“Stimulus” is a Toxic Substance

The current economic establishment, at least those with any real power, hold that we must continue to spend even as deficits expand far beyond the parameters most reasonable human beings consider acceptable. Stop spending they say and all hell breaks loose. Plus they assert (though I think even Krugman doesn’t believe this in his heart of hearts any more) that deficit spending will spark the economy so that the economy can again grow in (what they consider) a more sustainable way.

We have chronicled many times why we think this is a foolhardy position and why we believe in the end this gigantic economic experiment will end badly. But here’s a little more fuel for the fire.

In the attached article the author sites a study which shows that countries which run large deficits in the short term hobble themselves in the long term. Run up the card now, pay through the nose later. This is all very encouraging for this 36 year old.

(From IBD.com)

“The study, published recently by the National Bureau of Economic Research, looked at 26 episodes in advanced economies since the early 1800s where gross public debt levels exceeded 90% of GDP for at least five years.

What they found was alarming: When countries run debt levels that high, average growth rate is significantly below low-debt years — 2.3% on average vs. 3.5%.

Worse, the study also found that once countries run debt up to that level, it can take years, if not decades, to bring it back down. In fact, 20 of those high-debt episodes lasted more than a decade, and the average duration was 23 years.”

Click here for the article.