Wednesday, January 6, 2010

You Can't Spend Your Way To Long-Term Prosperity!

Take a close look at this chart from The Market Ticker, a site I highly recommend reading. It is a picture of the debt of the United States compared to its GDP. The U.S. Government spends a lot more than the economy produces. The money seized from the producers and consumers in the form of taxation is not enough to cover the debt, which continues to soar to astronomical numbers. The U.S. Government is spending more and more money we don't have.

What would happen to a consumer who bought everything on credit, and continued to spend to their heart'c content?
What would happen to consumer who bought a house with no collateral, but was given a loan in spite of the fact they could not repay it?
What would happen to a company who made products no one wanted, and could not make enough sales to cover the salaries and legacy costs of unionized labor?

All of these questions were answered for us in 2008 and 2009. It will all get put on the taxpayer's tab in the form of more government bailouts and spending, er, "stimulus." The continued result will be the widening of the spread between debt and GDP on this chart. The economic actors in the three scenarios previously mentioned will eventually be bankrupt. They will have merely drained more money away from productive resources in the process. As for the government? It remains to be seen, but it is not unreasonable to believe that bankruptcy is in our future.

For another perspective on this, read a speech by Dallas Fed President Richard Fisher from May of 2008. If this doesn't wake you up, nothing will!

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