Wednesday, July 10, 2013

$1.8 Trillion spending to create $320 Billion of GDP

In September of 2012 I wrote a post titled, Money Going Down a Black Hole in which I explained that Democrats, Republicans and the Federal Reserve were operation under the Keynesian notion that deficit spending was justified in a recession, depression or financial crisis to kick start the economy. The basic idea is that $1 of deficit spending would have a multiplier effect of greater than the $1 spent and result in higher economic activity.

The 2008 stimulus was based on this idea and projected a multiplier of 1.5, meanin for every $1 spent we would expect to see $1.5 worth of additional GDP. This didn't happen and John Cochrane put it closer to point five (.5). Biderman noted at the time that is was closer to point two (.2) which meant that it took a dollar of deficit spending to create 20 cents of new economic activity measured as GDP.

In the post above Biderman revisits this concept and notes its now barely .18. That's right, it now takes $1.8 Trillion to boost GDP by $320 Billion.

This is not only unsustainable, but points to diminishing marginal returns. The longer we continue creating and spending new money, the less effect it has on the economy. And of course, there is always the notion that we cannot print money forever.

Conclusion, this farce of a recovery will come to an end at some point. And when it does, we will be worse off, broke and our currency will be significantly devalued.

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