March 11, 2014
Fiscal Folly: A new study says governments around the world boosted their debts by more than 40% to over $100 trillion in response to the global financial crisis. Where’s the promised recovery from all that spending?
From mid-2007 to last summer, the world added $30 trillion in government debt to its balance sheets, the Bank for International Settlements says. By comparison, that’s twice the size of the $15 trillion U.S. economy.
After the financial crisis, governments around the world, but especially in Europe, the U.S. and Japan, went deeper into debt so that they could spend more. They were following the old Keynesian nostrum that more government spending ignites the flame of economic growth.
But it doesn’t. Look across Europe. Look at the U.S. Look at Japan. All those economies are growing slowly at best, as higher government spending sucks capital out of the productive private sector and puts it in the hands of bureaucrats and welfare recipients.
“Stimulus,” as it’s called, hasn’t worked at all. And yet, the notion has spread that somehow we’ve all undergone a kind of austerity, with governments pulling back sharply on spending.
Well, not exactly.
In the major countries of Europe, for instance, spending surged after the financial crisis. And in the U.S., federal spending soared from roughly $2.7 trillion before to $3.6 trillion in just two years — a record jump.
Did all that spending work? In a word, no. Despite five years of Keynesian debt-fueled stimulus applied by world governments, including our own, the world’s economy hasn’t grown nearly as much as the debt.
In 2008, the year the financial panic was at its worst, global GDP hit $61.95 trillion, according to World Bank data. By last year, based on current estimates, world GDP reached $74.6 trillion.
That’s $12.7 trillion in added GDP for $30 trillion in added debt. And that’s only if you believe that every penny of the added GDP was due to government debt, and not the private sector’s rebound.
If that’s what’s meant by a “Keynesian multiplier,” it’s a pretty bad deal.
Worse, the world will be paying off that $30 trillion debt for generations to come. Even at current interest rates of 3% to 5%, at a bare minimum that means an added $1 trillion to $1.5 trillion a year in debt payments for already bankrupt governments around the world.
Get ready for the big tax hikes that are surely coming.
We keep hearing this is an age of austerity. It isn’t. Governments are still ringing up record amounts of debt so they can spend more, but have nothing to show for it.
Here in the U.S., where debt now stands at $18 trillion, the problem is especially bad. And it’s getting worse.
The big question is, as the debt mounts, who will buy it? And who will pay for it? A binge’s end is never pretty.
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