newjerseynewsroom.com

BY ROY NERSESIAN

COMMENTARY

You don't have to even have data to realize that the massive debt infusion into our economy by the U.S. government is not having its intended effect of spurring economic activity. All you have to do is open your eyes and look around.

As an example of what is a national and international problem (southern Europe), Governor Christie has announced a wide range of cuts that will affect state workers, municipal budgets and educational aid, all of which will lead to higher taxes and less disposable income for New Jerseyans. The Governor must take such draconian measures because New Jersey's debt has reached a level where further funding is well-nigh impossible. Without fresh inflows of new debt, the deficit has to be taken care of by some combination of increased taxation and reduced spending.

It's all over for New Jersey, California and New York, and other states and municipalities that thought they could live without budgetary discipline. This also holds true for millions of individuals who were derelict in handling their personal financing: they can no longer borrow to sustain their life styles. Where once money flowed in to be spent today and repaid tomorrow, guess what, tomorrow is here. Disposable income takes a tremendous hit when debt acquisition is replaced by debt repayment. This is the principal reason why the economic recovery is going to be painfully slow.

But at least the U.S. government can spend willy-nilly to flood the system with new debt as a substitute for reduced spending by states, municipalities, and individuals. According to Keynesian theory, it is the duty of the state to spend profusely when corporations and individuals refuse to spend to maintain economic activity. The theory is that a dollars worth of debt will add a dollar to economic activity.

The chart represents the change in economic activity to the change in total debt. In the 1960s, a dollar of extra debt added about a dollar to economic activity, proving the efficacy of Keynesian theory. But the chart also indicates that the increased transfusions of economic stimuli eventually lose their desired impact. As anyone on drugs knows, the same dose has less kick over time. To get the same kick, the dose has to be increased. By 2000, a dollar of increased debt added only about 30 cents to economic activity. This means that the government has to acquire $3 of debt to stimulate the economy by $1. Recently economic activity has fallen into the red. Negative changes to economic growth divided by positive additions to debt has turned the ratio negative. Now the more we spend, the worse the economy, the perverse inverse of Keynesian thought.

On top of this, the principal foreign holders of U.S. debt, such as our friends China and OPEC, are pressuring the United States to do something about the mounting losses in purchasing power of the trillions of dollars they hold. At some point, the U.S. government will have to raise interest rates to prevent our friends from dumping the dollar as a global reserve currency. If the U.S. dollar lost its global reserve status, the price we would have to pay for Walmart imports and for oil imports is something you rather not contemplate. This forced rise in interest rates will further spiral the trillions of dollars of government deficits into la-la land. None of this spending helps the economy. Government spending pours into financial institutions holding U.S. debt, not into creating jobs. The trillions poured into financial institutions by Bush and Obama to save them from the consequences of gross mismanagement by overpaid so-called executives did not create jobs and did not enhance economic activity. That is what the chart is telling us — we're at the end of the line.

There is no palatable way out. Americans and their elected representatives are not going to find a way to actually repay the ever mounting mountain of private and public debt. The reason is simple: there is no acceptable way. Ultimately, whether we want it or not, whether we think it right or wrong, morally or ethically or otherwise, the crushing debt load will have to be liquidated. For many individuals, it is called bankruptcy. For a nation, bankruptcy can take a form of issuing a new currency and formally repudiating all existing debt private and public. The new currency cannot be debt based unless we want to repeat this horrific experience again. Control over the currency will return to the government as dictated by the Constitution, not be handed over to private banking interests known misleadingly as the Federal Reserve.

Roy Nersesian, a resident of Maplewood, teaches at the Leon Hess School of Business at Monmouth University in West Long Branch and also at the Center for Energy and Marine Transportation at Columbia University. He has authored several books, the last on Energy for the 21st Century published by M.E. Sharpe.

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