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You Can’t Eat IOUs

When the mainstream media talks about the growing “problem” of government deficit spending, they always focus on nations which are having trouble servicing their debts. The issue of actually “repaying” the debt is seldom mentioned. If it is, it is taken for granted that the debt will be repaid – sometime in the indeterminate and nebulous future [ also see “Debt, It isn’t what it used to be” – Ed.] . Further, most mainstream media examinations of the fiscal problem facing any particular nation measure the annual deficit as a percentage of Gross Domestic Product (GDP). What is not pointed out is that the government spending which this borrowing makes possible is a component of that same GDP.

Government spending does not contribute to the creation of wealth in an economy, it inhibits it in direct proportion to the amount of that spending. That is true even when there is no borrowing involved, with the government running a genuinely balanced budget. Government creates no wealth, it simply confiscates it from those who do. The situation deteriorates rapidly when government spending exceeds government “revenue”. The dead weight of government then falls not only on present production but on future production. The higher the debt grows, the further into the future the burden stretches.

Government spending has no place in any measure of REAL economic growth. Government borrowing is the greatest economic threat to REAL economic growth. Once government borrowing is established as a prime component of the statistic (GDP) that purports to “measure” economic growth, then gradual economic impoverishment is assured. Once government borrowing is deemed to be the most important component in re-establishing economic growth, financial collapse is assured.

That is why the European nations have opted for what is called “austerity”. Portugal, the latest nation to be singled out in the sovereign debt crisis, has already cut its deficit almost in half (by 47.3 percent) over the first ten months of 2010 as compared with the equivalent period in 2009. Every other European nation is on the same path. Only in the US are the government and the central bank both clinging to the old economic orthodoxy that it is possible to borrow one’s way to prosperity.

This is the simple fact which makes US Treasury bonds THE most risky investment imaginable at present. And this is the reason why “crises”, both geo-political and financial, are cropping up with increasing regularity everywhere EXCEPT the US. The bogeymen are being worked harder than ever.

About the author

The Privateer

The Privateer is an essential, must-read journal published and edited by Australian William "Bill" Buckler:

"We are fundamentally concerned with the underlying ideas which shape the way nations interact, the way economies and markets work, and the way individuals prosper or decline on the basis of their ability to choose and act.

We hold that the fundamental reason behind the present chaos in global relations, in trade, in financial interactions, and in markets themselves is an "absence". What is absent, or missing, is the freedom to choose and act, the security of private property, and the use of sound money. That is the fundamental premise on which The Privateer bases all its analysis."

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