U.S. governments’ statistics have been changed. Relying on debatably biasedstatistics provides cover for politicians and compliant economists to project rosierviews of the world than might really be the case.The potential of faltering consumer demand should have been obvious to economistsby 2007. In the U.S., savings rates (whose statistics were again revised and look ‘better’ than they used to be) dropped to all time lows hovering in the -2 to 0 percent range of after-tax disposable income. This was while debt service levels were atall time highs. These extremes demonstrated that consumers could retrench in theirspending at any moment. Yet mainstream economists never sounded the warning!
Complicit, non-analytical media fed economic illusion
The media were at fault too. Facing deadlines and wanting ‘reputable’ quotes, theyinevitably interviewed economists from major financial institutions who had a vestedinterest in not rocking the boat. A few years ago a top Canadian journalist, whenasked why he primarily quoted bank economists on the economy, replied that theywere always available, whereas economists in academia - who might give a moreindependent view -were not.
Keynes theory inappropriate today
Most economists follow Lord Keynes’ economic theories. A principal concern of hiswas what he called the ‘output gap’—the difference between an economy’s potentialoutput versus its present performance. If the economy was underperforming, Keynesadvocated the government spend and borrow more to close the gap. Of course, thisis what governments are doing today, spending and borrowing anywhere from 3 to16 per cent of their GDP as private consumer demand for goods and services hasfallen precipitously.Keynes also indicated that in good economic times governments should tax more andrun surpluses to offset the deficits of bad times. However, I have not seen any largedeveloped country government or international economic agency project surpluses inthe decade ahead. Thus, Keynes’ theory relating to eliminating government deficitswill not work today. His current day followers conveniently neglect this aspect of histheory. Thus, huge debt accumulation with no offsets is facing developed countries.
Debt growth to depress economic activity
Now with developed countries’ government debt expanding rapidly, a limit to theirbond issuance might be reached.In a major report last March, the Bank for International Settlements (BIS)—the ‘central bank of central banks’—studied government debt trends in twelve countriesincluding the U.S, U.K., Germany, France and Japan. The Bank said that, “drasticmeasures [bold added] are necessary to check the rapid growth of current and futureliabilities of governments and reduce their adverse consequences for long-termgrowth and monetary stability.” Drastic measures means big government programcuts and higher taxes, which create slow or declining economic growth.Highly regarded Professors Carmen M. Reinhart and Kenneth S. Rogoff confirm thisprospect of slow or negative growth ahead in their seminal study, “Growth in a Timeof Debt,” published January 2010. They found that when government debt/GDPratios are, “… above 90 per cent, median growth rates fall by one per cent, andaverage growth falls considerably more.” BIS estimates put U.S. government debtexceeding this threshold: at 92 per cent for 2010 and 100 per cent in 2011.