I does seem that governments living on credit or on the printing press will come to a bad end. Europe, as a whole, is in recession and southern Europe is in depression. And now we have Japan trying to out do our Federal Reserve on quantitative easing (money printing). Japan has put their printing presses on overdrive in an attempt to drive the Yen down and create a goal of 2% inflation. Things went a little haywire yesterday. Japan’s stocks took off like a rocket, but their bonds fell like a rock and the market was forced to atop trading in Japanese Government Bonds (JGB). Zero Hedge has a couple of dramatic graphs that tell the story:
Meanwhile back at the ranch, our government keeps racking Trillion dollar deficits each year; much of which is borrowed from the Fed. i.e. printed money. How is that working out for us? Not so good according to Of Two Minds author , Charles Hugh Smith. You see, he doesn’t care how many times Mr. Obama calls government spending “investments”, he knows government spending is not the same as investments from the private sector. Mr. Smith knows something about the Law of Deminishing Returns and he has a graph the illustrate how America’s continued borrowing has less and less benefits for our economy:
Borrowing money (debt) yields diminishing return. There’s this funny little thing called interest that piles up in a borrowing spree that eventually siphons off much of the debtor’s income stream, effectively impoverishing the borrower.
The above graph is the ratio of GDP to Debt over time. You see that back in the sixties, when the government was borrowing much less money, the GDP grew by $1.70 for each dollar borrowed. But now there is almost no gain in GDP from borrowing at much higher levels.
If this trend is allowed to continue, additional borrowing will have an immediate negative effect on GDP. That is when, I assume, the printing presses will have to be stopped. And when that happens, the stock market ands the bond market will crash
Well, that’s what I’m thinking. What are your thoughts?