by Karl Denninger, Market Ticker:

Sigh…..

How do you fail middle-school math and wind up on TV, in academia or arguing for a policy that is demonstrably economically bankrupt?

Let’s do this again:

This is all government data.  It shows the nominal reported GDP expansion (blue line), the federal debt addition (deficit spending) as a percentage of GDP, and the arithmetic subtraction of the two, which is actual GDP expansion.

Except there hasn’t been any of material importance since the 2000 tech wreck.

Years ago I printed an article in which one of the source pieces was a chart showing the declining beneficial impact of new debt taken on.  It was a “best fit” declining slope with a zero intercept.

When debt accumulation begins in an economy you get more than one dollar of economic activity for each dollar of debt taken on.  This is one of those intuitive things; you have a dollar of debt, you buy a dollar of product, but in order to make it a bunch of people have to touch it from raw material forward, and all the activity involved in making the “thing” means that for one dollar of borrowing you get more than a dollar of economic activity.  Thus, at the beginning, more debt means faster economic growth.

But once you cross that zero intercept new debt harms you.

That is, if you take on a new dollar of debt you don’t get a dollar of economic activity out of it; you get less than a dollar and yet you still owe the dollar, plus interest.

That’s a trap and once in it you’re in a lot of trouble.  It is akin to digging a hole while standing in the center.  Not long after you start, assuming you have a means to get the dirt out, you find you’re in over your head and then over the reach of your arms.  At this point you’re screwed; absent outside help you can’t get out!

We crossed the negative influence point approximately coincident with the tech crash in 2000 and since that time we have not only refused to stop the deficit spending every incident has brought forward more of it.

Yet it is a fact that we’re now getting less than a dollar of new economic activity for a dollar of new debt and this has been, almost without exception, true since 2000.

The trend is in fact accelerating; if we did not spend that new federal borrowing last year the nominal GDP print would have been negative.

If you have a copy of Leverage (look to the right) the chart that shows you what happens is on Page 26.  This isn’t politics, it’s math and always happens.  The negative contribution not only gets worse but if you keep it up eventually the accumulation of debt consumes all of output and there’s nothing left to do other things with — like buy aircraft carriers, pay government employees and cover Medicare benefits.

In short for a stable economy the following must be true:

1. The Federal Government must not run a fiscal deficit as a percentage of GDP that is larger than the expansion rate of GDP.  If you have a 3% GDP nominal growth rate the fiscal deficit must be smaller than that as a percentage of the economy.

AND

2. Monetary policy must not permit short-term interest rates to be less than the nominal GDP expansion rate.

Since governments love to provide stimulus when the economy sags inevitably some short-term violations of these rules will happen.  But when they become policy rather than exception you’re in trouble.

Even these two conditions, obviously, do not prevent debt accumulation — but they do prevent said accumulation from turning into a negative-sum game.  If deficit spending is practiced over a long enough period of time these rules will force said deficits to zero and in fact into surplus because that zero-crossing point will happen if you continually borrow more and more money.

Failure to follow both of these rules results in a charade that can continue for quite a long time — but it cannot continue forever.  The Fed can play games with interest rates and asset purchases to enable continued federal deficit spending but it does not, because it cannot, control the economic outcome that results.  Japan dug itself deep into this hole and has never been able to exit it since its crash.  China puts out flat-false (intentionally so) economic data so as to confuse people but their debt is running at some 300% of GDP, which is ridiculously beyond the point at which negative contribution is made.  As that negative contribution has shown up they’ve put more and more monetary and fiscal distortion in.

The premise that we can keep doing this on a forward indefinite basis, and thereby you should buy stawks because, if nothing else, we’re the best house in a crappy neighborhood holds no water as the underlying economic premise is mathematically bankrupt.  A negative real rate of return for borrowing money is negative no matter whether you’re the best or worst of the bunch and when you’re down to paying your food bill with a credit card because you have no free cash flow you are not all that far from going bankrupt, being evicted into the street and becoming the next crazy dude living in a refrigerator box.

Last year the Federal Government spent $4,108 billion dollars.  It ran a $779 billion deficit on a cash basis, not counting the Social Security and Medicare scammed funds.  That’s roughly one dollar in five that was not collected from taxes; it was instead borrowed.  This year it appears we may approach one dollar in four!

There is a point where this will fold back on us.  I’ve long argued that the salient point where it happens occurs when CMS (Medicare and Medicaid) cannot cover their funding from bond redemption and tax collections.  As a reminder, Medicaid has no tax base behind it; that is a pure give-away program.  Medicare is allegedly funded by tax collections during one’s working life but the medical SCAM has turned it into an outrageous extortion racket that collects five times the market price on an average basis across the entire economy.

My best guess — for more than a decade now — is that this “knee point” arrives by 2024.  Back in the 1990s when I was running MCSNet I calculated that this “knee point” was likely to arrive somewhere between 2025 and 2030.  Nobody cared then because it looked so far off.  Well, “so far off” is now here and yet we’ve habituated the American public to more and more spending while simply running the credit card up higher and higher.  This will not continue forever because it can’t. It’s entirely plausible that if we get a recession by 2024 the Federal Government won’t be running a 25% fiscal deficit it will try to run a 60% fiscal deficit!

Trump, in the 2016 campaign, correctly called this an “ugly bubble.”  The moment he was elected he changed his tune and intentionally blew a bigger one.  He’s a fraud folks; he didn’t change his mind.  He does not care; just like Obama he thinks he’ll be out of office before it blows up and thus he does not give a wet crap if you, your children and grandchildren literally have to live through a civil war or revolution as a direct result of his self-aggrandizing economic nonsense.

He will get on his private jet.

You will die.

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