with the people of Mexico. In the U.S., the overwhelming volume of debt has managed to foster an illusion of prosperity. Yet it appears that countless residents are witnessing the shift of small slum areas into vast, sprawling ghettos.
In light of these circumstances, accumulating a modest reserve of gold and silver bullion may be more critical than ever, preparing for the potential early onset of dollar devaluation. Additionally, cultivating a side hustle now appears prudent. From our observations, nearly everyone in Mexico City is working—albeit many may lack formal employment.
On Monday, we ventured beyond the city to the ancient pre-Aztec ruins of Teotihuacán. We climbed the Pyramid of the Sun and explored the Pyramid of the Feathered Serpent, traversing the Avenue of the Dead towards the Pyramid of the Moon.
At its height around 450 AD, Teotihuacán was the largest city in pre-Columbian America, housing around 150,000 people. However, by the 6th century, the population began to wane, and the city ultimately vanished by the 7th or 8th century. The cause remains a mystery.
One theory attributes the decline to an extended drought; another cites potential internal uprising or economic collapse.
As we pondered the ruins, we kicked some stones, listened intently, and observed our surroundings. No answers emerged from the spirits—or perhaps we had already witnessed enough truth.
Sincerely,
MN Gordon
for Economic Prism
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