Anabolic and Catabolic Debt

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The ‘Liberty Street’ blog of the Federal Reserve Bank of New York has a 5-2-12 posting on debt in the United States, just as Professor Pettis has a posting on his ‘China Financial Markets’ blog from Beijing University about debt in China. While they both are cautionary tales about the debt loads in the respective countries, other expert economists, such as Nobel laureate in Economics Dr. Paul Krugman of Princeton, argue for more debt in order to stimulate our stagnant economy.

Who is correct? U.S. debt hit 100% of GDP three months ago; is more debt better, or worse, for economic growth? Japan is buried in two decades of stagnant growth with debt loads at more than 200% of GDP, and Greece is bankrupt with debt at 180% of GDP. Yet the Krugman/Keynesian ideo/theology of Fabian socialism calls for an increase in U.S. government debt to 130% of GDP in order to finance greater growth.

The little-mentioned key factor in the debt debates is the necessity of a positive return on the debt. So long as the yield on the debt-financed project is greater than the interest rate on the debt instrument, the positive return justifies incurring the debt. However, whenever the yield from the debt-financed investment is less than the interest rate on the debt, then incurring the debt was a mistake and we are engaged in ”death spiral” economics.

Ten-year Treasuries are at 2%. So anytime the U.S. government borrows at 2% and does not make at least 2% on the assets it financed with the debt, it spirals into impoverishment. All any taxpayer has to ask of any proposal to finanace or expand their government is: ‘Are we incurring debt to finance this government expenditure, and if debt is being used then what is both the yield and cost of the debt?’

They can tell us the cost. They never tell us the yield, because there is rarely any quantifiable yield in excess of the cost for a government which has no profit-motive. Remember, profit, among other things, is a measure of efficiency. So, we steadily go more broke by borrowing money in order to finance non-profitable government projects.

When does a government go bust from too much debt? Never, because they can print money. When does an economy go bust from too much government debt? Consensus seems to be: around 60% of GDP. To be on the safe side, the DuoFreedomists recommend 30% during peace-time, and otherwise the debt should have a verifiable positive yield. If you are going to finance greater growth using debt, then factually demonstrate the greater growth!