Every dollar, yen, euro, or yuan a government spends has to be taken from someone or borrowed. When the taken or borrowed marginal currency unit taken or borrowed generates less production (or no production at all if it funds consumption) than the currency unit, a government is on the road to ruin unless it changes its ways. From Daniel Lacalle at dlacalle.com:
A few years ago, The Economist published an issue called “The Triumph of Big Government,” highlighting the rise of government intervention as the main driver of economic recovery and growth. The years of budget and deficit control were over. Mainstream economists hailed the decisive action of governments in developed nations, committed to spending to boost growth and abandoning the old “austerity” principles.
Only a few years later, The Economist publishes an issue titled “The Coming Debt Emergency,” mentioning the enormous deficit and debt problems in France, the United Kingdom, Japan, and the United States.
What happened? How can long-term bond yields rise when central banks are cutting rates? How did government debt lose its place as a reserve asset? Easy. Developed economies’ governments of all colours, from Biden and Sunak to Macron and Ishiba, bought the MMT fallacy that “deficits do not matter” and “sovereign nations can issue all the debt they need without risk.” Virtually all international bodies hailed statism as the global solution. However, in 2022, global central banks and investors started abandoning sovereign debt as a reserve asset and decided to add gold.
Developed nations have surpassed the three limits of indebtedness: the economic, fiscal and inflationary limitations. When more public debt creates lower economic and productivity growth, the economic limit has been surpassed. When interest expenses and deficits continue to rise despite rate cuts and higher taxes, the fiscal limit collapses. Additionally, when governments become addicted to issuing more debt in any part of the cycle, with diminishing investor demand, inflation becomes persistent.
Triumph of the Swill?
For me to poop on.
Hecho en China isn’t ending well?
You gotta make something that people are willing to buy.
AI photochops as it consumes all the water and electricity?
The best laid plans of mice and men.