Stage 1 – Government Spending Creates the Appearance of Growth

The first stage of America’s Financial Endgame™ is one that we are already in the midst of … namely that government spending (and deficits) creates the appearance of economic growth.  According to the news broadcasting outlets, the US economic recession ended in 2009.  The reason cited for this is because the “economy” (meaning GDP) resumed a growth trajectory.  However, this growth has been accompanied by large government deficits.

It is no secret that the government is running large deficits with each passing fiscal year.  These deficits are frequently blamed on Defense spending, which totals a significant $800B+ per year.  However, when compared to the nearly $5.5T in total Federal, State, and Local government spending, it becomes rapidly apparent that defense spending is only the tip of the iceberg.

The fundamental problem that everybody knows, but nobody will admit is that the government spends too much money in transfer payments or “entitlement” programs.  The reason why nobody will admit this is because nearly half of the adult population receives some form of direct or indirect assistance from the government.  From a political perspective, this makes cutting entitlements a matter of near impossibility … almost everybody will agree that the government engages in too much wealth transference, but almost nobody is ready to sacrifice the programs that benefit them personally.

What has resulted is a situation where Trillion dollar deficits have gone from being the fodder of conspiracy theorists to a recurrent phenomenon.  What was once considered to be a doomsday scenario is now a structural reality of the government’s fiscal situation. Many have referred to the current situation as “unsustainable” … this is an accurate, if mild method of describing our current national finances.  The simple fact of the matter is that borrowing isn’t free.  At some point, the people from whom the government is borrowing all of this money from will expect to be paid back … with interest.  Thus, it would seem reasonable to expect that if the government is going to borrow money, that it be use for something that is really, really important.

The funny thing about events that can’t go on forever is that they usually don’t …

According to the US government‘s own press releases, the purpose behind these deficits is “stimulus” or boosting the gross domestic product.  Using this line of logic, let’s examine how much the economy has grown vs. how much the US debt has grown (in the form of residual government deficits) over the past few years.

Since 2008, the US government has borrowed nearly $4 dollars in new debt for every $1 dollar in GDP growth.  This means that we have borrowed four dollars from the future, which must be paid back (with interest) to create one dollar of current growth.

In past years, the size of the government deficit remained manageable, because it was a small fraction of the total GDP growth.  Put another way, national fiscal stability is much easier to maintain when the economy is growing faster than the national debt.  The reason for this is quite plain … the economy is driven by private enterprise, and governments are funded by taxes on private enterprise.  If private enterprise grows faster than the rate of government indebtedness, there is minimal risk of a massive financial collapse.

On the other hand, if government spending grows so large that it exceeds its tax revenue by such a large margin that it must borrow in excess of the entire economic growth for the whole nation, then there are serious problems brewing.  If this trend continues for multiple years, these problems run the risk of becoming catastrophic.  If this trend ceases to be an “exception” and becomes “normal” then it is all but certain that a financial collapse is going to ensue.