Photo Credit: Official White House Photo by Chuck Kennedy
By Bill Wilson — Today at Camp David, the Obama Administration is expected to push France and Germany to engage in more “stimulus” policies (i.e. spend, borrow, and print more money) to lift Europe’s ailing economy.
As reported by Time, “The U.S. has been pushing [newly elected French President Francois] Hollande to consider some short-term stimulus… [and] hopes to persuade [German Chancellor Angela Merkel] to take stronger stimulative measures, and to shore up the central bank and other big banks bracing for a Greek default.”
There’s only one problem. Too much government debt and borrowing is how Europe got into this mess in the first place, and what is leading their recession.
So, how will more “stimulus” and more debt lead Europe out of its malaise?
Despite government debts in the Eurozone growing €1.089 trillion in 2010 and 2011 since the crisis began, the economy there has only grown nominally by €492 billion in the past two years, according to data published by Eurostat, accounting for much of the currency bloc’s entire credit expansion during that period.
That means for every 2 euros governments borrowed and printed, only 1 euro of growth was achieved. And as the crisis drags on it only gets worse. In the first quarter of 2012, the economy there did not grow at all, despite all of the “stimulus” borrowing and spending. Hardly a measure of success.
Obama will likely tell Merkel that she just needs a more efficient printing press.
Across the pond here, we actually have one in the Federal Reserve. But our own experience in the U.S. has not been much better. Despite $3.4 trillion of fiscal and monetary “stimulus” since the crisis began, 27 million Americans still cannot find full-time work in the Obama economy. More than 5 million have given up looking all together.
Overall, the relationship between debt boosting economic growth appears to be weakening over time. As we reported in Feb. in “Can the economy grow without debt?” from 1945 to 1970, for every dollar of debt created public and private combined, there was an equal or greater sum of economic growth.
But once Richard Nixon severed the dollar’s ties to gold in 1971, that relationship broke down. Now, like Europe, it takes 2 dollars of debt for every dollar of growth.
Madeline Schnapp, Director of Macroeconomic Research for TrimTabs Investment Research discovered a similar relationship, this time between gross federal debt and economic growth. She writes, “Since 2009, the traditional relationship between debt and GDP growth has been turned upside down. Each $1 increase in GDP has been accompanied by, on average, a $2.50 increase in debt.”
Carmen Reinhart and Kenneth Rogoff’s own research found that when gross debt exceeds 90 percent of the Gross Domestic Product (GDP), economies lose 1 percent off of their median growth rate.
But they were not alone. In an interview with Kate Welling, chief economist at Austin, TX-based Hoisington Investment Management Dr. Lacy Hunt noted similar problems with too much debt and warned, “you cannot solve that overindebtedness problem by getting deeper into debt,” calling it “counterproductive.”
So, the Keynesians were wrong. While debt can clearly boost an economy’s fortunes for a little while, once debt becomes too pervasive, it becomes a net drag on economic output. Worse, new debt piled atop it all becomes a cycle of diminishing returns.
Now, somebody just needs to tell Obama — before he pushes Europe into an even deeper crisis.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.
